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The $15 million hole in our budget

There is a $15,484,000 hole in the Yukon government budget. When the spring budget was tabled, finance officials expected $95.6 million in corporate and personal income tax revenues this fiscal year.

There is a $15,484,000 hole in the Yukon government budget.

When the spring budget was tabled, finance officials expected $95.6 million in corporate and personal income tax revenues this fiscal year. In the recent supplementary estimates, this figure had fallen to $80.1 million.

What gives?

Is this Tory tax cuts for the rich in action?

No, actually. The Yukon Party announced tax cuts in the spring budget, but these revenue reductions were already baked into the $95.6 million number.

And anyway, the Yukon tax cuts weren’t for the rich. In fact, although Justin Trudeau somehow forgot to mention it during the election campaign, the federal Liberal tax policy looks weirdly similar to what the Yukon Party did in the spring.

The federal Liberals cut taxes on the middle class, and raised them for people making more than $200,000.

The Yukon Party, on the other hand, cut taxes on the middle class and raised them for people making more than $138,586.

In fact, the Yukon Party tax cuts benefited even more people in the lower income brackets than the federal Liberal changes, since they also cut taxes for the lowest three brackets, not just the middle ones. The tax rate for people making less than $44,701 went from 7.04 per cent to 6.40 per cent, for example. Meanwhile, the Yukon Party also introduced a new bracket for people making more than $500,000. Their taxes went up from the former highest rate of 12.76 per cent to 15 per cent.

So let’s look at the next suspect. Was it a Tory giveaway to corporations?

Again, no. Corporate taxes are still at 15 per cent, where they have been for years. The Yukon’s corporate tax rate is the highest in the country other than P.E.I. and Nova Scotia. Even Alberta’s new NDP government only raised theirs to 12 per cent.

The Yukon Party did cut the small business tax rate from four per cent to three per cent. But again, this was already baked into the spring budget numbers.

The difference between the corporate tax rate and the small business rate is the subject of an old economist joke: the government supports small businesses so much that it wants them to stay small (since if you grow your business from “small” to “medium” your tax rate goes up 12 points).

Now that you’ve stopped slapping your knee at that economist humour, let’s move on to the next suspect.

If we were playing the board game Clue, this is where you would say, “Was it the Recession in the Resource Sector with the Pipe-Wrench?”

Indeed, after three consecutive years of the Yukon economy shrinking we should expect some impact on tax revenues. However, the scale of this year’s revisions is eye-catching. Personal income tax is expected to be down $4.7 million to $64.3 million, a fall of seven per cent. Since the Yukon’s government workers’ wages and taxes are stable, this suggests that private sector workers are taking a beating. Lower tax revenue is consistent with the stories you hear from friends: fewer people working, less overtime, longer time between contracts, and so on.

Corporate and small business income is where the biggest hole is. These revenues are down $10.8 million to $15.8 million, a whopping 40 per cent reduction in one year.

Yukon companies are making a lot less money. Again, this is consistent with what we hear about there being fewer projects, less mining activity, minimal oil and gas work and so on.

And remember that when struggling Chinese state-owned mining companies don’t pay their bills to Yukon businesses, those businesses have to make write-offs, report lower profits and pay less in tax. We don’t know the exact financial impact of the Wolverine closure, or what Yukon government jobs or programs those revenues would have funded.

A $15-million hole appearing in six months is worrying. There are still three months left in the fiscal year, so things could change. There might be an economic revival. Or it could get worse.

It will change the tenor of next year’s election campaign. Combined with slowing federal transfers, there will be a lot less money for the three parties to throw around in campaign promises. The numbers aren’t final yet, but it looks like federal transfer payments will go up only around three per cent this year, much lower than the five-to-seven per cent rate we got used to over the last decade. This means there is not much cash left to spend on new things after paying for inflation and the cost-of-living increases of the existing government workforce. If personal and corporate tax revenues are shrinking too, that exacerbates the problem.

If any of the parties want to make big-spending promises, the options are to raise taxes or run deficits. Our taxes are hardly low now, and raising them risks emulating a Nova Scotia-style doom loop of ever-rising taxes on a shrinking tax base. Deficits are possible in the short term, but unless the private sector revives you are basically just stealing transfer payments from future years to spend now. That might be popular, but isn’t good policy.

The other option is to keep our taxes where they are, or even a bit lower, and try to attract more investment and people to live here. But that is a long-term strategy, something politicians are not famous for pursuing.

A healthy private sector with profitable companies hiring people and paying taxes is part of most people’s vision of the Yukon. One of the ballot questions in next year’s election will be which party has the best approach to help it happen.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won this year’s Ma Murray award for best columnist. You can follow him on Channel 9’s “Yukonomist” show.