Government policy hurts P.E.I. residents with modest incomes

In Prince Edward Island, thanks to government policies, when workers earn additional income, they effectively get penalized for their extra efforts. Here’s why.

Many provincial and federal benefit programs are based on income, which means that workers at certain income levels will lose some of those benefits if they earn additional income.

For example, the Canada Workers Benefit provides a tax credit of $1,428 for individuals with net income up to $23,495 per year. The benefit is gradually “clawed back”—that is, its cash value is reduced—for any individual who earns more than $23,495 up to $33,015, after which no benefit applies. The cost of this clawback is on top of the fact these workers already pay personal income taxes.

Consequently, if you account for all provincial and federal benefit programs in P.E.I. and both provincial and federal personal income tax rates, any worker (or family) earning $60,000 who earns an additional $100 will lose $59 of the $100 due to the joint effects of clawbacks and taxes, keeping only $41 to pay their bills, feed their families and meet other priorities.

Economists call that loss of $59 the “marginal effective tax rate” or METR. At a time when many in the province are struggling with the cost of living, taking home just $41 of an additional $100 earned is a discouraging prospect. After they do the math, some workers may decide to not take on additional work or pursue increases in their incomes.

Unfortunately, METRs are generally higher for workers with modest incomes, which means—again, thanks to government policy—some Islanders face a substantial disincentive to move up the income spectrum. In fact, the study found that those earning between $30,001 and $60,000 faced the highest METR of any income group in the province.

This should come as no surprise given that P.E.I. has among the highest personal income tax rates in North America. At $50,000 in income, residents in the province face the fifth-highest tax rate among 61 jurisdictions in Canada and the United States. These high tax rates combine with program design to produce the punishingly high METRs experienced in the province.

The King government and the Trudeau government should look closely at both the design of their benefits programs and their tax rates to provide relief for workers in the province and across the country.