At a time when many Nova Scotians worry about the cost of groceries, housing and other essentials, taxes also have an impact. And in its upcoming budget, the Houston government should eliminate one hidden tax hike in particular.

Nova Scotia is currently one of only four provinces that does not fully adjust its personal income tax backets to account for inflation, creating a phenomenon known as “bracket creep” (brackets being the range of income where an individual pays a given rate of income tax).

Most other provinces and the federal government adjust these brackets annually based on inflation, so individuals aren’t pushed into higher tax brackets simply because they received a salary adjustment that merely kept pace with changes in the cost of living.

A basic example can help to illustrate the issue. A Nova Scotian earning $29,560 falls into the province’s lowest tax bracket, where income is taxed at 8.79 per cent. Inflation in the province in 2022 was 7.5 per cent. Therefore, this worker could receive a raise of 7.5 per cent, bringing their salary to $31,777, which would only result in their salary keeping pace with the cost of living.

The problem? This pay adjustment has pushed the person’s salary into a higher tax bracket where income is taxed at 14.95 per cent, so the person will pay $331 in income tax rather than $194 if the tax bracket had simply kept pace with inflation.

That difference of $137 may not seem like a lot, but these changes have the strongest effect on people with low incomes who generally struggle to afford basic necessities. And this hidden tax increase occurs each year, resulting in a potential difference of thousands of dollars over one’s working life. Of course, the impact is increased during times of high inflation such as we’re experiencing currently.

Consequently, each year since 2000 Nova Scotians have faced what is essentially a hidden tax hike. Again, most governments across Canada have recognized that it’s unfair to collect additional tax revenue on salary adjustments, which only keep pace with the cost of living. The federal government began adjusting tax brackets (known as indexing) yearly in 2001, and more recently Manitoba began the practise in 2017 followed by Saskatchewan in 2021.

Aside from Nova Scotia, Prince Edward Island, Ontario and Alberta do not fully index their tax brackets on a yearly basis (though Ontario does index some of its brackets and Alberta has promised to reintroduce indexing).

Finally, Nova Scotia is already among the highest-taxed jurisdictions in North America. According to a recent study published by the Fraser Institute, which measured tax competitiveness across all 60 Canadian provinces and U.S. states, found that Nova Scotia applied the second-highest tax rate on personal income for those who made $50,000 and the third-highest for those who made $75,000. In other words, bracket creep is only one of many ways Nova Scotia is uncompetitive with its peers when it comes to personal income taxes.

With the spring budget fast approaching, the Houston government has an opportunity to bring its tax code in line with most other provinces by ending this hidden tax hike. Indeed, adjusting tax brackets for inflation on a yearly basis would be a good first step in tackling Nova Scotia’s overall tax competitiveness problems.