Alberta's income tax 'advantage' exists for the poor and the rich, but not those in between

Alberta governments of every stripe love talking about the "tax advantage" in this province.

And it's generally true that Albertans pay less tax — on the whole — than other Canadians, when you add up all the different types of taxation that all three levels of government throw at us.

• Tax burden lowest in Alberta, Saskatchewan: Conference Board of Canada

But when people think of taxes, they often think first of income tax. And that's where many people might be surprised about Alberta.

The phrase "Alberta tax advantage" figured heavily into the budget introduced by Ralph Klein's government in the year 2000, which made income-tax reform a key plank. That budget set the stage for the "flat tax" system, which set Alberta apart from other provinces for the next decade and a half.

Unlike people in the rest of the country, who were subject to progressively higher tax rates that increased with income, Albertans paid the same rate — a flat 10 per cent — regardless of how much money they made.

Facing a massive budget shortfall in the wake of the 2015 oil-price crash, the short-lived government of Jim Prentice introduced plans to kill the flat tax, but never passed the legislation before his Progressive Conservatives were defeated by Rachel Notley's upstart NDP. The new government then went ahead and eliminated the flat tax, itself.

Most Albertans still pay a 10-per-cent income tax rate, but those who earn more than $128,145 per year now pay 12 per cent on earnings above that threshold. The rate increases further, maxing out at 15 per cent on income above $307,547. (Quebec's income tax rates, by comparison, start at 15 per cent.)

The United Conservative Party, meanwhile, recently endorsed a return to a flat tax. The idea was overwhelmingly approved by members of the newly formed party at their first annual general meeting.

Would this restore the "Alberta tax advantage" of the Klein era? That's a matter of political debate.

But the numbers are cold, hard facts.

So let's take a look at the math to see how Alberta's previous and current tax systems compare — both to each other, and to the rest of the country.

Alberta vs. other provinces

A key but often overlooked part of Alberta's income-tax system is the generous personal exemption that everyone receives. This was brought in as part of the "flat tax" system that Klein introduced and has been maintained to this day, with increases for inflation.

Alberta's basic personal tax credit now stands at $18,915, meaning Albertans effectively pay no income tax to the provincial government on income up to that level.

That makes Alberta the best province, from an income-tax point of view, to be living on low income. While Ontario and B.C. have lower tax rates at their bottom brackets (5.05 per cent and 5.06 per cent, respectively), their basic personal exemptions are also about half that of Alberta.

Conversely, the highest-income Albertans still pay the lowest taxes in the country, even with the progressive tax brackets the province recently adopted. Their taxes would be lower still if the province were to revert to its flat tax system.

It's Albertans in the middle who don't fare as well, as you can see from the interactive chart below.

Click or tap on the drop-down menu to change income levels and see how much in provincial income tax you would pay in each province.

(Can't see the chart? Click here for a version that should work with your mobile device.)

While Albertans making $25,000 a year pay the least income tax in the country, the picture changes as you approach $50,000.

At that level, Albertans pay more than both Ontarians and British Columbians.

The gap between Alberta and B.C. grows as you approach $75,000. At that point, Albertans pay about $1,200 more in provincial income tax than their neighbours to the west.

Around $100,000, Albertans pay less than Ontarians but still more than people in B.C.

(For those interested in the nitty-gritty details, these calculations include both the high-income surtax and the health premiums charged in Ontario as part of the income-tax system. They do not include Medical Services Plan premiums in B.C., which are collected separately.)

It's around the $150,000 mark that Alberta returns to the lowest income-tax burden of all provinces. And its lead grows from there.

If you earn $250,000 a year, you'll pay about $4,000 less in Alberta than in B.C. — and about $18,000 less than in Quebec.

As you can also see from the interactive chart (by comparing the yellow and blue columns) the advantage for high-income earners would increase with a return to the flat tax.

But how many people does this actually represent?

Statistics Canada gives us a rough idea.

Distribution of income — and tax paid

About 178,000 people in Alberta reported individual incomes of $150,000 or more in 2015, the most recent year for which detailed data is available. (Of those, about 57,000 earned more than $250,000.)

On the other end of the spectrum, about 950,000 Albertans had incomes of less than $25,000.

The bulk of the adult, tax-filing population — some 1.9 million people — fell somewhere in between $25,000 and $150,000.

The median individual income was $41,770. That means half of Albertans earned less than that amount, and half earned more.

You can see how it all breaks down in the chart below.

(Can't see the chart? Click here for a version that should work with your mobile device.)

This gives a sense of how many individuals fall into each income category, but there's another measure that Statistics Canada also tracks — the share of total tax paid.

This is typically expressed by income percentile, and those at the very top pay by far the most, per person.

Again, the most recent data comes from 2015. This was the first year that the "flat tax" no longer applied in Alberta, but the progressive tax rates didn't escalate as quickly then as they do now. (In that first year, the rate increased to 10.5 per cent for income above $125,000 and maxed out at 11.25 per cent on earnings above $300,000.)

The top one per cent of earners paid 31.5 per cent of the total income tax collected in Alberta that year. The top 0.01 per cent, alone, accounted for 5.7 per cent of all the income tax revenue.

By comparison, the bottom 50 per cent paid 2.3 per cent of the income tax. The 40 per cent of earners above them paid 28.7 per cent of the tax.

As you can see from the interactive graph below, Alberta's highest-income earners carry a higher proportion of the tax burden than those in Ontario or Canada-wide.

Click or tap on the tabs below to switch between jurisdictions:

(Can't see the chart? Click here for a version that should work with your mobile device.)

So what does this all tell us?

In a nutshell, Albertans across the income spectrum pay less tax on their earnings than people in Saskatchewan, Manitoba, Quebec and Atlantic Canada.

Low-income and high-income Albertans, meanwhile, enjoy the lowest taxes in the country.

But, middle-income Albertans — who account for the bulk of the population — pay more than those in Ontario and B.C.

Returning to the Klein-era flat tax would not change any of this, other than to increase the "tax advantage" already enjoyed by the richest Albertans compared to other provinces.

These richest Albertans also pay a larger share of the total income taxes collected in Alberta, compared to the wealthiest people in other parts of the country.

All facts for voters to consider, as another debate over income tax looms.

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