When British Columbia's finance minister recently talked about "redistributing" federal tax cuts to BCers in a manner more to his liking, he set off a deserved firestorm of criticism. Finally, Ottawa was getting the message on tax relief, and here was BC's minister playing class warfare politics with a well-deserved tax cut. The minister later claimed that no federal tax cuts would be taken back by the province, but that British Columbia would de-link from the federal tax system for reasons of transparency.

"Transparency" was the spin. But the real reason BC will cut and run from the federal tax system is that provincial revenues mushroomed significantly over the past 11 years thanks to bracket creep taxes. If BC stayed linked, then federal tax cuts would cut into that annual extra provincial taxpayer cash.

To understand why BC's government wants to avoid falling federal tax rates, it helps to understand how provincial and federal taxes have been linked, and how Ottawa's past tax policies have boosted BC's tax coffers. Until now, provincial income taxes were calculated as a percentage of federal tax. The basic BC rate (excluding surtaxes) is 49.5%, so for every $100 a taxpayer sent to Ottawa, another $49.50 is due to Victoria. That meant when federal taxes went up, so did provincial taxes. Now that federal taxes are heading down, BC's taxpayers would have also received an automatic provincial tax cut.

Because BC will "de-link" from Ottawa this year and instead calculate provincial taxes based on income instead of federal tax, BCers will miss out, not only on the automatic provincial tax cuts in 2000, but in every future year that Paul Martin cuts taxes. Only a taxaholic would like that scenario.

What makes this shift in tax policy so galling for taxpayers is that provincial finance ministers had no complaints about what bracket creep did to taxpayers for the last 11 years. The extra amount of tax taken by BC's government grew from $52 million in 1989, to $566 million in 1998. Last year, the gouging declined slightly to $532 million.

According to media reports, BC's take would have shrunk by another $150 million this year due to the recent federal budget. Now that BC is de-linking though, the province's finances won't be affected by Paul Martin's recent tax cuts, i.e. - no automatic provincial tax cut.

Out of all the provincial finance ministers, only Alberta Treasurer Stockwell Day complained about the effect of bracket creep upon taxpayers. He announced back in February 1999 that Alberta would kill bracket creep, and that when the new tax system kicks in there in 2001, annual overall taxes would be reduced by $750 million, an amount that will more than compensate Alberta's taxpayers for the current effect of past bracket creep taxes.

Shifting how provincial taxes are calculated is not a bad idea in itself, and in fact, the Canadian Taxpayers Federation supports such an idea, providing provincial taxes are cut annually similar to the cuts that would occur were provincial taxes still linked to federal rates.

If that doesn't happen, and BC's government reduces taxes by a smaller amount, (and then takes credit for tax cuts that would have happened anyway and would be more significant under the old system,) that will mean the province decided to hoard the extra annual tax revenues that resulted from bracket creep. Watch the next provincial budget - and the ones until 2004 - very carefully.