Reforming the Federal Political Contribution Tax Credit

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Most individuals making political donations have higher incomes, social networks, and levels of political engagement.[1] These  donor characteristics likely come as no surprise. As an aphorism goes,  “money is the lifeblood of politics.” Naturally, political parties and  candidates are “more attentive or sympathetic to the concerns or  interests of donors, which can affect political discourse and policy  outcomes.”[2] The federal government encourages individuals to make political  donations through the Political Contributions Tax Credit (PCTC).

I argue that the PCTC must be a refundable tax credit to gradually  increase some marginalized groups’ citizen participation. The PCTC is a  non-refundable tax credit.[3] An individual receives refundable tax credits regardless of the taxes  owed, and non-refundable tax credits reduce only the taxes owed on an  individual’s taxable income.[4]

Every individual making a valid (federal) political monetary donation is eligible for the PCTC. The Canada Elections Act caps an individual’s political contribution limit at $1,500, with an annual increase of $25. For 2021, the limit is $1,650.[5] The PCTC calculates the tax credit amount using a progressive structure:

• when that total does not exceed $400, 75% of that total,
• when that total exceeds $400 and does not exceed $750, $300 plus 50% of the amount by which that total exceeds $400, and
• when that total exceeds $750, the lesser of
• $650, and
• $475 plus 33 1/3% of the amount by which the total exceeds $750.[6]

The maximum credit available is $650.[7] The PCTC’s declining rate structure is considered a good example of  promoting “a more genuine pluralism by providing a larger subsidy for  small and medium-sized donations and a smaller subsidy for large  donations.”[8] For example, an individual donating $200 will get a PCTC for 75% of the donation amount (or $150).

The PCTC serves as one of the main public funding sources for political parties.[9] Another public funding source is the “reimbursement of election expenses for candidates and political parties.”[10] However, this blog post solely focuses on improving the PCTC compared to other funding sources for Canada’s political parties.[11]

The PCTC is a tax expenditure because, unlike a technical tax  provision, it incentivizes individuals to make political donations,  which improves the civil society[12] through encouraging “broad citizen participation in the electoral process.”[13] The PCTC is likely situated within the tax expenditures incentive  category because it ensures “political parties are the principal vehicle  for communal political organization”[14] by “reducing the after-tax cost” for taxpayers making political donations.[15] Professor Neil Brooks proposes the following questions to analyze tax expenditures:

1. Do they serve legitimate and important objectives of government policy?
2. Are they effective in achieving their objectives?
3. Do they achieve their objectives equitably?
4. Do their benefits outweigh their costs?
5. Are there alternative policy instruments that would achieve the government’s objectives more effectively and equitably?[16]

The PCTC serves a legitimate and important objective because it  rewards any individual’s eligible political donation. However, the PCTC  is likely ineffective in achieving this objective even though it was  claimed by 147,000 individuals in 2017 and provided approximately $25  million back into Canadians’ pockets.[17] A 2011 study on non-refundable tax expenditures  found that the top 1% of income recipients benefitted the most from the PCTC.[18]

The PCTC is unlikely to achieve an equitable result because its  non-refundable status often rewards higher-income recipients more than  lower-income recipients. Professor Neil Brooks describes that,  generally, all tax credits should be refundable because, “[a]n individual  who is entitled to a tax credit and whose tax liability is not  sufficient for full offset of the credit should have the excess credit  refunded as a transfer payment. If credits are not refundable, many  low-income people are excluded from being beneficiaries of the spending  program.”[19] For example, many eligible claimants cannot access the disability tax  credit (DTC) because they have “insufficient taxable income to benefit  from the [disability tax] credit”[20]  compared to other eligible claimants. Some scholars advocate for  changing the disability tax credit’s designation because it would  improve its availability and better achieve the tax credit’s objective.[21] The DTC is analogous to the PCTC because of the lack of low-income claimants accessing the PCTC.[22]

The benefits of a non-refundable PCTC fail to outweigh its costs  because it encourages only a narrow group of income recipients to  participate. Under a refundable PCTC, low-or middle-income individuals  are more likely to benefit because they are no longer limited by their  taxable income when making smaller donations. Students, seniors, or  persons with disabilities with fixed or limited incomes are unlikely to  have sufficient taxable income to benefit from claiming a non-refundable  tax credit. However, no existing research makes the causal link between  any of these social groups and claiming the PCTC.

Professors Randy Besco and Erin Tolley find that “[r]elative to their  share of the population, most ethnic minority groups donate less often  than Canadians with European surnames. Black, Chinese, Other East Asian,  and Middle Eastern and North African Canadians all donate at rates  below their proportion of the population.”[23] An overwhelming majority of donations come from donors of European  ethnicity, but donor ethnicity does not impact the average size of a  donation—which could be a product of contribution limits.[24]

However, PCTC claiming patterns are gendered.[25] Women are less likely to donate and, when they do, they make smaller political contributions compared to men.[26] Although, among 2017 sole filers, women (54.7%) are slightly more likely to claim the PCTC compared to men (45.3%).[27] Still, male spouses (69.4%) are more likely to claim the PCTC compared to female spouses (30.6%).[28]

Tax expenditures are often less effective compared to other policy solutions.[29] For example, the Per-Vote Subsidy program (PVS) offered quarterly  payments to political parties based on their previous electoral results  from 2004-2015.[30] Under PVS, an individual funds their preferred political party by  voting for them. This policy instrument is more effective because more  individuals vote than currently claim the PCTC.[31]

The PCTC’s abolishment—for an alternative policy instrument—creates a  challenge because high-income individuals will benefit  disproportionately from voting while and still making donations. The  PCTC seeks to offset a barrier for individuals to make political  donations, which remains a distinct form of political participation.  Individual political donations are likely here to stay because political  expression lays “at the heart of the guarantee of free expression and  underpins the very foundation of our democracy.”[32] Without any tax incentives, the interests of high-income individuals  will likely get more exposure. A refundable PCTC provides a modest step  forward because it better meets the tax expenditure criteria and  encourages other income class donors.

Ontario’s current regime outlines a potential political finance model  for the federal regime to adopt. Ontario’s tax credit is refundable.[33] Ontario’s political finance regime encourages individuals to make donations, [34] contains contribution limits,[35] and offers a similar declining tax credit rate structure.[36] Ontario’s approach also provides a policy implementation mechanism for  ensuring that eligible individuals receive the excess credit amount  “after the Canada Revenue Agency has assessed [their] return.”[37] Ontario’s Bill 254 also allows political parties to receive a per-vote  subsidy based on past election results as another source of public  funding.[38]

In sum, a refundable PCTC incentivizes the participation of  underrepresented groups within the political marketplace. It remains  only one source of public funding for political parties.