The Parkland Institute

Op-eds | December 29, 2009

Time to change Alberta taxation

Cutting social programs not the answer to provincial deficit woes

by Diana Gibson

The Christmas season is a time for Albertans to be giving and to take stock of the year. However, Albertans may have found it a little harder to get in the spirit this year with a conservative government that has been cutting its budget on the backs of middle class families, the sick, elderly, the mentally ill and the disabled.

Scrooge is very much alive in the government’s choice to cut social programs while keeping taxes artificially and unnecessarily low. Premier Ed Stelmach and his cabinet have made it clear that they will not talk about revenues despite a dramatic fall-off in natural resource income. Instead, they have chosen to cut social services to the tune of more than $2 billion, even though Alberta can easily afford to increase taxes in a number of areas and still have lower taxes than elsewhere in Canada.

Alberta could move from deficit into surplus simply by restoring the progressive tax system that was in place before 2001. In 2001 the provincial government abandoned progressive taxes and moved to the across-the-board 10-per-cent “flat tax.” This resulted in billions of forgone revenues every year. In fact, in 2006 alone, the flat tax cost Albertans $5.5 billion. For context, the government’s most recent deficit projections are for a $4.3 billion deficit this year.

And that is just the income tax revenues. In other areas of taxes there is even more room for tax reform. The Alberta government’s own reports boast that Alberta is leaving in the range of $10 to $18 billion on the table each year by failing to charge tax rates even close to those of other provinces.

According to provincial government figures, Alberta’s average tax share was the lowest in the nation at only 77.7 per cent of the national average in 2004-05. Nova Scotia is in second place 99.4 per cent of the national average. This gap is unnecessarily and unjustifiably wide, even by the standards of a low tax ideologue. Areas where Alberta is far below other provinces in taxes include the gasoline tax, retail sales tax, capital tax on financial institutions and corporate taxes.

Raising taxes at this point is not as heretical as the Stelmach government would have you believe. Mainstream voices like the C.D. Howe Institute, the Canada West Foundation and the Institute for Public Economics at the University of Alberta see the need for reform.

Colin Busby at the C.D. Howe Institute advocates for a sales tax as an important move to stabilize revenues and thus also spending. This would help to ensure that high-value programs for all Albertans, such as health care and education, were well-maintained in lean times. He also agrees that a value-added tax would permit the government to save more energy revenue for future generations. He calculates that at a level of two or three per cent, a sales tax could bring in about $1.5 billion of extra revenue next year.

Over at the Canada West Foundation, Robert Roach cautions the provincial government on the hazards of “dangling tax dollars in front of businesses,” the major hazard being a “race to the bottom” competition between provinces in which the whole country loses. Accordingly, Alberta should be prioritizing advantages of the availability of skilled workers and excellent infrastructure over subsidies and tax breaks.

Most businesses do not choose Alberta due to low taxes, but because of the resource wealth and natural bounty. Those industries cannot thrive without expensive infrastructure, healthy, educated workers, and research and development, all of which require strong and sustainable government revenues.

By forgoing tax revenue, the Alberta government has chosen to make Alberta’s social programs dependent on revenues from natural resources, especially natural gas. Albertans have paid the price in revenue volatility.

The foolishness of this strategy was made clear to all Albertans this year when natural gas prices tanked and revenues plummeted.

Natural gas production in Alberta peaked in 2001 and has been declining precipitously since. Yet, the government continues to rely on royalties from gas to fund operations. The province needs to move to more sustainable revenues from progressive income and other taxes.

Not only is the flat tax costing Alberta a lot of money, but the income tax advantage is a myth for many Albertans, with only high earners paying less income tax here than they would in other provinces. For the lowest tax bracket, Alberta actually has the third highest income tax rate in the nation.

The middle tax bracket fares only slightly better, placing in the middle of the pack. Those at the very bottom do fare better, not because of the flat tax, but because the government raised the income exemption threshold, which has been a very positive move.

The same disadvantage plays out for middle-income families. A family earning $75,000 in Alberta pays a higher income tax rate than the same family in British Columbia, Saskatchewan, Ontario, Quebec, the Yukon, the NWT, and Nunavut. A two-income family with two children in Alberta, earning $125,000, would still pay a higher tax rate than the same family in B.C. or Ontario. Alberta’s income tax advantage is a myth for many and should not get in the way of real income tax reform.

Progressive tax reform would actually be an economic stimulus. Across the board, economists have been saying that tax cuts to the wealthy are not an effective economic stimulus. The reason: the bulk of that money is spent on imports, savings and debt repayment. Little of the money is spent locally where it would create jobs and stimulus.

The converse is also true—increasing taxes for that class of earners will not have much, or any, negative impact on the economy.

Making the tax system more progressive is a perfectly responsible choice for a government in a recession. Reclaiming lost tax revenue will also mean that spending can be maintained on social programs like health care and education. Direct spending by government is recognized by economists as the most effective form of stimulus.

Making the tax system more progressive would also stimulate the economy, creating and protecting jobs for working Albertans.

Perhaps visits by the ghosts of Alberta booms and busts past, present and future might help put the Alberta government in the mind of a more responsible form of budgeting and help make the policies a little less Scrooge-like.

Diana Gibson is research director of the Parkland Institute at the University of Alberta.

Links to Media:

• Edmonton Journal, December 29, 2010

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