Preserving Alberta’s advantage means levying a provincial sales tax
“We can no longer spend like we’re the rich kids on the block because, quite frankly, we’re not anymore.” So said Alberta Finance Minister Travis Toews in a speech to the Calgary Chamber of Commerce following the release of the recent MacKinnon Report, which examined the state of government spending in Alberta.
In a new study for the University of Calgary’s School of Public Policy, I argue that Alberta can no longer tax like we’re the rich kids on the block, either. Nor, to stretch the “rich kids” analogy perhaps a bit too far, can we continue to rely on our “trust fund” — our endowment of oil and gas — to generate a steady and reliable stream of income. In short, it’s time for Alberta to grow up and tax and spend more responsibly.
Everywhere in the world policies relating to climate change and technological developments in both renewable and non-renewable energy are changing the landscape in the energy sector. Though the eventual implications of these changes are far from certain, the Alberta of the future is unlikely to look like the Alberta of the past. The province therefore needs to make structural changes on both the tax and spending sides to make its fiscal system more flexible and responsive to whatever the future brings.
This does not mean the government needs to increase taxes to raise more revenue, though it may decide to do that. Rather, it needs to rework its revenue mix, raising some taxes and lowering others. In general, it needs to rely less on volatile oil and gas revenues and move to a more stable, less costly approach to generating revenue.
And, yes, that means introducing a provincial sales tax (PST). Alberta actually had a sales tax, a three per cent tax on “ultimate purchases,” which the Social Credit government introduced in 1936. It lasted a year. Public outrage forced the government to withdraw it in August 1937. Since then in Alberta “PST” has stood for “Political Suicide Tax.” In the economy we’re now in, however, that should no longer be the case.
As a revenue source a PST has a lot to offer. Many studies confirm that a broad-based tax on consumption is substantially less costly economically than other types of taxes. A PST is, in many ways, “the least costly tax of all,” in that it distorts people’s economic choices less than any other tax. Moreover, it is a stable source of revenue that is less susceptible to the ups and downs of business cycles or oil and gas markets.
By contrast, the corporate income tax (CIT) imposes big costs on the economy. The CIT is generally considered “the costliest tax of all” in economic terms and it is clearly a more volatile source of revenue. To its credit, the province’s new United Conservative Party government has recognized this. One of its first policy announcements was a phased reduction in the CIT rate from 12 per cent to eight per cent by 2022.
On balance, the reduction in the CIT rate is good policy. It is not a silver bullet but, all else equal, it should lead to an increase in investment and jobs and help diversify the economy. Even so, it comes with a cost.
In Alberta ‘PST’ has stood for ‘Political Suicide Tax’. In the economy we’re now in, however, that should no longer be the case
Contrary to the musings of some analysts, it will result in a reduction in government revenue. Some — but not all — of that reduction will be offset by the increased economic activity generated by the cut. But even accounting for this supply-side effect, my calculations suggest it will leave a hole in government revenues of between $770 million and $1.4 billion annually.
That hole could be filled by a PST. A five per cent PST would raise a little over $5 billion per year, some of which could be used to offset the reduction in revenue due to the CIT cut.
One argument against a PST is that it is regressive, with the burden falling proportionately more on people with lower incomes, who typically consume more of their income than higher-earners. But this problem can be dealt with by using part of PST revenues to provide a refundable tax credit to lower-income Albertans similar to the federal GST credit.
But won’t the middle class (and those “working hard to join it”) be hurt by a PST? Fair enough. But that suggests some of the PST revenue should be used to finance a personal income tax (PIT) cut. Cutting the tax rate on the middle two brackets by two percentage points would lower Alberta’s PIT revenue by about $3 billion.
In sum, a five per cent PST would: generate enough revenue to offset the reduction in revenue due to the announced CIT cut; finance a transfer to lower-income earners; and pay for a middle-class tax cut, with perhaps a little left over. And after all of this Alberta would still have the lowest PST, CIT and PIT rates in the country. The so-called Alberta Advantage would remain intact but the “rich kid” would have grown up.
Kenneth J. McKenzie is a professor in the University of Calgary’s Department of Economics and a Fellow at its School of Public Policy.