But neither will ignoring the revenue side cure the deficit problem
Franco Terrazzano’s Opinion piece in the 9 October Edmonton Journal is quite right when he observes that a “provincial sales tax won’t erase Alberta’s red ink.” No single mechanism can do that. Alberta’s massive deficit and future deficits will not go away merely by blaming Alberta politicians (past and present) who have spent resource wealth on maintaining a high level of public services and infrastructure. However to suggest that sales tax advocates believe a sales tax will eliminate the deficit by itself is disingenuous.
The economic argument for a sales tax is compelling for a number of reasons. First, it is a far more efficient tax than personal or corporate income taxes. A commonly used metric of the economic cost associated with any tax is the marginal costs of public funds. This measures the full impact to society of raising one more dollar of revenue by way of a given tax. Economics research calculates the cost to society of raising one dollar of additional revenue is $1.41 for the personal income tax, $2.91 for the corporate income tax and $1.00 from a sales tax.
But it is not just the efficiency factor that supports the case for a sales tax. As economists are well aware, a sales tax is a far more reliable source of revenue than either corporate or personal income taxes, owing to the relative stability of its tax base. Moreover, corporate and personal income tax bases are more volatile than the sales tax.
In contrast to personal and corporate income, two areas in which clever tax planning can be used to reduce taxes, a sales tax is more difficult to evade. The tax is simply collected as the point of sale.
Coupled with the volatility of Alberta’s royalty revenues and volatility of investment income, the funding of Alberta’s public services is subject to the vagaries of an unbalanced revenue structure. This vulnerability has been evident for decades in government reports and academic studies.
This vulnerability, more evident now than at any time since the Great Depression, has been the result of policy decisions made by Peter Lougheed in 1982 and Ralph Klein in the late 1990s. In 1982, Lougheed decided to increase spending dramatically and to finance the expenditures by cutting in half the amount of resource revenue to the Heritage Fund and taking all the investment income back to pay for government programs. My calculations show that the effect of removing the investment income meant that by 2020 the Heritage Fund would have held about $260 billion. This is without adding 30 per cent of the resource revenue to the Fund.
A steady, predictable line of revenue is critically needed in Alberta, with its history of booms and busts. This history exists because Alberta continues to depend very heavily on a notoriously volatile source of revenue: resource royalties. If royalty revenue is subtracted from income, Alberta has never had a balanced budget since 1965. The fact of the matter is that Albertans have enjoyed one dollar of public services while paying only 60-90 per cent of the total costs because of energy royalties. Coupled with the vagaries of the province’s investment income, this lopsided revenue structure has left Alberta’s public services vulnerable to fluctuations over which the province has little control—a vulnerability more evident now that at any time since the Great Depression.
Terrazzano notes the provincial structural deficit could be around $7 billion so a 5 per cent harmonized sales tax would go a considerable way to eliminating the structural deficit but a sales tax would contribute to removing the illusion that resource revenue will always keep our taxes low.
Terrazzano advocates cutting spending but like most advocates he is not specific about where he would like to see spending cut. In my judgment one of the areas which should be cut is the corporate welfare that has been flowing to the energy sector for years in the form of unconscionably low royalty rates, low corporate tax rates, and various royalties and tax holidays that have flowed for decades. If the current government is looking to save money, it should undertake a full review of the grants to business and tax expenditures benefitting businesses, large and small rather than just a focus on education, health care and social services. While it may be true that our civil service is overpaid, you didn’t hear complaints when oil and natural gas prices were sky high.
There are objections to a sales tax, especially concerns about the regressive nature of the tax- its impact on low income people. However, there are various ways to reduce the impact on this segment of the population through tax credits and exempting goods deemed necessary like food. That said, all taxes have varying costs and benefits.
The resistance to sales taxes however is political, not rational. Our two main political parties refuse to discuss this option. Provincial finance ministers have over the years, mused about a sales tax and every premier has shut down any discussion. This fear should not stifle debate as Alberta remains the only province without a sales tax in its revenue structure. Is Alberta so much different than our neighbours in Saskatchewan and British Columbia that we can afford to remain the only province without a sales tax. Is this worth fighting for? But to whom does this Alberta Advantage accrue? And are we prepared to believe that a sales tax would “hurt” Albertans whereas additional cuts to education, health case, and social services would not?
Albertans are the owners of the resource and theoretically direct policies through their MLAs. Albertans deserve a thorough discussion about how to reconcile their affection for quality public services while keeping taxes $12 billion lower than the next lowest taxed jurisdiction. A sales tax is not a panacea for the province’s economic ills, but neither are spending cuts. Albertans deserve better than to be asked to sacrifice their quality of life so that past mistakes can be repeated.