Alberta’s Revenue Options: Presentation to Association of Retired University Professors, U of A

Presentation

On Thursday, 6 January I was invited to make a presentation on what the province’s revenue options were going into the next budget. Provincial budgets by law must be presented before the end of each February. The presentation generated a great deal of discussion which will be touched on below. The PDF of presentation can be found at the foot of this article.  

The purpose of the discussion was to stimulate an exchange of ideas concerning what  future Alberta governments might do to raise more revenue.

I began by defining what I saw as the problem. The first problem is the Alberta government’s over-reliance on resource royalties to fund its spending. The second issue is that Alberta has not achieved a budgetary surplus without resource revenue since at least 1965. The first chart in the presentation shows that if royalties are taken out of total government revenues, since 1965 the provincial government  has not once ran a budgetary surplus.

Another problem is the illusion that Alberta taxpayers have been picking up the full tab for the costs of public services.  I paraphrased  former deputy treasurer Al O’Brien whom I interviewed for the forthcoming A Sales Tax for Alberta: Why and How– that the Alberta public have, since the Second World War,  been fooled by their political leaders into believing that they, as taxpayers, have been paying 100 per cent of the costs of public services when it’s been more in the range of 60 to 80 per cent.

The chart was followed by quotations from government reports and Herb Emery and Ron Kneebone that  1) price booms are invariably followed by price busts; resource revenue is highly variable; and over-reliance on resource revenue is problematic.

At the present time – looking at the distribution of the revenue pie from the province’s mid-year fiscal update, the three largest components of revenue are personal income taxes (23 per cent); federal transfers (20 per cent); and resource royalties (19 per cent). Even with nearly one-fifth of resource royalty revenue funding programs the province is still running a $5.8-billion deficit.

I then showed the Alberta Tax Advantage chart, a chart that has been included in every provincial budget since around 2002. This chart illustrates what additional revenue would accrue to the Alberta treasury if the government implemented the same revenue structure as other provinces. This chart always takes my breath away. In the 2021 budget, Alberta would receive an additional $13-billion if it levied taxes, premiums, fees etc. at Ontario rates. A sales tax set at Ontario’s rate of 8  per cent would alone bring in an additional $9-billion or about $1.1-billion for each per cent levied.

The presentation next explored the major options for bringing Alberta’s deficit to balance by illustrating the different marginal rates of major revenue sources. In the case of marginal tax rates for personal taxes, Alberta has some room to bump up tax rates vis-a-vis B.C., Ontario and Quebec but not in relation to Saskatchewan. At the most, incremental changes might bring in an additional $1-billion.

The big difference is in the corporate income tax (CIT). Alberta’s so-called Job Creation Tax Cut has dropped the CIT rate from 12 per cent to 8 per cent, a dramatic one-third reduction. The purpose of the policy move is to attract investment and jobs. The other “competitor” provinces – British Columbia. Saskatchewan, Ontario, and Quebec’s rates are set at 11.5 to 12 per cent. So there is substantial room to raise revenue to capture the leakages that have taken place over the past several years. Alberta’s projected CIT take take this year- a most profitable year for oil and gas companies- could be in the neighbourhood of $1-billion. 

In the case of other taxes such as gasoline/carbon taxes, tobacco and a payroll tax, the only two areas where more revenue could be extracted are from a payroll tax. Today Alberta, like Saskatchewan, has no payroll tax but B.C., Ontario, and Quebec all have meaningful payroll taxes. The second large potential revenue source is the carbon tax which Ottawa collects and then redistributes to some Albertans. Alberta could reinstate a carbon tax and use some, or all, to fund spending and reduce the deficit. Another billion dollars or so would be freed up.

Finally, there is the sales tax, what I have labelled the Voldemort of Alberta politics. Alberta, as everyone knows does not have a retail sales tax. In B.C. the sales tax is seven per cent and in Saskatchewan the sales tax is set at six per cent. Alberta could still retain its claim as Canada’s lowest tax jurisdiction with a four per cent sales tax that could bring in about $4.5 billion.  Adopting those policy choices above would eliminate the budget deficit.

I highlighted the commonly cited advantage of a sales tax to the retired professors:

• Retail sales tax is far more stable compared with CIT and Resource Revenue;
• Easy administrative mechanisms through a Harmonized Sales Tax;
• Taxes out of province consumers;
• Taxes consumption of inherited health; and
• Cost to raise a dollar much lower than other taxes.

Of course the big downside is the regressivity of a sales tax. Individual taxpayers, regardless of their incomes, pay the same rate and same taxes on goods and services paid for. As I said, there are existing ways to protect low income people from the effects of the sales tax through a GST tax credit, but not all the regressivity can be eliminated. 

Discussion

Discussion largely focused on three areas: Alberta’s low level of resource royalties compared with other jurisdictions; the likelihood of politicians bringing in a sales tax; and the merits of wealth or estate taxes. (I have added reflections which occurred to me after the discussion.) 

We talked about the failure of

Ed Stelmach’s royalty review- Our Fair Share -and how industry have successfully pushed back on proposed changes to increase revenue. This report was addressed to the Minister of Finance- not the Minister of Energy. It showed conclusively that Alberta’s royalty take was at the bottom of comparable jurisdictions such as California and Texas for conventional oil, and below Venezuela, Norway and the U.K for unconventional fields. The report contained some radical proposals including moving the royalty collection apparatus away from the Energy department to the Finance department. The rationale for this was that Energy’s principal role was to encourage energy investment and not to maximize resource rent to resource owners which fits more appropriately under the revenue section of the Finance department. The pro forma 2016 At the Crossroads report did little to increase Alberta’s ownership take of energy revenues. 

An excellent discussion ensued on the practicalities of Alberta politicians accepting the need for a sales tax. I spoke about my “naïve” proposals to establish a representative committee to examine the broad revenue options (chapter 10 of forthcoming book). One key objection to a sales tax is its political unsaleability-  since politicians want to be re-elected and to achieve government they would not support a sales tax (the realpolitik position). Unless there was some deeply compelling reason for voters to support that change- and evident to the political advisers- Alberta politicians would stay away from discussing a sales tax. I also added that political decisions are increasingly being formulated by chiefs of staff and executive decisions. The voice of the neutral public service is rarely heard.

Travis Toews hopes to announce a revenue review before the next general election. This decision is highly charged and caution will possibly delay such a review. Toews has said “everything would be on the table” including a sales tax. (See abpolecon.ca 6 December 2021)

This political perspective has hardened over the past several decades into the conventional wisdom that an ALberta sales tax is a political suicide tax. It is my (vain?) hope that when A Sales Tax for Alberta: Why and How hits the bookstores this spring, it will generate a broader debate about the long-term sustainability of the province’s finances. As one participant said, unless there is a societal crisis- which touches everyone – the inclination for change is just not there.  If there is no inclination for change, public information sessions, general education and provincial commissions, no matter how well structured and attended will not reverse the negative attitude to an Alberta sales tax. That said, if UCP cuts continue to impact people’s lives in a very negative way, I do think that we might see support for a sales tax creep up to pay for sustainable public services. 

I was asked about the merits of a wealth or estate tax. These types of taxes require widespread adoption by governments across the world to eliminate the prospects of wealth gravitating to tax havens (fiscal leakage).  Already disclosures such as the Panama papers and Paradise papers reveal vast swathes of income and wealth go under-reported to tax authorities. Thomas Piketty in his Capital in the Twenty-First Century- argues that, at a minimum, all European Union countries must agree to impose such a tax to have any hope of capturing significant tax revenue. With income and wealth inequality growing during the pandemic there is a even stronger case for governments to find ways to tax wealth.

I didn’t address estate taxes which were abolished during the 1960s federal Carter tax reform process when capital gains became subject to tax. The United States has estate or inheritance taxes but the use of foundations have been ways for the ultra wealthy to pass on and shield their wealth. It would make sense for the federal government to occupy the field with a national rate and share some or all of the proceeds of the tax revenue with the provinces. However, like with wealth taxes, unless there is a date that locks in place the tax payable on death, wealthy families will  follow advice of their tax lawyers and accountants to structure their affairs in such a way as a to minimize their tax liabilities.