Greg Flanagan says YES—Eventually
Why impose taxes in the first place? First and foremost, to pay for the public services we all need and enjoy. In an ideal public-finance world we’d first determine the level and cost of the public services we want, then set the tax system to provide the needed revenue. Second, taxes—subject to their progressivity—redistribute net income, thus reducing inequality. Even when not progressive, tax revenues support redistribution through public goods such as healthcare and education. Third, taxes help stabilize the economy, offsetting the cyclical nature of markets. Fourth, taxes can be used to change behaviour—think taxes on cigarettes and liquor, or tax exemptions such as RRSPs. Fifth, taxes can be used to correct market failures. A carbon tax, for example, puts a price on pollution. More generally, paying taxes contributes to the collective well-being, helping build a sense of connectedness and community.
Alberta’s taxes are too low. For decades Alberta’s government under the PCs bragged about having Canada’s lowest taxes. More bizarrely, the NDP government continues to profess the “Alberta Advantage”—$11-billion to $21-billion less tax revenue than other provinces’ tax regimes would generate in Alberta. But the province’s tax revenue has never covered the cost of its public services, not even in the 1990s, when Klein cut the public sector by an unsustainable 20–25 per cent. Alberta’s budgets have only ever been balanced (or in surplus) by adding non-renewable resource revenues. This is clearly not a sustainable plan over the long run.
Income inequality is an increasingly serious social problem, and Alberta has by far the worst record in Canada. Food bank use is rising. Redistribution through higher taxes and basic income security could reverse these trends.
Alberta’s economy is volatile largely due to its reliance on the petroleum market. This volatility is magnified when public finances depend so much on the same industry. Worse, the PCs cut public expenditures when revenues declined, further exacerbating the cyclical ups and downs. A stable public service paid for by stable tax revenues would dampen the volatility of Alberta’s primarily resource-based economy. In a world where climate change due to fossil fuel consumption is a prime concern, dependence on petroleum revenues to fund public services further constrains the government’s policy agenda.
Finally, Alberta’s emphasis on low taxes accentuates individualism and self-interest. All citizens need to contribute to the cost of society. With no sales tax and a high exemption amount ($38,000 per couple) in the provincial income tax, many Albertans pay almost no taxes—including some high-earners.
Alberta must raise at least another $10-billion a year in tax revenue. A sales tax would generate half the amount needed. The province must increase alcohol and fuel taxes (Canada’s lowest) too. Higher and more-progressive taxes (both personal and business) would do the rest.
Bev Dahlby says No—AT LEAST NOT YET
Unlike “Should Calgary host the Winter Olympics?” the question “Should Alberta have higher taxes?” cannot be answered with a simple yes or no. It must be considered in the context of our province’s fiscal situation, with its large fiscal deficits and growing provincial debt, and the decline in household incomes and higher unemployment rates owing to the downturn in the provincial economy. The status quo, however, is not an option. Eventually the provincial government will need to raise revenues, cut spending or implement some combination of the two.
The first question, then, is “How much of the fiscal adjustment should be through spending cuts and how much through tax increases?” Given that Alberta’s per capita expenditures are exceeded only by Newfoundland and Labrador’s, Albertans should see how much the government can reduce spending without sacrificing key public services. In areas such as healthcare, it will be as important to reform how services are provided in order to achieve lasting savings.
I don’t know how much of the adjustment can be achieved this way. For the sake of argument, suppose that only half of the fiscal adjustment can be done through cuts, and the province must increase revenues by about $5-billion per year.
Now the question is which taxes to raise. Options include personal and corporate income taxes, post-secondary tuitions, carbon taxes and provincial property taxes, but the elephant in the room—the largest untapped source of tax revenue—is a provincial sales tax. Alberta is the only province that does not levy a sales tax, and is the lowest-taxing province overall. The differential—the amount of extra taxes Albertans would pay if we had the same tax system as other provinces—is known as the Alberta Advantage. Some 60 per cent of our tax advantage with Ontario and BC and over 80 per cent with Saskatchewan is attributable to the absence of a provincial sales tax.
My research with MacEwan University’s Ergete Ferede shows that a broad-based sales tax, such as the harmonized sales tax in five provinces, has the least harmful effect on taxpayers’ incentives to work, save and invest, which ultimately determine a province’s level of economic activity and its citizens’ standard of living. Research by the University of Calgary’s Philip Bazel and Jack Mintz has shown that an HST in Alberta accompanied by a tax credit for low-income families would offset the potentially regressive effects of a consumption tax. Of all the major tax changes that could help alleviate Alberta’s fiscal situation, an HST is the most appropriate.
So should Alberta have higher taxes? In my view, a major tax increase is only warranted after the public has become convinced that spending cuts have gone as far as possible and that further cuts would imperil vital public services. Then we should be prepared to start paying a sales tax to help pay for public services.
Greg Flanagan responds to Bev Dahlby
There’s much in Professor Dahlby’s initial statement that I agree with. Changes to the tax regime should be considered within the context of the province’s fiscal situation. I would not recommend increasing taxes at this time; possibly some rates for low-income individuals should even be lowered and/or subsidies given to certain individuals and firms until the economy recovers or adapts. The province can carry deficits for a considerable time before debt becomes an economic drag. I also agree with the statement “Eventually the provincial government will need to raise revenues, cut spending or implement some combination of the two.”
However, as public spending cuts are often floated as a budget solution when Alberta faces a deficit, and inevitably Alberta’s spending levels are compared to other jurisdictions, I will delve into these comparisons.
Dahlby has made a simple comparison of provincial public spending using gross expenditure per capita. It’s true that if you take each province’s 2017 gross expenditures per capita, Alberta is second-highest. Note that Alberta is not much higher than Saskatchewan, Manitoba or Quebec. However, for many reasons these provincial comparisons are irrelevant.
First, these gross figures do not consider circumstantial expenditures. For example, Alberta has had the greatest net migration and expansion in the country. This in-migration has created large infrastructure needs, which are exacerbated by the infrastructure deficit left by former governments. Newfoundland and Labrador, the highest spender, has been caught up in the Muskrat Falls financial burden ($10-billion in 2018 alone) and is adjusting to the demise of fishing industries.
Inflation rates among provinces have diverged significantly over the last few decades, and Alberta has had by far the highest increases. Thus the current-dollar value of Alberta expenditures doesn’t equate to other provinces’. Also, Ontario and Quebec, with much larger populations, can take advantage of economies of scale in the provision of public goods.
Personal incomes are considerably higher in Alberta. Albertans average $36,600 compensation per employee compared to a national average of $29,270. This has two effects. It costs more to hire a public sector worker here, given high private sector wages. Secondly, wealthy Albertans want more public goods as well as more private goods.
If we want a single metric for provincial comparisons, gross domestic product seems a better measure. GDP is used when making international comparisons, to overcome the inherent complications in comparing finances of different jurisdictions with divergent economic contexts. As a percentage of provincial GDP, Alberta’s government expenditures are the lowest in Canada, at 17 per cent.
Does this indicate that Alberta needs to increase public sector spending? Although it adds another perspective, I don’t think it or any other indicator captures the complexity of the question. Ultimately the citizens of Alberta need to decide, through some process, the right level of public goods and services for Albertans. And in the longer term they will have to accept a tax system that pays for that level.
For the sake of argument, Dahlby has proposed a spending reduction of $5-billion. I’m all for efficiency, including in the provision of public services. If a given level of service could be provided equitably at a lower cost, then do so. However, a $5-billion decrease in current expenditures wouldn’t be an exercise in efficiency—it would be a disaster: $5-billion is almost the entire post-secondary education budget.
Notley’s government has been wise in maintaining public sector spending. Alberta didn’t need higher unemployment during the recent economic downturn. Also, the public sector needed to regain stability and direction after decades of turbulent civil service funding determined by volatile resource revenues. As my opening statement notes, income disparity is also a major concern for Alberta. Public services redistribute net income; reducing them would only increase disparity.
Alberta should have higher taxes. A PST wouldn’t eliminate the deficit, so personal and business income taxes would also have to increase.
This brings us back to taxes. Alberta’s tax regime must be reformed substantially to create stable public revenues. I agree completely with Dahlby that the lack of a provincial sales tax (PST) comprises the largest differential—“the amount of extra taxes Albertans would pay if we had the same tax system as other provinces.” I too see a sales tax as necessary, but equity considerations must be foremost in creating one. Good mechanisms can offset the regressive tendencies of a sales tax; for example, exempting certain goods and services. With the addition of income-based rebates, sales taxes on lower-income households can in some cases be eliminated.
A PST alone wouldn’t eliminate Alberta’s deficit, so personal and business income taxes would also have to increase. Other taxes could be implemented, such as a land transfer tax (which brings in considerable revenue in BC). To be fair, first-time homebuyers would be exempted and the rate would rise with the property price. Such a tax captures some of the speculative and unearned revenue obtained through real-estate inflation, without affecting incentives.
Alberta should have higher taxes. Public spending seems about right and any efficiency gains are likely small. Unless the Alberta public chooses to significantly reduce public spending, tax changes should be implemented as the economy recovers and incomes rise. To get it right, tax regime change will require education and leadership.
Bev Dahlby responds to Greg Flanagan
Greg Flanagan and I agree that taxes are important; indeed the tax system provides the foundation for a prosperous and just society. Many years ago, as the author of a public finance textbook, I wrote that taxes are one of mankind’s great inventions, on a par with the invention of fire and the wheel. Yes, really!
But, like most great inventions, that which has the power to do enormous good can also, if misused, inflict tremendous damage. In the case of taxation, it is necessary to balance the tax system’s ability to generate revenue to fund public services—including a social safety net that is the hallmark of a civilized society—with its negative impact on the economy’s capacity to generate economic opportunities for citizens. Tax rates erode incentives to work, save and invest, impairing the ability of the private sector to provide the goods and services that contribute to our high standard of living. And yes, Virginia, there is a Laffer curve. Higher tax rates cause tax bases to shrink through tax avoidance and evasion. At some point, a higher tax rate can actually lead to lower tax revenues.
Given the Government of Alberta’s current deficits, Albertans have to decide on the balance between reducing public expenditures and raising more revenue through higher taxes and user fees. To the extent that Albertans collectively agree that more revenue must be raised, we will also need to decide which taxes should be increased.
Flanagan and I agree that in broad terms, Alberta has a $10-billion annual fiscal gap. He argues that the fiscal adjustment should fall entirely on the revenue side, with the adoption of a sales tax, higher alcohol and fuel taxes, and higher personal and corporate income taxes.
Will Albertans want to pay higher taxes in order to maintain our government’s currently high spending levels? The Alberta government’s per capita program expenditures are the second-highest in Canada—22 per cent higher than the average of the other provincial governments. As my colleague Melville McMillan of the University of Alberta has pointed out, one reason why Alberta’s public expenditures are so large is that per capita income in Alberta is so high. High private sector incomes mean that wages and salaries in the public sector must also be high, to attract and retain public sector employees. As well, higher incomes mean that people demand better public services. However, real (inflation-adjusted) per capita household incomes in Alberta declined by 12.8 per cent between 2015 and 2017, and the provincial budget forecasts that real per capita household incomes in 2021 will be lower than they were in 2013. Private sector incomes have taken a significant hit, and according to the above logic, public spending should also decline through public sector wage cuts and a public willingness to accept reduced public services.
Another reason why public sector spending is so high is that Albertans have not had to pay the full cost of public services through their taxes. Since 2000, taxes, user fees and other charges have only covered 77 per cent of Alberta’s public spending. We have been content with a high level of public spending because we have only had to pay 77 per cent of the cost of providing public services. In my view, many Albertans will want to see belt-tightening by the provincial government before they’re willing to pay a much higher share of the cost of public services through higher taxes.
A further reason why most of the fiscal adjustment will have to be mainly on the expenditure side is that there is no prospect for raising significantly more revenue through higher personal and corporate income taxes. Alberta’s top marginal personal income tax rate of 15 per cent, combined with the top federal marginal tax rate of 33 per cent, results in a 48 per cent marginal tax rate for the highest income earners. That places Alberta slightly below the Canadian average of 50.3 per cent, but higher than any US state except California. A number of studies have shown that the taxable incomes reported by high income individuals decline when the top tax rate increases. Because of this, raising the top rate in Alberta might generate some additional revenues—but not nearly enough to close the deficit.
The general corporate income tax rate in Alberta of 12 per cent, combined with the federal rate of 15 per cent, puts Alberta in line with BC and Saskatchewan and slightly higher than Ontario. However, we need to look beyond our borders to consider our business tax competitiveness. Studies by Philip Bazel and Jack Mintz of the University of Calgary show that the marginal effective tax rate on investment, which takes into account tax depreciation allowances and other deductions, is substantially higher in Alberta than in most US states. Numerous econometric studies have shown that higher effective corporate income tax rates reduce private sector investment, lowering labour productivity, wages and employment opportunities for workers. Raising corporate tax rates would make it even more difficult for Alberta to attract investment at a time when the energy sector is facing significant challenges. My research with Ergete Ferede indicates that the corporate income tax is the costliest source of provincial tax revenues in terms of forgone income-generating opportunities for Alberta’s working population. Thus it is neither feasible nor desirable to fix our deficit problem by increasing personal or corporate income taxes, with or without a sales tax in place.