Raise Revenues!

Five economists and one health policy expert on how Jason Kenney can address the other side of Alberta’s fiscal ledger

Three weeks after the UCP formed government in 2019, Premier Jason Kenney struck a “blue ribbon” panel chaired by Janice MacKinnon to recommend ways Alberta could address “a critical fiscal situation.” The MacKinnon panel’s mandate read, in part, “balance the budget by 2022–23 without raising taxes.”  (My italics.)

It didn’t escape attention that Kenney seemed to be predetermining the panel’s findings—that nowhere among the panel’s recommendations would citizens find “raise revenues.” As Maclean’s reporter Jason Markusoff wrote: “Kenney[’s] government may as well have announced a task force on nutrition, populated it with children and ice cream manufacturers, and limited their mandate to determining what we should eat for dinner.”

True to expectations, the MacKinnon report, released in August 2019, did not recommend any ways for Alberta to increase revenues. Instead it focused on “restructuring in order to achieve significant savings,” “efficiencies” and “reductions in spending,” and this advice has since informed provincial budgets in 2019 and 2020.

In both budgets, the UCP government made huge cuts. And in both cases it failed to balance the budget. In fact, deficits have only grown. In the wake of the latest dismal budget update, Alberta Views decided to strike its own “blue ribbon” panel, asking a selection of local experts for their ideas about how this province might raise revenues. (Think of this as the MacKinnon panel flipped on its head.)

“Our leaders have received lots of ideas about cutting and reducing,” I wrote to these experts. “What about the other side of the ledger?” Here are their ideas.

Evan Osenton


 

Raise income and corporate taxes, says Junaid Jahangir

I teach undergraduate economics students, but I was briefly involved in data analysis with former MLA Kevin Taft when he published Follow the Money: Where is Alberta’s Wealth Going? The book showed that whereas personal incomes in Alberta increased by 35 per cent from 1989 to 2009, corporate profits increased by 317 per cent. If Alberta didn’t have enough money to pay for public services, we concluded that it didn’t have a spending problem but rather a revenue problem.

Instead of focusing on revenues, the current UCP government, facing a fiscal crisis, has resuscitated the slice and dice approach of the Klein era, cutting taxes along with essential services such as education and healthcare. I’m particularly concerned about how cuts are affecting my students, many of whom earn a pittance as frontline essential workers.

The UCP government says it’s incentivizing job creation by cutting corporate taxes from 12 per cent to 8 per cent. Is this working? For the first 11 months of UCP government, 35,700 full-time jobs were lost in Alberta and only 14,600 part time jobs were created. From the start of the pandemic until September, Alberta had the worst job recovery in Canada.

Many top economists reject the Klein/Kenney approach. Nobel laureate Paul Krugman has written on the austerity delusion and its destructive legacy. Fellow Nobel laureate Joseph Stiglitz has written that we need to restore balance by increasing public sector funding. 2019 Nobel laureate Abhijit Banerjee writes that we need to tax the wealthy, who are sitting on cash. Peter Diamond, Nobel laureate at MIT, Emmanuel Saez at Berkeley, Christina Romer, and the French economist Thomas Piketty have all argued for an optimal top marginal tax rate of 73 to 80 per cent or above.

Currently, the top marginal tax rate in Alberta (federal and provincial combined) is 48 per cent, the second-lowest among the provinces. And this rate only kicks in at $314,928—the Ontario threshold is $220,000. Canadian economist Lars Osberg has argued that the top marginal rate in Canada should be raised to 65 per cent on income over $205,000. This is still lower than the 70 per cent rate from 1940 to 1980, and would bring revenues from $15.8-billion to $26.1-billion.

The reasoning is simple. The marginal utility of an additional dollar is much lower for a wealthy person than it is for someone with meagre means. This means taxing the uber-wealthy doesn’t “hurt” them nearly as much as it benefits people near the poverty line.

Also, corporations don’t create jobs because of tax cuts but because of favourable economic conditions. This lesson should have been learned long ago. Despite fiscal stimulus during the financial crisis of 2007–2009, companies sat on huge piles of cash or funnelled financial incentives to overpaid CEOs and shareholders rather than invest in long-term projects. The stock market is performing quite well in the current pandemic even as millions of people have lost their jobs. Consider Husky, which got about $233-million in provincial tax cuts but laid off hundreds of workers. Or Cenovus, which saved $658-million from the Kenney tax cut, then announced in January 2021 it would be eliminating up to 2,150 jobs.

The risk of corporations leaving Alberta because of higher taxes is overblown. Osberg has argued that entrepreneurs shift to places with excellent public services including “pothole-free roads, nice parks and crime-free public spaces,” along with “orchestras, live theatre and opera.” Instead of tax cuts, this requires tax upkeep to sustain public services. Osberg highlighted that the highest top marginal tax rate jurisdictions of New York and California have a heavy corporate presence—Wall Street and Silicon Valley, respectively.

Some will argue that companies would hide their wealth in tax havens or through shell companies. But overdue reforms could treat multinationals as single entities for tax purposes, require them to publish tax accounts on a country-by-country basis, end Canada’s agreements with tax havens and give financial incentives to whistleblowers who expose tax fraud.

Let’s increase Alberta’s corporate tax rate back to 12 per cent and raise the top marginal tax rate to at least 65 per cent at a threshold of $220,000. Let’s also introduce more tiers beyond $220,000, and raise the top marginal rate to 90 per cent. Nobody deserves to hoard an obscene amount of wealth.

Junaid Jahangir is an assistant professor of economics at MacEwan University.


 

Bring in a sales tax, says Bob Ascah

The main arguments against a sales tax are basically political: No political party believes they would be re-elected if they introduce a sales tax, or elected if they propose one. Albertans oppose a sales tax. This, however, may be changing, as recent CBC polling shows a significant minority of Albertans now support the tax.

Nonetheless, a sales tax is regressive and represents an additional layer of regressive taxation on such items as tobacco, fuel, alcohol and vehicle registration fees. Imposing a sales tax to justify lower income taxes, as some economists propose, would only increase regressivity and income inequality. Provincial legislation requires a referendum on this issue.

Few Albertans know that in March 1936, Social Credit introduced the Ultimate Purchasers Tax Act, which imposed a 2 per cent retail sales tax on a range of goods. At that time, the Alberta government’s, municipalities’ and school boards’ finances were in terrible shape. The province was on the brink of default. The sales tax idea was supported by a government committee and by orthodox financial advisors. The law quickly passed and went into effect on May 1, 1936.

Almost immediately there was business and political opposition to the tax. The following year, the government decided it would rescind the tax, as it had many political and constitutional fights going on with the dominion government and the banks. However, the tax raised about 10–15 per cent of total government revenue over the 16 months it was collected.

There are a number of good reasons for Alberta again to implement a provincial sales tax, to be harmonized with the federal GST. These include:

■ The cost of raising a dollar of revenue from a sales tax is much lower than with other taxes.

■ A sales tax is a far more stable source of revenue than corporate and personal income taxes and non-renewable resource revenue. A 5 per cent rate would reliably raise about $5-billion each year.

■ Even with a 5 per cent sales tax, Alberta would still remain the lowest-taxed jurisdiction in Canada.

■ A sales tax would obtain revenue from visitors to the province, who use our public services and infrastructure.

■ The regressive nature of a sales tax can be mitigated by a refundable tax credit directed at low-income individuals and families. In addition, as with the GST, many necessities could be exempt from the tax.

■ A sales tax is efficient to collect and difficult to avoid.

While the Alberta government today isn’t approaching a default, its financial prospects remain dependent on volatile resource revenue. This dependency has, over the past half century, allowed Alberta to keep taxes low. Absent a sustained return to higher oil prices, we may have little choice but to bite the bullet and implement a sales tax as a remedy for our unstable revenue base.

Bob Ascah is editor of the forthcoming A Sales Tax for Alberta: Why and How (AUP). His blog is abpolecon.ca.


 

Institute a property transfer tax, says Greg Flanagan

A property (or land) transfer tax is not the property tax that is levied annually on the owner of a property by a municipal government based on the current assessed value. A property transfer tax (PTT) is imposed on the new owner of a residential property, assessed on its market value at the time of sale or transfer, and administered along with the registration of the title at a provincial land titles office.

A PTT is a type of wealth tax, although limited to one type of wealth—real estate. This wealth tax is warranted in that the Canadian tax system promotes home ownership as a form of wealth. Specifically, Canadians don’t pay tax on the imputed value of the shelter services a home provides; and upon sale, any capital gains realized on a principal residence are tax free. A PTT is usually structured to be progressive—that is, the marginal tax rate increases with the price of the residence.

The British Columbia Property Transfer Tax (then called the Property Purchase Tax) was first introduced in 1987 as a wealth tax to discourage speculation. The tax was set at 1 per cent of the first $200,000 and 2 per cent of the remainder of the selling price. At the time, approximately 95 per cent of home sales were below $200,000 and didn’t qualify for the PTT, so the tax had little effect, raising only a small amount of revenue. But as home prices have risen (and as changes have been made to the PTT), the tax now brings in considerable revenue.

The PTT in BC, to qualify as a wealth tax and to be truly fair, is imposed only on high-value properties for first-time buyers and on individuals who have owned property previously. Recently, similar ancillary property taxes have been levied in some regions of BC, including the foreign buyer tax, the vacancy tax and the speculation tax. These aren’t considered here for Alberta, but they have similar structures and purposes as the PPT—that is, they attempt to reduce inequality between people who own homes and those who can’t afford to.

First-time homebuyers in BC are exempt from paying the PTT if the price of the home is less than $500,000. There’s also a proportional exemption for homes priced between $500,000 and $525,000. A price exceeding $525,000 eliminates the first-time-buyer tax exemption. The first-time exemption only applies if you’ve never bought property anywhere, not just in BC.

To promote new home construction, BC exempts buyers of new homes from the PTT if the purchase price is less than $750,000 (with a proportional exemption for homes between $750,000 and $800,000). If the home costs more than $800,000, the buyer pays the PTT.

For people who formerly owned or currently own property, the tax rate of 1 per cent on the first $200,000 remains, while 2 per cent is now charged on the next range up to $2-million, 3 per cent on the next million, and 5 per cent on amounts greater than that.

The property transfer tax in BC contributed $1.8-billion to the public purse, approximately 3 per cent of BC government revenue in 2019. If we were to assume the same percentage of Alberta’s total revenue, then a PTT could possibly bring in $1.5-billion to Alberta. However, Alberta’s residential real estate costs less than BC’s and its population is smaller—85 per cent of BC’s. With a similar tax here, it wouldn’t be unreasonable to expect up to $1-billion in revenue.

A property transfer tax is politically supportable as fair and progressive. And it’s worth noting that the PTT has had little to no opposition in BC—unlike, for example, the implementation of the harmonized sales tax.

Greg Flanagan worked for 30 years in the Alberta post-secondary system, and retired from the University of Lethbridge. He is a distinguished research fellow with the Parkland Institute.


 

Take back control of the carbon tax, says Trevor Tombe

For most provinces, it’s fiscal fantasy to have high spending, low taxes and balanced budgets. But Alberta is not most provinces. Massive windfalls from non-renewable resource revenues and investment income meant that, historically, Albertans could live this fantasy. Over the past 50 years, non-renewable resource revenues alone contributed nearly 30 per cent of all government revenue in this province. Alberta hasn’t balanced the budget without resource revenues in generations.

But all good things must come to an end. Future resource revenues in Alberta are likely to disappoint. Luckily, there’s another (nearly) free fiscal lunch on offer, one that can increase government revenues and shrink Alberta’s deficit—without any new tax at all!

It’s simple: We take back control of the carbon tax.

Alberta’s first carbon tax was implemented under premier Ed Stelmach. The rate and scope of the tax were later expanded by premier Rachel Notley. With a new government in 2019, things changed again, but by less than you might think.

Contrary to popular opinion, Alberta’s current government is a strong supporter of some carbon taxes (in policy, if not rhetoric) so long as the public doesn’t see them at the pump or on heating bills. So, after their election in 2019, the UCP shrank the carbon tax coverage, removing it from gasoline, natural gas and other fuels while maintaining the carbon tax on large industrial emitters. But even the change at the retail level didn’t eliminate carbon taxation on fuels. It merely opened the door for Ottawa to step in and fill the gap. We still pay a carbon tax on fuel, only now it’s a federal tax—and slated to rise to $50 per tonne by 2022.

The trouble: Whereas previously Alberta received the revenues from a carbon tax, today the province gets none. Instead, the federal carbon tax is fully (and perfectly) revenue neutral. All proceeds are rebated directly to Alberta households and businesses—over 90 per cent to households in relatively flat amounts (in 2020, an average of $888 for a household of four).

It doesn’t have to be this way. Alberta can, if it chooses, take back control and use the revenues to shrink its deficit.

The amounts are large. By 2022 we’re talking about $2.4-billion per year. After the government takes, say, a sixth of this ($400-million) for boosted cash transfers to lower-income households to compensate for the tax’s regressive effect, we’d have $2-billion to shrink the deficit.

An increase in revenues, without a tax increase on Albertans…! We pay the tax already; we’d pay no more if this change were made.

Of course, this isn’t magic. There would certainly be a cost to Alberta households if the provincial government eliminated the current federal rebates. But two things work in Alberta’s favour here. First, the Kenney government regularly ignores the very existence of the generous federal household rebates, so many Albertans might not even notice the elimination of the rebates. (This is a political point, rather than an economic one.) Second, in both Budgets 2019 and 2020, spending reductions were the Kenney government’s priority. Provincial carbon rebates would be a type of spending. So, eliminating them would technically be a cut to provincial spending rather than a tax increase.

While $2-billion is not the entire fiscal gap we need to fill, it’s roughly one-quarter of the challenge. That’s meaningful improvement. Higher revenues and smaller deficits, all with no new taxes? That’s an option worth considering.

Trevor Tombe is an associate professor of economics at the University of Calgary and a research fellow at the School of Public Policy.


 

Reduce TIER’s large-emitter subsidies, says Jennifer Winter

Solving Alberta’s budget challenges requires having another look at existing sources of revenue. The Technology Innovation and Emissions Reduction (TIER) regulation, Alberta’s greenhouse gas emissions pricing system for large emitters, is just such a potential source of additional revenue.

Briefly, the regulation covers onsite emissions of 34 GHGs from regulated facilities such as power plants and oil sands operations. Facilities are required to reduce their emissions below an emissions-intensity benchmark (emissions per unit of output, such as tonnes per barrel). Compliance can be via emissions reductions, use of emissions performance credits (purchased from facilities that exceed the emissions-reduction requirement), use of Alberta-based emissions offsets, or payment into the TIER fund. Facilities, however, are also granted a “free allocation” of emissions based on their output, which substantially lowers the cost of compliance. These free allocations are a subsidy to regulated facilities. The allocations also represent forgone revenue compared to full compliance.

TIER applies to facilities with emissions greater than 100,000 tonnes of CO2e (carbon dioxide equivalent) per year, but facilities with lower annual emissions can opt in. Doing so exempts them from the federal fuel charge, or carbon price.

Based on 2018 emissions and data from Canada’s National Inventory Report and Greenhouse Gas Reporting Program, I estimate TIER covers 52 per cent of Alberta’s 272,555,000 tonnes of emissions. This increases by another 8–10 percentage points of coverage if all conventional oil and gas facilities opt in. At $40 per tonne (the price in 2021), expected revenue from full pricing of emissions covered by TIER would be $5.7-billion–$6.8 billion. (Recall that prior to COVID, Alberta’s estimated deficit for 2020–21 was $6.8-billion.)

Actual TIER compliance payments were estimated in Budget 2020 at $421-million for 2020–21, $463-million for 2021–22 and $485-million for 2022–23. (The 2020–21 first quarter fiscal update subsequently dropped expected TIER revenue to $298-million.) TIER is deliberately set up to reduce cost impacts to large emitters by protecting them from the competitiveness impacts of emissions pricing, but the consequence is forgoing quite a lot of revenue—literally billions of dollars.

Alberta’s TIER subsidies are set to taper over time, reducing the free allocations for emissions by 1 per cent annually starting in 2021. But a faster tightening rate would raise much-needed revenue—and as more countries enact climate policies, Alberta’s rationale for these subsidies disappears. Of course, the expected effect of increasing the cost of emissions is that facilities will start reducing emissions, which will have an offsetting effect on revenue. Nevertheless, reducing the subsidies to industry which result from TIER would be a significant source of revenue in the short and medium term.

Jennifer Winter is an associate professor of economics and Scientific Director of the Energy and Environmental Policy research division at the School of Public Policy, University of Calgary.


 

Put a tax on empty calories, says Kim Raine

Imagine a policy that would reduce healthcare costs in Alberta by more than $1-billion over 25 years and generate annual revenue to the province of $141-million. The 25-year health and economic impacts of this policy would provide a net benefit of over $4.6-billion to Alberta’s economy, an average of $185-million annually. Although it may sound too good to be true, this is the predicted outcome of a 20 per cent tax on sugar-sweetened beverages.

Sugar sweetened beverages (SSBs) contain added sugar, syrup or other caloric sweeteners, and include products such as soft drinks, sports and energy drinks, flavoured water, and sweetened fruit drinks and juices, as well as sweetened tea and coffee beverages. A growing body of research links SSB consumption to weight gain and obesity among children and adults alike. Independent of weight, SSB consumption is associated with a variety of nutritional health risks, including heart disease, hypertension and diabetes. SSBs are not the innocent treats we’ve been led to believe they are!

Sugar sweetened beverages are widely available and relatively inexpensive compared to healthier beverages such as milk, and this accessibility plays out in their consumption. The most recent (2015) estimates of dietary intake in Alberta show the average per capita daily intake of SSBs is 247 ml, which works out to 123 calories per day. The most frequent consumers are teenage boys, who take in over 600 ml (or 286 calories) per day, mostly in the form of soft drinks and sports drinks.

After a comprehensive tobacco control strategy was instituted, which included raising prices through taxes, tobacco use dramatically decreased in Canada. Taxes can similarly encourage healthy eating by decreasing demand for more expensive unhealthy foods and beverages. SSBs are an ideal target, as they’re clearly linked to health risks, they offer no nutritional value, and consumers of these products are sensitive to price increases. A 10 per cent price increase is expected to reduce SSB consumption by 10 per cent on average—and by even more among the most frequent consumers.

Over 20 jurisdictions around the world, from countries such as Mexico to cities like Berkeley, California, have implemented an SSB tax. Mexico’s six-year-old tax has driven down SSB purchases, while sales of (untaxed) bottled water have increased. Similar findings were observed in Berkeley after one year of the tax.

These findings can inform economic modelling studies to predict the health and economic outcomes of taxes elsewhere. In 2017 an Assessing Cost-Effectiveness model was used to simulate the impact of a tax on Alberta’s adult population. It estimated that a 20 per cent tax on SSBs would postpone 1,201 deaths in this province and prevent 61,324 cases of excessive weight gain, 21,661 new cases of type 2 diabetes, 5,700 cases of heart disease and 2,099 new cases of cancer over a 25-year period. This is where the $1.1-billion in health savings comes from.

These taxes are popular, too. In a 2019 survey of 1,200 Albertans, the majority of respondents (57 per cent) supported a tax on soft drinks and energy drinks. If revenue from taxes were reinvested in prevention, the public might be even more supportive. Even if only half of the revenue were reinvested, think of the possibilities of a $70-million annual infusion into subsidizing healthier foods or a universal school nutrition program.

It’s time to think of creative solutions to our health and economic crises, and leverage the beverage!

Kim Raine is a distinguished professor of public health and a researcher in the Centre for Healthy Communities at the University of Alberta.

 

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