Taboo No More

Some prominent Albertans are expanding the conversation about taxes. Here’s why.

By Sheila Pratt

You have to talk to Jack Mintz if you want to talk taxes in Alberta. He’s the go-to guy. Premiers and prime ministers consult Mintz, who now runs the School of Public Policy at the University of Calgary after seven years as CEO of the C. D. Howe Institute. He’s firmly on the conservative side of tax policy and he’s hailed as an innovator. He takes both mantles seriously. And in 2009 Mintz became the first influential policy analyst to suggest—are you ready?—that some form of sales tax would be good for Alberta.

Surprisingly, Mintz is no longer the only establishment voice talking about the once unmentionable. A handful of brave Albertans have dared lately to raise the issue of a sales tax and taxes in general. They’re all worried about the same thing—how will we pay for government services as royalties decline? The easy money, royalties from conventional oil and gas, is already slowing. Sooner rather than later, we have to raise some cash to replace that royalty revenue, especially as the population keeps growing. So it’s time, these forward-looking Albertans say, for a conversation about taxes.

On a beautiful, warm September day, Mintz is back in his hometown of Edmonton to pitch his sales tax idea again at his alma mater, the University of Alberta. This might seem like tilting at windmills, given Alberta’s inbred aversion to a sales tax. Sitting in the venerable old Hotel Macdonald, with the mid-morning sun peering in the windows, Mintz meets that suggestion with a good-natured smile.

A sales tax is good public policy, he says. Most modern governments—notable exceptions are Alberta’s provincial government and the US federal government—have some form of consumption tax. It’s a “game changer” in terms of encouraging economic growth, allowing for lower corporate and income tax, says Mintz. So he turns the tables. Given those advantages, what’s puzzling is why Alberta clings so fiercely to a 40-year-old notion that it must remain a sales-tax-free zone. “It’s hard to understand the source of that pride,” he says.

That no-sales-tax point of pride is based mostly on mythology, not rationality. Like lone cowboys and voting Tory, scorn for a sales tax is seen by some as part of being Albertan. It gave us bragging rights after the 1970s oil boom brought an era of prosperity to Alberta. We didn’t need a sales tax, while other provinces did—lucky for us. Later, in the 1990s, a no-sales-tax mantra became part of the right-wing dogma of the Klein revolution, which preached that any tax, especially any new tax, was bad.

Of course, the dirty little secret was—and continues to be—that Alberta keeps taxes low and avoids a sales tax by spending its inheritance. The flow of royalties from our oil and gas resources covers 20–30 per cent of provincial expenses every year. Albertans are the only Canadians to have enjoyed such a large subsidy for so long. Yes, a few other provinces have oil and gas revenue. BC, for instance, expects to take in $3.1-billion in natural resource revenue in 2011–2012; not a bad sum, but a fraction of that province’s $40-billion revenue and less than half of Alberta’s royalty take.

Mintz knows that kind of subsidy can’t last in Alberta because an oily chicken is quietly coming home to roost. Alberta’s flow of royalties is not growing as fast as it used to—or as fast as growth in the economy. The big gusher, royalties from natural gas, has been in decline for several years. Because of the high cost of production, the oil sands won’t provide the same level of royalties. Future royalties are hard to predict, of course. But it’s clear we have a growing population and that royalties are declining per capita. This adds up to less petro-subsidy per citizen. It quickly becomes obvious that if Alberta doesn’t review its mix of taxes, or cut spending, it’s headed into red ink. That’s Mintz’s view.

“Even if spending rose at a rate close to growth in GDP, demographic-related spending and slow natural resource revenue growth would necessitate higher taxes if Alberta is to maintain a balanced budget and avoid issuing debt to finance its operating expenses,” Mintz wrote in an October 2009 paper on sales tax. But Mintz had actually begun waving the red flag way back in 2007, when he was chairman of the province’s Financial Investment & Planning Advisory Commission. That commission warned that Alberta could face a substantial tax hike by 2030 because resource revenue is growing more slowly than it used to and the population is increasing. It also called for a plan to build up the Heritage Fund to $110-billion to produce investment income to offset the decline in royalties. There’s been no action yet on either front.

Mintz surely didn’t feel so lonely after David Emerson released his report this spring. The BC-based CEO and former federal cabinet minister (for the Liberals and Conservatives), discussed Alberta’s petro-subsidy in the bold and pointed report “Shaping Alberta’s Future.” That May 2011 document, written for the Premier’s Council for Economic Strategy, put the situation this way: “Since 2000, Albertans have paid on average only 70 per cent of the costs of such services. Funds from the sale of non-renewable energy assets have paid for the remainder.”

But spending our inheritance—and not saving very much of it—is no way to build an economy for the future, writes Emerson. He likens Alberta’s current fiscal practices to those of a misguided landowner: “If we knew a farmer who regularly sold his or her fields—an acre at a time—to cover daily grocery bills, we’d worry about that family’s financial prospects and the children’s future.” It’s high time Albertans started a “difficult conversation” about taxes, he writes.

A few figures help set the table for this conversation. As the Emerson report notes, the royalty subsidy to Alberta’s annual expenses has been growing, while the contribution by taxpayers has been shrinking. From 2000 to 2011, per capita spending on government services jumped from $7,505 to $10,240. At the same time, revenue from taxes and fees actually declined by $150 per capita, while the government dipped further into royalties.

Alberta’s dirty little secret is that it keeps taxes low and avoids a sales tax by spending its inheritance.

Some might ask: What’s the worry, really, when there’s enough sticky bitumen in the oil sands to last Alberta and the world 100 years? Surely those royalties will be there for our children and maybe their children. The crucial question, however, is not how much black gold is in the ground, but rather how long Alberta will have customers for those costly hydrocarbons. “We must plan for a time when we can no longer sell these resources profitably,” writes Emerson, arguing that this will be soon, and recommending a 10-year transition to wean government from oil and gas royalties.

“If we are wise, when the time comes, we will have closed the gap by whatever combination we choose,” notes the report. Our choices are lowering spending and cutting services (how realistic is that with a growing population?) or finding “greater revenues from other sources,” i.e., income or corporate taxes, fees, gambling revenue or a consumption tax.

Meanwhile, royalties should go into a strategic fund to build an economy for the future, the report concludes. Emerson calls this “investing to shape the future with intentionality,” and notes that governments around the world are “investing substantial resources in creating, attracting and retaining industries they identify as strategically important.”

For any Alberta government, the most crucial job is figuring out how to manage the roller coaster of oil and gas revenues. It’s not easy. Since the 1990s the Tory government has cut spending when revenues drop suddenly and loosened the purse strings when the cash flow is strong—all regardless of what the population actually needs.

That’s why Mintz likes a consumption tax. It’s a more stable source of revenue. It’s also a more efficient tax. These days, when investment flows freely across borders, it’s harder to tax income effectively, says Mintz. A consumption tax affects residents and everyone who visits. It’s also a more effective tool to promote economic growth and diversification, he argues. Mintz figures an 8 per cent HST (a combined provincial tax and GST), for instance, would allow the province to cut corporate and personal income taxes. Imagine, he says, how that would help Alberta attract investment, grow the economy and increase government revenues.

If you want to see a sales tax in action, Mintz says, cast your eyes on Texas, similar to Alberta with its twin base of oil and agriculture. Texas has no income tax, but has a sales tax. Mintz says Texas has been more successful at diversifying its economy, in part because of its tax policies—no income tax, low capital gains tax and a consumption tax. “How much Texas growth is due to its tax policies would require some careful study,” he says. “But the contrast with Alberta—no sales tax, poor diversification record—hits one between the eyes.”

If you want to talk taxes with the ruling Conservative Party (beyond hearing “no thanks,” that is), the go-to guy is Doug Griffiths. At 39, the MLA for Wainwright-Battle River was the youngest contender in the leadership race that put Alison Redford in the premier’s chair. Articulate and thoughtful, Griffiths then jumped into the inner circle as Municipal Affairs minister in Redford’s cabinet. Griffiths is careful to say he doesn’t advocate a sales tax as the only option for Alberta’s looming revenue problem. But he certainly wants Albertans to start talking about it.

Griffiths’s epiphany came when he was appointed to the Treasury Board, which oversees all public spending. Immersed in budget documents, he started to get very uneasy at what he read. The gap between taxes paid by Albertans and the money spent was huge—and growing. In the 2010–2011 fiscal year, for example, revenue from taxes totals only $12-billion, while total spending is $39-billion—a $27-billion gap, noted Griffiths. Yikes. This just isn’t sustainable, he thought.

Can Griffiths be right about that gap? That’s the reaction he often gets, he says. “First people say, ‘You guys spend too much, but don’t cut these services and don’t raise taxes and don’t spend more royalties.’ Then they don’t believe me about the figures—until they look for themselves.”

In Budget 2011, income tax was forecast to bring in $7.5-billion, corporate taxes $3.4-billion and education property tax $1.6-billion. That’s about $12.5-billion, compared to $39-billion in spending. Gambling revenue and taxes on booze and cigarettes total another $2-billion. So where will the rest come from? Well, in 2010, Alberta took in $8-billion in royalties, $5.2-billion in federal transfers, $1.9-billion in investment income and $4.4-billion in other revenue, including motor vehicles fees, land titles and campsite reservations.

Here’s another way to look at it. In 2011, corporate and income tax cover only about 34 per cent of government spending, while oil and gas royalties cover about 23 per cent.

So what happens in other provinces? BC, for example, also has royalty revenue, but taxes are the big revenue source, at $19-billion in the 2011–2012 fiscal year. The harmonized sales tax raised $5.8-billion, almost as much as personal income tax. Fuel tax, tobacco tax, a carbon tax, corporate taxes of $1.7-billion and medicare premiums brought in an extra $2-billion. The rest came from federal transfers.

Griffiths thinks Albertans have been lulled into a false sense of security after years of being told by politicians about Alberta’s limitless wealth. Using royalties for daily expenses isn’t just a habit, it’s seen as a birthright. (“Here, take this cheque for $400, your prosperity bonus; thank the Klein government.”) What politician wants to tell a different story—that the petro-subsidy is shrinking —and get voters upset?

Then there’s the low-tax dogma that Klein adopted and which Ed Stelmach continued. So committed was Stelmach to the view that taxes must never rise that he reversed a small increase in the liquor tax four months after it was approved in the 2009 budget. The consumption tax—75 cents on a bottle of wine, $1.30 on a case of beer—would have raised $180-million per year. But Stelmach gave up the extra revenue, even though government was running a $5-billion deficit.

“I heard no complaints about that tax at all,” says Griffiths. In fact, Stelmach’s retreat had many people scratching their heads. If no one was whining about a few cents more on a bottle of beer, why cancel it? Stelmach was proving his right-wing bona fides. “As long as I’m premier of this province, there will be no tax increases,” Stelmach told reporters after a cabinet meeting in Calgary in July 2009. “So don’t talk about them.”

Griffiths, however, is a realist. When Albertans are given the facts, he says, they understand the problem and start looking for a solution. “It’s happened dozens of times,” he says. “I don’t know why everyone is so scared to ask the question. At the very least, we should be ready to re-examine whether a mantra of 30 years ago—no sales tax in Alberta—is still correct.”

Such a tax shouldn’t run afoul of even the most conservative Albertans, he adds. “A consumption tax is more conservative than income tax because it leaves money in your pocket and lets you decide where to spend it.”

Griffiths says it’s time to review the whole mix of taxes, fees and levies in the revenue stream, including the flat tax on income. Alberta is the only province to charge the same rate, 10 per cent, on all income levels. Even though Alberta has had a flat tax for 10 years, no other province has followed suit—inviting the question, Are we pioneers or are we fools? It’s estimated that Alberta has given up $5-billion per year in revenue since it switched to a flat tax.

And there’s another issue. The flat tax hits the middle class hardest and benefits the rich the most. Albertans earning $500,000 a year pay the same tax rate as those earning $50,000. Such a tax system is widely viewed as not only flawed from an economic standpoint, but unfair.

Griffith’s epiphany came when he was appointed to the Treasury Board. He started to get very uneasy.

In the US, Warren Buffett, the third-richest man in the world, recently proposed in a New York Times editorial that it’s time the wealthiest US citizens paid more taxes. At least one prominent Canadian has proposed likewise. Alex Himelfarb, a former clerk of the federal government’s privy council, warned of the growing inequality that follows low-tax dogma. In an October 2011 speech in Toronto he said, “We can’t afford to wait much longer as the bills for our free lunch pile up. We will have to be smart about taxes and we will all have to carry the burden. But a good place to start is to ask the rich to step up.”

Meanwhile, if Doug Griffiths is looking for support closer to home, he might start with a group of Calgary businessmen who recently proposed a penny sales tax for their city. They want to get the federal government to add a percentage point to the GST on goods and services in the city and give the cash back to Calgary to fund projects approved in a plebiscite. (Mintz cringed when asked about this proposal, arguing that it’s impractical. Shoppers would simply drive to the nearest no-sales-tax town to buy their goods or order on the Internet, he said. But he mused that adding a percentage point to the federal GST for municipalities might work province-wide if all municipalities agreed to the same rate.)

If we want services, we have to pay taxes, says Griffiths. “The point is, the entire tax system needs to be re-evaluated. We pride ourselves on being good fiscal stewards, but maybe we shouldn’t brag so much about that.

“People don’t realize the reason California is broke is that they cannot raise taxes unless there’s a referendum,” he adds. “But they demand more services. You can’t have it both ways.”

Some countries in Europe—Italy and Greece for instance—tried to have it both ways. Now they’re in crisis because they don’t collect enough taxes to pay their bills. Alberta is not Greece, of course. But how is this province preparing for the day when taxpayers have to cover the 30 per cent gap themselves now that the royalty subsidy is declining?

Interestingly, the discussion of these issues—a sales tax, royalties and Alberta’s inadequate tax regime—cuts across ideological lines. Last summer, the Parkland Institute published “Fixing What’s Broken: Fair and Sustainable Solutions to Alberta’s Revenue Problems.” The report echoes the Emerson report in its concerns over dependence on oil and gas royalties. The Parkland report calls for a wider range of tax tools to be put on the table for discussion—a sales tax, a return to progressive income tax, a higher gasoline tax, a halt to the downward spiral of corporate tax. A 5 per cent provincial sales tax would raise $5-billion annually, the Parkland study claims. That would go a long way to help Albertans cover the revenue gap.

The Alberta government loves its low-tax status quo. It put a table in the most recent budget showing that Alberta citizens and businesses would pay $11-billion more in taxes if they had BC’s tax regime. The government’s message is clear—see how lucky Albertans are! But there’s another side to it: Do you see how much tax room Alberta has? Do you see how much we could bolster our shaky revenues and still have the lowest taxes in the country? Albertans don’t think much of the higher taxes in that so-called left-leaning province next door. But it doesn’t stop them from moving there to retire. All those Albertans flocking to Kelowna, Kamloops and sunny Osoyoos—if the taxes are so terrible, why don’t they come back?

It won’t be easy to convince our government to change the tax mix to increase revenue and shift from its reliance on royalties. The mantra “no new taxes,” the watchword of the Calgary School, still has a firm grip. But the window for this new conversation has opened. Former premier Peter Lougheed thinks the government can be convinced. In May 2011 he told the Edmonton Chamber of Commerce that it’s time to consider raising corporate and personal income tax, given the drop in conventional oil and gas royalties. And Mintz keeps plugging away, as any serious economist must. “The political opposition to a sales tax is rooted in history, but it doesn’t mean that historical preferences can never change,” he says.

Doug Griffiths is determined, too. “We ride the roller coaster of oil and gas and leave nothing for our kids. We’re not planning for the future,” says Griffiths. “I don’t want to live with that.” #

Sheila Pratt is a senior feature writer at the Edmonton Journal and co-author of Running on Empty: Alberta after the Boom.


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