How good is Alberta 'tax advantage' when it requires deficit borrowing?

Amid all the ups and downs in Alberta’s yearbook budgets, hither’s 1 thing that has remained constant quantity o'er the decades.

Whether the province is awash in surpluses or drowning in red ink, there’s always a chart found toward the back of the provincial fiscal plan. This year, it’s on page 121 of 178, and as proud as ever.

Alberta’s Tax Advantage, the chart is called. To hammer home the lure of Alberta’s “competitive tax environment,” the budget document lays out how much more residents and companies would pay if they were under any other province’s financial regime — what with all their PSTs, HSTs and higher income tax rates. 

The latest budget estimates that Albertans and their businesses would pay $16.9 billion more if the provincial system matched British Columbia’s, and as much as $35.2 billion more under P.E.I.’s tax system. That’s more than double the $30.4 billion in total taxes that Alberta will collect in 2026-27.

This chart has been a budget-book mainstay since before the Danielle Smith-Jason Kenney UCP years, stretching back through the NDP’s four years and well into the years of the Progressive Conservative dynasty. 

It goes back at least to the 1998 budget from the government of then-premier Ralph Klein, who made “Alberta advantage” an unofficial provincial slogan.

This chart’s aim then was the same as it is now: a calling card for businesses to relocate here from the rest of Canada, and for residents to bask in all their savings in the one province without a PST.

But in deficit years like this one, the last one and the projected few to follow, Alberta is having to borrow billions of dollars to make this “advantage” proclamation.

Some economists and finance veterans look at the same chart and see something else — the ability for Alberta to erase all its deficits through tax hikes and still remain comfortably the lowest-tax jurisdiction.

“Of course there is!” said University of Calgary economics professor Lindsay Tedds, an expert in tax policy and public economics, when asked about the chart. “Alberta has oodles and oodles of tax room to manoeuvre without damaging what the [low tax boosters] of the world will call its competitive advantage.”

The tax edge that Alberta perennially touts exists largely because of its geological advantage: the oil and gas resources that raise additional billions of dollars that other provinces cannot otherwise generate, said Charles St-Arnaud, chief economist at Servus Credit Union.

But when oil prices aren’t as high as Alberta’s cabinet needs for program spending, royalties and the low-tax system translate into shortfall. It’s become clearer this deficit is structural, St-Arnaud said.

Resource royalties are not part of those annual budget bar graphs comparing Alberta to other provinces. Calgary-based economist and blogger Ben Atkinson recently put it like this: “Alberta is not a low-tax province. It is a province that taxes its oil instead of its people."

Taxes make up 41 per cent of Alberta’s total revenue, not counting resource royalties (which other provinces don’t count as tax revenue, either).

That’s by far the lowest share in the country, well behind oil-reliant Newfoundland and Labrador, as well as other smaller provinces that rely more on federal transfers and equalization to fund their budgets.

The larger provinces all rely far more on taxation to fund their social services. In neighbouring British Columbia, the coming year’s deficit is forecast at $13.3 billion, higher than Alberta’s $9.4 billion. That province’s finance minister has admitted its budget is “unsustainable,” but St-Arnaud said the fact they are already relying so heavily on taxation makes it harder for B.C. To hike rates to balance its books.

“Because in Alberta, we could just say, ‘OK, let's find a path that plugs the $9-billion hole and we're good,’” he said.

Technically, it may be that simple. Politically, far from it.

And that isn’t just because Alberta is led by United Conservatives set to face re-election next year, and who won last time by promising an income tax cut and badgering NDP rivals for proposing a higher corporate tax rate (although still Canada’s lowest).

A well-defined Alberta political chiché is that PST here stands for “political suicide tax,” and another Klein saying still echoes faintly: “The only way taxes are going is down.”

But even more than that, a government that musters up the political chutzpah to do something as stereotypically un-Albertan as hike taxes or add a sales tax cannot do so so easily. 

The Klein-era Taxpayer Protection Act means the province can’t adopt a sales tax without getting it endorsed by referendum. In 2023, the Smith government added to that law a rule that governments must also get the public’s blessing via referendum to hike personal or corporate income tax rates.

(No such referendum rule exists for hiking provincial property taxes, which Alberta did sharply to raise more than $500 million more this year, to the frustration of the mayors whose municipalities must collect that raised tax on property bills.)

Lennie Kaplan is a perhaps unlikely voice bemoaning those anti-taxation restraints. He’s a former Alberta Finance official who helped write the 2019 UCP election platform.

In an unpublished essay Kaplan circulated to friends this week, he wrote that a too-large portion of Alberta’s revenue base is volatile, mainly its royalties.

“But government does not appear to be taking the necessary steps to smooth over this volatility by diversifying its revenue base,” he wrote. “In fact, Alberta has been narrowing its revenue base over the past two decades,” and then went on to cite measures like Kenney’s corporate tax cut, Smith’s income tax cut, and the rule requiring a referendum to hike rates back up.

Kaplan was executive director of the Kenney government’s blue-ribbon panel on government finances, the Janice MacKinnon-led effort that focused on controlling Alberta’s budget spending. Kaplan now calls for another expert panel, this time on provincial revenue, suggesting a five per cent sales tax that brings in $6 billion more annually and a return to health care premiums to raise $1.3 billion.

Kaplan believes that Alberta has both a revenue problem and a spending problem, as well as a “budget amnesia problem” by forgetting both the noble ambitions and ultimate failures of past leaders who’ve tried reordering Alberta’s fiscal house.

Tedds isn’t as sure that Alberta’s spending is the issue, when it’s compared to that of other provinces. But she observes that the increases in health and education spending in this month ’s budget show the UCP gets the message that Albertans expect government to keep funding quality services.

“But we’re still struggling with what it means to have those from a fiscal policy standpoint,” she said.

Of course, the surging oil prices caused by war in Iran could erode both the deficit and a public conversation about Alberta’s fiscal health. Finance Minister Nate Horner, however, has cautioned that the supply-demand cycle that set prices lower could soon return, and that he wants to know “if Albertans are more tax-averse or debt-averse” before the UCP opens up any large conversation about revenue sources.

He and Smith would both recall that when former premier Jim Prentice bid to cut spending and raise taxes (including a health premium) in his 2015 budget, the NDP swiftly replaced his Tories and his budget (with no health premium).

Smith was in her brief stint as an MLA in the Tory benches at that point, and by all accounts she intends to win the next election and become the first premier to win two straight Alberta campaigns since Klein.

She may well conclude that the key to staying in power is by letting a big “advantage” and a big deficit co-exist in the same fiscal document.

Producer and writer

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