October 23, 2014

An HST for Alberta: National Post Op-Ed

Published in the National Post on March 6, 2013

By Colin Busby & Alexandre Laurin

In the 1980s, during a time of large provincial deficits, Alberta premier Don Getty famously quipped that the difficulty of restraining spending after years of unrelenting growth was akin to “turning the Queen Mary.” The phrase undoubtedly resonates with Alberta’s fiscal planners today.

This week’s provincial budget may include revenue options to help get this ship-turning process started. While now is arguably a bad time for new levies, the province’s planners could rearrange the tax mix to help chart a clear path out of its fiscal mess.

Despite resource revenues averaging over $9-billion per year, Alberta’s budget has been in deficit for the last five years. This year’s deficit is estimated to be about $4-billion. To cover its string of deficits, the government has drawn down resource savings by around $13-billion.

The province’s rough fiscal waters flow from rapidly growing expenses that depend on high resource revenues year after year. Overall program spending in Alberta grew at 7.6% per year over the last 10 years, compared to 5.6% among other provinces.

Over the same period, per capita program expenditures in Alberta have been growing at 5% annually (with population growth at 2.2%). Resource revenues were expected to cover the growth in spending, but resource prices have fallen thanks to external pressures and limited market access for Alberta’s bitumen.

The current fiscal crisis, however, opens up opportunities for far-sighted reforms. Alberta, uniquely situated as Canada’s lowest tax jurisdiction today, can plot a course to improve both its near- and long-term fiscal prospects.

To navigate Alberta’s budget back to balance, a smart fiscal plan would emphasize a combination of spending restraint and more stable sources of revenue. Currently, Alberta’s need for more predictable revenue is dependent upon uneven flows of future resource royalties. By changing its revenue mix (without adding more revenue to the government’s coffers), Alberta can pave the way for future economic prosperity.

The option for a provincial HST (a value-added tax) should be seriously considered. New revenue from a provincial HST can be used to reduce — or fully replace — other more volatile or more distortive taxes.

For instance, income taxes have historically been shown to reduce incentives to work, save and invest, thereby negatively impacting future economic activity. Value-added consumption taxes are much less economically-damaging, and represent a more stable source of fiscal revenues. (Income taxes tend to fluctuate more closely with economic cycles.)

Were Alberta to introduce a provincial HST at a rate of say, 5%, it could replace and eliminate potentially up to half of Alberta’s flat income tax. This would boost the province’s economic prospects, making the provincial tax regime among the global leaders in competitiveness.

This shift may cause concerns that the new tax burden would fall predominately on poorer taxpayers. This could be overcome with a well-calibrated rebate program linked to income, which would ensure a fair distribution of the tax burden. Alternatively, the government could raise basic exemption limits, alter tax-based family benefits, or switch from a flat income tax to a tax with two (or three) brackets and set the bottom bracket rate to zero.

The switch from personal income to consumption tax would improve the economic efficiency of Alberta’s tax system and lower its overall revenue volatility. But even so, as long as resource revenues make up a big piece of the revenue pie, major revenue uncertainty will remain. Solutions on this score include capping annual resource revenues for current budgetary purposes at a fixed dollar amount.

While the Queen Mary might be slow to turn, the task is not impossible. In the upcoming 2013 budget, the Alberta government should prioritize spending restraint and change its revenue mix to improve economic prospects and revenue predictability.

Colin Busby is a senior policy analyst and Alexandre Laurin is associate director of research at the C.D. Howe Institute.

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