It is clear Alberta is facing a challenging fiscal landscape. But the problem has much more to do with revenue than spending.
Past Progressive Conservative governments have been entirely unwilling to examine the revenue side of the ledger, which always put public service cuts squarely at the centre of the agenda. Alberta has had a long history of justifying cuts to public services. Whether it is zero-based budgeting initiatives or discussions about “trimming non-essential services,” the narrative has not been whether we will cut, but how much?
The new Government of Alberta has a critical task ahead as it attempts to turn the page on decades of austerity. Since being elected four months ago, it has made considerable progress in raising new revenues needed to support public programs and services. However, given Alberta’s continued reliance on high commodity prices, much remains to be done as Minister Ceci now anticipates a record budget deficit of at least $5.9 billion.
By eroding tax fairness, past governments have placed the new government in an extremely difficult position as it asserts the need to maintain public services and staff levels, while addressing serious revenue shortfalls.
Spending is Not the Problem
The Alberta government has recorded a troubling string of budget deficits since the beginning of the global recession in 2008.
But were these deficits caused by “out-of-control” spending as advocates of austerity would have us believe? The answer is no.
When we adjust for inflation and population growth, Alberta spends only slightly more today on public services than it did 20 years ago. When you take out the billions that have been spent on catching up on overdue projects, we are actually spending less.
At the same time, Alberta spends only slightly more on public services than other provinces, even though we are much wealthier (our per-capita GDP is 75 per cent larger than the national average).
Clearly, spending on public services is not excessive, out of control or out of line with other provinces. So, what’s the real problem? The answer can be found on the other side of the budget ledger: revenues.
Starting with the Klein government in the early ‘90s, successive provincial governments have presided over a remarkable series of tax and royalty giveaways that have blown a hole in the revenue base that our province needs to fund things like education, health care and other vital public services.
In other words, if the budget cupboard is bare, it’s because we have decided to make it bare.
The economic boom that Alberta enjoyed between 2004 and 2008 allowed government – for a short time at least – to paper over what has essentially become a deep structural problem. But now that the provincial economy is starting to slow down along with the rest of the global economy, the budget chickens have come home to roost.
Volatility, Budgets, and Public Services
According to the CD Howe Institute, provinces that rely on oil and gas revenues have the worst record when it comes to hitting budget targets in Canada, leading to wild swings in public sector spending and uncertainty for the private sector. The CD Howe Institute recommends saving more of our royalty revenue in order to mitigate the problem.
How to Fight Volatility: Income Taxes and Corporate Taxes
Corporate and personal income tax revenues are a much more reliable source of stable revenue than resource royalties.
However, Alberta’s flat tax for income and 10 per cent tax for corporations have undermined our ability to offset the fluctuations in revenue from resource royalties. Very wealthy Albertans got a 24 per cent tax cut with the introduction of the flat tax in 2001, a tax cut they have enjoyed every year until 2015.
The truth is that the very-wealthy have been grossly under-taxed in Alberta, paying the lowest rates in Canada and among the lowest rates in the industrialized world. Although the new government has raised the marginal rate for those with incomes in excess of $125,000, Alberta still has amongst the lowest tax rates in Canada and industrialized nations. More needs to be done to raise revenues through increased personal income tax rates.
Corporate taxes are another area where Albertans would benefit from a balanced approach. Since 2001, we reduced the general corporate rate to 10 per cent, the lowest in Canada. Restoring our general corporate rate to 12 per cent puts Alberta still slightly below the national average. We are not proposing any changes to the small business rate, which should remain at 3 per cent.
The usual reaction that companies will simply pick up and relocate is unrealistic. Only Alberta has vast deposits of bituminous oil sands, the world's most important and strategic resource. Only Alberta has the highest number of university-educated workers in Canada, the highest-quality roads and associated infrastructure for private industry, and one of the highest-quality health care systems and health research infrastructures in the world.
Outside the oil sands, we remain a significant source of coal and natural gas, a national leader in wind power generation, and a regional hub for financial services industries. Companies set-up here because we have everything they need, including access to the world's most strategic resource, not because our corporate tax rates are lower than most countries in the world.
Of all the world’s oil reserves, only 8 per cent are fully available to international oil companies. Of that 8 per cent, half is in Alberta’s oil sands. In other words, over half of the future business of the world’s most powerful corporations will take place in Alberta.
Alberta is also giving away much of our tax room to the US Treasury. American companies operating in Canada must pay a 35 per cent corporate tax rate to the American government. If the Canadian federal government charges a 15 per cent tax on corporate profits, and Alberta charges 10 per cent, American companies operating here must, by law, turn the remaining 10 per cent over to the US Treasury. If Alberta were to restore our general corporate rates to more reasonable levels, we would keep much of that lost revenue here in the province.
Our public services are far too dependent on the price of oil. We must diversify, save for the future, and invest in a different kind of economy. If we charged appropriate royalties, we could achieve those goals. But we continue to give away billions in valuable resources. We continue to fail to heed Peter Lougheed’s advice: “Think like owners” of our natural resources.
The Question of a Sales Tax
In winter Budget 2015 consultations, 50 percent of respondents rejected a sales tax.
The Alberta labour movement also opposes a sales tax.
A sales tax adversely affects low- and middle-income people. This is because sales taxes are flat, since everyone pays the same rate. Because lower-income people tend to spend a high percentage of their income on basic consumer goods such as food and clothing, sales taxes do require the poor to pay a higher percentage of their income in taxes.
While a sales tax might generate extra revenue, there is a reason why only elements of the fringe right-wing like it. Only people like Jack Mintz, a board member for Imperial Oil and commentator for the corporate class via the University of Calgary School of Public Policy speak in favour of this option.
There are two reasons the corporate class does not mind a sales tax. First, a sales tax is highly regressive, hitting our poorest citizens in the pocketbook far harder than the wealthy. Second, it masks the real tax debate: income tax and corporate taxes. It is in these areas that Alberta’s wealthiest individuals and corporations are getting a free ride – and it is in the corporate sector’s interest to keep the free ride going as long as possible.
Cuts Hurt and Sales Taxes Bite: 30 Years of Stagnant Wages for Alberta Workers while Corporate Profits Spike
Low- and middle-income Albertans are rightfully opposed to a sales tax, health care premiums, and other user fees, cuts and privatization because for most families, there simply isn’t anything left over at the end of the month. The boom did not “trickle down” as the right-wing spin factories would have us believe. For many Albertans, keeping up with the cost of living just keeps getting harder every month — no matter if it’s a boom or a bust.
Albertans have higher out-of-pocket expenses for utilities, child care, car insurance, and post-secondary education.
When Peter Lougheed was Premier, Alberta collected royalties and fees that amounted to 35-40 per cent of the gross revenue generated from the development of our publicly-owned energy resources in royalties. In 2011, we collected a meagre 10 per cent.
According to CERI, Alberta will collect an average of 17 per cent of revenue in royalties between 2012 and 2045.
According to the CD Howe Institute, Alberta collected $4669 per person in revenue from non-renewable resources in the 1980s. We now collect just $2661 per citizen.
Failure to Pace Development and Failure to Keep Upgrading Promises
Our bitumen royalty revenues are low because the price is low.
Past governments are partly to blame for the heavy discounting of various bitumen blends. Our energy regulator approves every project application, which creates a glut in the market. A glut of a low-quality product, without any adjustment in supply, creates a low price. Low prices mean lower royalties for Albertans.
To make matters worse, the Government of Alberta has yet to set an appropriate value-added agenda for the oil sands. We are trying to sell non-upgraded bitumen to refineries that would prefer to buy synthetic crude oil. If we were to approve projects only if they came with associated upgrading capacity, we would be selling the right product to North American refineries.
The market is full of the wrong product – bitumen. The right product is synthetic crude oil (SCO).
The Solutions are to Upgrade and Pace Development
There are policy options that would require a mixture of regulation, government leadership, and incentives for the private sector, just as the Government of Alberta has done in the past in the petrochemical sector. We will be presenting options to the royalty review panel currently underway about the need for Albertans, the owners of the resource, receiving their fair share from natural resource development.
Saving Royalty Revenue
Saving for the future is a nice idea, but Alberta has to have something to save. We built the Heritage Savings Trust Fund at a time when we collected at least 35 per cent of oil industry revenue in royalties. Collecting no more than 10 per cent makes saving for the future very difficult.
According to figures provided by the Canadian Energy Research Institute, collecting Lougheed-era royalties in 2011 (35 per cent of gross revenue) would have resulted in $10 billion of extra revenue to the Alberta Treasury.
It is important to invest in infrastructure during the economic downturn. Low interest rates and job losses make infrastructure investment to be crucial in the current context. Alberta’s schools, hospitals, seniors facilities and other infrastructure such as roads must be maintained to support Alberta’s economy and population, and to begin to pay down the large infrastructure deficit that Alberta faces. A recent study by the Centre for Spatial Economics has argued that “a major public infrastructure program would give an important short-term boost to the economy”.
- 1. Spending is not the Problem
Alberta is in the middle of the pack in terms of spending compared to the other provinces. Alberta has for many years had a revenue problem, not a spending one.
- 2. Income Tax
The wealthy in Alberta are not pulling their weight compared to the rest of us, and our public services suffer as a result.
- 3. Corporate Tax Revenues
Alberta has historically collected the lowest corporate tax revenues in Canada. Meanwhile, corporate profits have soared.
- 4. Natural Resource Revenue
Export pipelines like Keystone XL and Northern Gateway are both wrapped up in intense environmental debates and review processes that have become increasingly political. Even if it were smooth sailing for these export pipelines, they would not be on stream for a few years. The low price is not so much due to export capacity as a glut of bitumen on the US market, a glut that lives on to this day.
- 5. Infrastructure
It is important to invest in infrastructure during the economic downturn to support the economy and maintain jobs for Albertans. Smart investments in infrastructure will boost productivity for years to come.
 In the US, states with no or flat income tax systems rely on sales taxes and property taxes for most of their revenue. In those states, low-income people pay far higher marginal rates than high-income people, according to a study released in January 2013. “The Institute on Taxation and Economic Policy found that the bottom 20 per cent of earners paid an effective tax rate of 11.1 per cent to state and local governments, while the top-earning quintile paid about half as much, 5.6 per cent. The middle 20 per cent pays a rate of 9.4 per cent … ITEP’s study found 10 states – Washington, Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana and Alabama – had particularly regressive tax systems. Those states, the study found, either have no state income tax or a relatively flat tax, and often rely heavily on sales taxes…States commended as “low tax” are often high tax states for low- and middle-income families.” http://thehill.com/blogs/on-the-money/domestic-taxes/280027-study-state-tax-systems-regressive
 Parkland Institute Fact Sheet: More Than Nickles and Dimes, February 3, 2010. http://parklandinstitute.ca/research/summary/more_than_nickels_and_dimes/
 Canadian Energy Research Institute, Working Paper #128, Canadian Oil Sands Supply Costs and Development Projects, 2011-2045, March 2012.
 Landon and Smith, CD Howe Institute Commentary, Energy Prices and Alberta
Government Revenue Volatility, November 2010.
 Andrew Jackson, “More Public Infrastructure Investment Needed to Boost Economic Performance,” National Newswatch, September 14, 2015. http://www.nationalnewswatch.com/2015/09/14/more-public-infrastructure-investment-needed-to-boost-economic-performance/#.Vfc45pfQOHx
 Alberta Federation of Labour Policy Paper on Alberta’s Revenue Crisis, 2011. http://www.afl.org/index.php/About-AFL/2011-afl-convention.html Also see: “Alberta continues to have one of the most competitive tax regimes in North America . Albertans enjoy the benefits of low personal and corporate income taxes. We have the lowest fuel taxes among provinces, no capital tax, no payroll tax and no sales tax. If Alberta had any other provincial tax system, Albertans and Alberta businesses would pay at least $10 .7 billion or more in taxes each year. Maintaining this tax advantage is an important part of growing the economy.” Government of Alberta. Budget 2012 Fiscal Plan Overview. http://www.finance.alberta.ca/publications/budget/budget2012/fiscal-plan-overview.pdf
 Argus Media. “Pursuing Premium Prices: Canadian Crude and Evolving World Markets.” November 29, 2012. http://www.afl.org/index.php/Download-document/804-Argus-Media-Pursuing-Premium-Prices-Canadian-Crude-and-Evolving-World-Markets-Nov-2012.html