News | January 15, 2015

By James Wood and Darcy Henton, Calgary HeraldPublished on: January 15, 2015Premier Jim Prentice has put all options on the table as the Alberta government struggles with a potential $6-billion to $7-billion hole in the spring budget thanks to the plunge in oil prices. Even the unthinkable in Alberta politics — a sales tax — has been floated by the premier. But there are several other ways the province can attempt to stay in the black, all of them painful to most Albertans.Here are possible solutions to the revenue crunch:

Provincial sales tax

A provincial sales tax has long been anathema in Alberta politics but Prentice opened the door to a PST this week by saying the province needs to consider all options.Alberta is the only province in Canada without a sales tax but many economists have long advocated for such a levy as the most efficient and stable means of bringing in revenue.It is estimated that each point on a provincial sales tax would raise over $1 billion annually.Economist Jack Mintz of the University of Calgary’s School of Public Policy says one advantage of a sales tax is that individuals only pay according to what they spend.It would also be paid by tourists and visiting workers, who don’t currently pay income tax, and it would be easy to implement since businesses already pay the federal GST, says Mintz.“All taxes are bad but some are less harmful than others, and a sales tax would not be costly,” he says.But Mount Royal University political scientist Lori Williams says there are good reasons why politicians have shied away from a PST in the past.Williams says the tax is regressive, since everyone pays the same rate no matter what they earn, and it hurts low-income individuals the most.A sales tax is also politically dangerous because voters see it almost every day as they make purchases, she says.“If you’re regularly reminded a new tax is in place, that’s not going to enhance the popularity of whoever came up with that,” says Williams.

Personal and corporate taxes

Prentice could find allies if he chooses to make changes to the province’s 10 per cent flat tax on personal and corporate income, as both the provincial Liberals and NDP have called for a return to a progressive income tax system.Alberta’s flat tax, implemented under Premier Ralph Klein, is the only one of its kind in the country.Prentice could raise the overall rate or put a higher tax rate on high earners.In 2013, the government said increasing the flat tax to 11 per cent would generate $930 million, while introducing a second tax rate on income over $250,000 — boosting it to 14 per cent — would generate $1.2 billion.The advocacy group Public Interest Alberta calls for those who make between $100,000 and $150,000 to pay 13 per cent and earners above that to pay 15 per cent, with corporations paying 12 per cent. That would reap $2 billion annually, says the group. Moving to Saskatchewan’s staggered personal tax rates of 11, 13, and 15 per cent and 12 per cent corporate would bring in $4.5 billion.Williams says a progressive income tax would be fairer and more affordable for those who need it.“The income tax is something that people come up against less frequently but, of course, the people who are paying the higher rate are those that have significant influence in any society,” she says.Mintz suggests that hiking income tax could lead to high earners steering away from Alberta in the future or shifting their incomes to other jurisdictions.“There are a lot of very high income households in Alberta relative to other provinces … the potential risk of the loss of the tax base can be quite significant,” he says.

Spending cuts and greater borrowing

Prentice has said he will curb spending before raising taxes, but in a province growing as fast as Alberta, cutting back on $38.5 billion in expenditures would be difficult without a parallel plan to boost sustainable revenues, says political analyst Chaldeans Mensah.“The premier has to be careful because if too much action is taken on the austerity part without a requisite focus on a long-term revenue boost, I think it will be very difficult to sell,” said the MacEwan University political science professor.Former finance ministers have said health-care costs, which make up 45 per cent of the government’s operational spending, have to be on the chopping block. A five per cent cut in the $18.3-billion health care budget would save close to $1 billion.Prentice pointed out that wages make up a significant portion of government expenditures, including 77 per cent of education costs. It’s a tempting target. Public sector wages and benefits totalled $21.4 billion in 2012 — more than half of the province’s total operating expense.But cutting costs alone won’t solve the problem, economists say.“To try to recover from this loss of revenue simply by cutting spending would have a catastrophic effect on health care, education and social assistance, so you can’t do it all that way,” said Ron Kneebone, a University of Calgary economics professor.Even cuts to capital spending and municipalities would be difficult.The province had committed to spending $6.6 billion next year and $19 billion over three years on roads, schools, health facilities and municipal projects, including nearly $700 million to twin Highway 43 to Fort McMurray.

Raising fees and premiums

Prentice can get the largest bang for the buck without raising taxes by reintroducing health-care premiums. The $1,000 annual fee, which was eliminated in 2008, would raise up to $2 billion in revenue, according to Alberta Finance estimates last year.Mensah said Albertans would likely accept the reintroduction of health-care premiums if they were sold as necessary to get the province off the resource revenue roller-coaster.“I think health-care premiums could be a continuing source of funding, if packaged specifically to address health-care outcomes,” he said. “If couched as a long-term solution, I think it could be politically saleable to the people of Alberta.”The government could also raise fees and so-called sin taxes on alcohol and tobacco to generate further revenue, but it would be “out of the question” to raise oil and gas royalty rates while the industry is in turmoil, Mensah said.“The industry is suffering right now and I think any effort to meddle with royalties would be politically difficult,” he said.Kneebone said a combination of tax increases, including raising all the sin taxes and tax on gasoline, as well as cutting back spending on programs and services, would be the most effective way to address the problem.“They need to do all those things,” he said.The province raises nearly $2 billion annually in tobacco taxes set at $40 per carton and fuel taxes set at nine cents per litre.Kneebone said the government should not make balancing the province’s books a priority until the oil crisis is resolved.“Allow the government to run a deficit at least for a couple of years while we try to transition to a better designed budget,” he said.

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