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.
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.
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.”
This is only an excerpt; get the full story on newsstands January 1.
