By Mark Milke
In a recent debate within the pages of the National Post many Albertans might have missed; two economists, Rhys Kesselman from Simon Fraser University and Jack Mintz from the University of Calgary, sparred over the most desirable tax mix for Alberta. Kesselman wanted Alberta’s single income tax rate replaced with cascading tax brackets, and structured to ensure higher overall taxes.
Mintz advocated a sales tax, but with the caveat that it be revenue neutral, i.e., some other tax should be lowered in exchange.
The tax tussle reminded me of a quip by Jean Baptiste Colbert, the minister of finance under Louis XIV: “The art of taxation consists in plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”
An Alberta sales tax is indeed preferable to other taxes. Properly designed, consumption taxes are more efficient and less damaging to the economy.
Problem is, all this tax talk is cemented in the notion Alberta is short revenue, or at the least, must find a more ‘stable’ tax source.
But the fact is, Alberta’s red-ink budgets have much more to do with real per capita program spending being near historic highs, which probably explains why so many Albertans hiss at the notion of a sales tax.
To understand why the spending side of the government ledger deserves more attention, let’s look at some statistics about Alberta’s program spending, ones that take into account Alberta’s population growth and inflation rate.
Back in 2005/06, at the height of Alberta’s last energy boom (when resource revenues hit their peak), program spending in Alberta came to $9,465 per person. This increased to $10,377 per person by 2011/12. (I have deliberately excluded the year just ended, 2012/13. Alberta’s last provincial budget completely changed how it accounts for spending and revenues making historical comparisons difficult.)
But neither of those years set the record. In 1985/86, per person program spending peaked at $11,905 but then declined to $6,733 by 1996/97. In other words, by 2005 Alberta’s government was already spending closer to the all-time high than to the all-time low.
If the Alberta government had based its program spending solely on inflation and population growth, it would have spent a cumulative total of $18.2 billion less between 2005 and 2012. Albertans would have seen balanced budgets in every single year, including during the recession.
Granted, Alberta’s own-source revenues are volatile and down from their highs in the past decade. But the point is that, had spending been better managed, Alberta’s budgets would have been in surplus. Who, except the financially reckless, spends up to the limit of their income every year?
My point is simple: the precise amount of revenues flowing into Alberta’s coffers every year is less important than if the province spends more prudently.
There is precedent for such prudence. At the end of the 1990s, Alberta suffered a 37% drop in resource revenues in just one year (between the 1997 and 1998 fiscal years). But the province stayed in the black because it better managed its growth in spending.
But since at least 2005, the province has budgeted and spent as if exceptional years were the norm, leading to unwise decisions. Some examples:
The province signed a contract with teachers between 2007 and 2012 that awarded raises double the inflation rate, indicative of its general approach to the public sector.
The province also took over billions in unfunded liabilities for the Teachers’ Pension Plan.
In addition, public sector compensation in Alberta is on average 10% higher than in the private sector.
Add to this spending on corporate welfare (the province spent $1.3-billion in carbon capture over several years) and a clear picture of fiscal profligacy develops.
Over the years, polls repeatedly show Albertans opposed to a sales tax, I suspect because, while many Albertans may not understand the economic intricacies of various taxes, they quite clearly and intuitively get it: Alberta has a serious spending problem and the politicians have barely begun to address it.
And that is why, whenever talk turns to tax reform, even on justifiable grounds of efficiency and proposed as revenue neutral, Albertans react much like Colbert’s plucked goose. They suspect that unless one tax ends in exchange for a sales tax, they will simply see more of their feathers plucked by a high-spending provincial government.
Mark Milke is a senior fellow with the Fraser Institute. His column is distributed through Troy Media.