A Provincial Sales Tax – If not now – When?

Spoiler Alert: This blog post draws the inevitable conclusion that Alberta must adopt a provincial sales tax.  If you can’t stand hearing that… read no further.

The Alberta government’s fiscal focus has been almost exclusively on deficit reduction.  The thesis was that Alberta has an expenditure problem.  The pitch said that if Alberta’s health and social expenditures mirrored other provinces then the budget could be balanced.  And secondarily, Alberta should get a better shake from the federal government on transfer programs.

As the first anniversary of their election arrives, the UCP fiscal campaign promises are dead in the water.  The COVID pandemic and the Russo-Saudi oil price war blew up the 2020 budget before it could be approved.  Regardless, the UCP rushed their somewhat mythical budget through, even as they announced expenditures to deal with the pandemic.

The provincial budget expenditure profile has changed radically: 

  • The Premier puts a $20.0 billion price tag on the cost for the pandemic amid sinking oil prices,
  • Plans to reshape the health care budget have been partly shelved in the face of stiff resistance from health care professionals,
  • The government reduced corporate taxes, but it hasn’t seen offsetting new investment
  • And the government held its philosophical nose and invested $1.5 billion in TC Energy to move the Keystone XL pipeline construction forward.  They will also offer another $6.0 billion in loan guarantees.

And worse yet, the revenue picture is disastrous:

  • Timing for recovery from the locked down economy and a return to a new normal will impact income and corporate taxes for the province.
  • The budget was built on an oil price of almost $60 and it is currently trading about $20/ barrel.
  • The value of bitumen-based oil is below $10/ barrel.
  • Forest product companies have been given a temporary respite from paying timber dues to government.
  • The upcoming tourism season will be a write off.

Economic forecasts are murky but negative

  • The International Monetary Fund (IMF) estimates the global economy will shrink by 3%. And Canada economy will contract by about 6%, as will the US economy.
  • RBC’s economic analysts think that the Alberta economy will contract by more than 5% in 2020. They forecast an unemployment rate of 8%.
  • The pandemic wreaked havoc on employment and corporate activity.  RBC’s recent forecast say 200,000 jobs in Alberta and Saskatchewan will be lost. The Premier has been heard to say that unemployment might reach 25% 
  • The price war between Saudi Arabia and Russia has resulted in a crash in oil prices just as demand dropped due to pandemic related issues. Even with an agreement to curtail production, demand destruction from the pandemic will keep prices low.
  • After the last federal election, the Alberta government sent clear signals to the federal government about digging Alberta out of its economic malaise.  Six months in – no program changes have been announced. Federal urgency to deal with “Western Alienation” is on the backburner.
The Alberta rollercoaster booms and busts

Now what?

Increasingly, the sound of expenditure reductions as the sole way to get out of deficit financing, is the sound of one hand clapping. And the hope that another boom in energy prices will save the budget is a mirage.

Royalty revenue are not the panacea 

  • Relying on unstable resource revenue sources to finance everyday operating expenditures has proved to be unwise.  Using this strategy has seen the province balance its budget only once in the past 10 years.
  • Government’s forecasts of royalty revenue are wildly optimistic given the destruction of demand.
  • Using resource revenue that ought to partly belong to future generations (not just current Albertans) creates inter-generational resource benefit problems.
  • And history has proven that when royalty revenue went up – increased spending the next fiscal year used over 50% of the increased royalties.

Federal government help? Alberta is an outlier in Confederation

  • Alberta’s political clout is limited; its population is only 11% of Canada’s (4.3 million of 37.7 million).  Moreover, representation in Canada’s Parliament and Senate are weighted in favour of Eastern Canada
  • The federal Equalization Program redistributes cash to “have not” provinces. The program is slanted so that Alberta will likely never benefit, and Quebec will typically receive two thirds of the program’s distribution year after year
  • In parts of Canada, it is good retail politics to pillory Alberta for its mostly conservative politics, its refusal to co-operate on climate change, and its tax policies, particularly lack of a sales tax.
  • Many Canadians are happy to see reduced oil production in Alberta to meet Canada’s commitment to climate change reduction.

The main takeaways…. if Alberta is going to become solvent it will have to do it itself!

  • Severely Normal Albertans have to face some hard realities that a provincial sales tax is necessary because: reductions are necessary; but they alone will not get Alberta to a balanced budget.
  • Riding the resource roller coaster has turned into riding a down escalator.
  • The federal government won’t be riding in to solve Alberta’s problems.  The often-promised relief package is likely to be much less helpful than Alberta would hope.

A provincial sales tax once named the ‘political suicide tax” is necessary now

Alberta must join every other province, 45 US states and every European country (except Monaco) and implement a sales tax.  Each sales tax percentage point would generate about $1 billion dollars. The tax could be harmonized with the federal tax, rebates to low income families could be incorporated. And to sugar coat the bad medicine; perhaps it could be accompanied by lower corporate and personal income taxes. 

As Alberta battles the headwinds of another recession, a sales tax of perhaps 3 to 4% and continued lower corporate taxes might be needed.