With surging oil and gas prices, Alberta finds itself in the enviable position of running a projected $12 billion surplus in 2022/23 after a devastating $17 billion deficit in 2020/21. With many forecasters expecting oil and gas prices to be firm over the coming years, Alberta could be in a relatively strong fiscal position throughout this decade. To make the most of this opportunity, the provincial government should hold the line on spending and reduce personal income taxes in its upcoming budget.

For any finance minister, surpluses are challenging since voters dislike paying more tax than they receive in public services. Often, that leads governments (particularly in Alberta) to spend away surpluses fuelled by onetime resource revenues. But our history is quite clear—this only leads back into deficits and more debt accumulation when resource revenues inevitably decline, which leads Albertans taxes to be funnelled to cover growing public debt charges.

But instead of squandering the surplus, the provincial government can use it to improve Alberta tax competitiveness and support strong economic growth for the long-term. More specifically, as discussed in a recent essay, the provincial government should reduce and simplify the personal income tax system.

Alberta was long considered a low-tax jurisdiction, which helped attract skilled workers and fuel investment in the province. However, the provincial NDP replaced Alberta’s single personal income tax rate of 10 per cent with five tax rates including a top rate of 15 per cent in 2015. To make matters worse, the Trudeau government increased taxes further adding a new top personal federal income tax rate in 2016, which increased the top federal rate from 29 per cent to 33 per cent.

As a result of these changes, Alberta’s top combined rate (federal/provincial) increased from 39 per cent to 48 per cent. At the same time, federal tax reform in the United States lowered the top federal personal income tax rate by 2.6 percentage points, from 39.6 per cent to 37 per cent. Overall, Alberta went from having the lowest combined top tax rate (federal and provincial/state) out of all 61 jurisdictions in Canada and the U.S. in 2014 to having the 10th highest top combined rate in 2019.

Alberta’s high income taxes discourage productive economic activity such as work, investment and savings, while putting the province at a competitive disadvantage in attracting and retaining skilled workers and entrepreneurs who drive innovation and job creation. High personal income tax rates coupled with claw-back rates on income-tested benefits (for example, welfare and child benefits) also hurt many lower-income Albertans. These high rates particularly discourage low-income workers from participating in the labour force and saving.

To restore tax competitiveness and support strong economic growth, the provincial government should return to a single-rate tax of 8 per cent, or at a minimum, levy an 8 per cent basic personal income tax rate with a 50 per cent surtax on upper-income earners (for instance, levying a 12 per cent tax rate on income above $131,220). The first more costly option would result in an estimated revenue loss of $4.2 billion—roughly one-third of Alberta’s surplus this year.

To be clear, rather than spend the remaining surpluses, the province should use a good portion of its windfall to reduce Alberta’s debt and/or to save for the future.

Keeping this in mind, the provincial government could use other revenues to cover the lost personal income tax revenue as needed, rather than rely on volatile oil and gas revenues. This could include repatriating the federal consumer carbon tax for a made-in-Alberta approach, introducing variable health premiums to help fund health care, and/or levying an Alberta sales tax of 3 per cent on the federal GST for an 8 per cent HST as part of a “Triple 8” tax solution alongside an 8 per cent corporate income tax rate and basic personal income tax rate.

By rejecting the temptation to turbo-charge spending and providing for affordable personal income tax reductions, the provincial government can avoid the boom-and-bust cycle in provincial finances while improving economic growth in the coming years.