Does Alberta need a sales tax?

With oil prices plunging and provincial resource revenues expected to drop, Alberta’s red ink will rise. In response, Premier Jim Prentice has floated the notion of a provincial sales tax and/or hikes in other taxes.

Falling oil prices are one obvious reason for Alberta’s pending red ink. Past spending commitments are another; more on that in a moment. First, let’s consider the sales tax question on its own merits.

Pure consumption taxes such as the GST make more sense by design than business or personal income taxes. (For the record, a sales tax can be a consumption tax but they are not always the same thing. Space does not permit an explanation of the differences, but my analysis is about consumption taxes; think of the GST as one example.)

To understand why taxing consumption is preferable to other types of taxes, consider the alternatives: high business taxes impede investment and job creation (see France over the last several decades); high income taxes harm the ability of people to save and invest in their future (see Quebec and Ontario).

In contrast, if governments can lower and moderate those two taxes through the use of consumption taxes (which can be designed to exempt low-income earners), economies face less distortion. That’s because consumption taxes have a smaller adverse effect on people’s incentive to do economically productive things like work, save, invest, or be entrepreneurial.

Some proponents of a sales tax (or a consumption tax) argue for it with reference to Alberta’s rising budgetary red ink, or the province’s reliance on resource revenues, or the desire to deposit money into the Alberta Heritage Savings Trust Fund.

But that should, first, bring us back to government spending. In his recent statement, Premier Prentice remarked that “I’m not getting into dissecting how we ended up where we are.”

Actually, such a dissection is exactly what’s needed, especially in light of talks about a new sales tax—or any other tax hike.

The province of Alberta is “dependent” on resource revenues the way an employee with a $60,000 income is dependent on a one-time $15,000 Christmas bonus. Start to incur obligations that presume $75,000 each year and you’re in trouble.

The province could have better controlled past spending but instead, since the mid-2000s, made the same mistake as the employee expecting an annual Christmas bonus.

Here are the hard facts: Back in 1993/94, per person program spending (in real dollars) was $8,978. The Ralph Klein government including then Finance Minister Jim Dinning cut that back to $6,828 per person by 1996/97.

By 2004/05, per person program spending had risen to $8,965—back to where it was before the mid-1990s budget cuts.

Even if the province kept spending at these elevated levels, but restrained future increases within the bounds of inflation plus population growth (after 2004/05), the province would have produced surpluses in every year since, including during the recession.

Instead, successive premiers and finance ministers let program spending get away from them. (That included refusing to moderate public sector compensation including pensions, for example.) By 2012/13 Alberta spent $10,672 per person on government programs.

That extra spending, beyond inflation and population growth, meant that the province spent $300 billion on programs between 2005/06 and 2012/13 instead of $259 billion—a $41 billion difference.

Let’s be clear. A consumption tax in Alberta makes sense if it is revenue neutral, where the government receives the same amount of money despite any changes to the tax system.

Absent that critical caveat, higher and newer taxes would simply impede Alberta’s opportunity-based economy and culture. It would also mean that politicians, at this critical moment, chose to avoid the difficult dissection of how the province arrived at its fiscal predicament. The numbers reveal how government spending remains fundamental to any discussion about Alberta’s red ink.