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No alternative to a sales tax

Tax measure would help Alberta get back onto a solid financial footing

This op-ed by Parkland Institute director Trevor Harrison appeared in the February 11, 2016 edition of the Lethbridge Herald.

Alberta must bring in a harmonized sales tax. This is the conclusion reached by myself and 18 economists, political scientists, sociologists and other public policy experts in an article that recently ran in two major Alberta newspapers. Why did we say this?

Put simply, there is no realistic alternative if the province hopes to return to a balanced budget and pay for necessary services.

In the past, the Alberta government has relied too heavily on oil royalties to balance its budget. Those days are gone, likely forever. But, even were they to return, such royalties must become part of a long-term savings, investment and development strategy, and not used to fund ongoing programs as done by previous governments.

"Alberta cannot continue to ignore basic principles of sound finance in favour of the myth of a tax advantage."

There are only two ways to deal with Alberta’s fiscal problems. The first is massive cuts to government expenditures. No one encourages waste; everyone supports greater efficiencies where they can be found. However, it is wrong to suggest – as the right-wing Fraser Institute and its fellow travellers at the Canadian Taxpayers Federation continue to argue – that cuts alone can solve the current situation. Alberta’s public spending overall is similar to other provinces. In fact, a recent Royal Bank of Canada report states that Alberta’s spending relative to GDP for 2015-16 will be the lowest of any Canadian province and only marginally higher than that of the federal government. To balance the budget solely by spending cuts would drive Alberta’s health, education, justice and other programs to levels far below even the poorest of other provinces. In the current context, cuts would also further harm aggregate demand, quickly turning a serious recession into a home-grown depression.

The second way to deal with Alberta’s fiscal problems is to increase revenues. The NDP have taken baby steps in this direction by making the personal income tax system more progressive. But the measures taken thus far are not enough. Even after recent tax changes, including those to the corporate tax and the bringing in of the carbon tax, Alberta will tax far less than the next lowest taxing provinces: $8.5 billion less than B.C. and $9.2 billion less than Saskatchewan. In other words, the two conservative-minded provinces bracketing Alberta find it necessary to have higher tax revenues to pay for services. There is no free lunch. Alberta cannot continue to ignore basic principles of sound finance in favour of the myth of a tax advantage that is no real advantage at all to most Albertans.

The best option – the only real option for dealing with Alberta’s fiscal problem – is a sales tax. There is nothing unusual about sales taxes. They are part of the fiscal fabric everywhere else in Canada, many U.S. states, and throughout Europe.

Some will argue that sales taxes are regressive, and they are correct. But there are ways, such as rebates to low-income earners, to mitigate the negative effects of a sales tax upon the poor and vulnerable.

The overall benefits to Albertans of a sales tax are enormous, however. A sales tax would stabilize Alberta’s finances. (The accepted rule is that every one per cent on a sales tax equates to one billion in revenue; thus a five per cent sales tax – harmonized in order to lessen the costs of implementation – would bring in $5 billion.) Stable finances, in turn, would protect core services during periods when those out of work are most in need of them, while also maintaining demand through government spending during economic downturns. A sales tax would also mean lower debt servicing costs while also protecting Alberta’s credit rating. Furthermore, such a tax would capture revenue from non-residents who work or travel in Alberta and who use, but otherwise do not pay for, vital services. Finally, a sales tax would also allow for the building up of the Heritage Fund, if and when oil royalties return.

Each of these presents a strong argument for the introduction of a sales tax. But governments, by their nature are cautious – dare I say, “conservative”? – and risk averse. They will only do the right, the bold thing when their citizens tell them to do so. As so often in the past, it’s time for Albertans to lead their politicians.

Trevor Harrison

Dr. Trevor Harrison is Director of Parkland Institute. He is a Professor of Sociology in the Faculty of Arts and Science at the University of Lethbridge, and Associate Director and Research Affiliate of the Prentice Institute for Global Population and Economy.

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