Detaxation got us into this mess, can Alberta’s new government get us out?

During the recent provincial election, the NDP based its platform on the promise of a new deal for Albertans. The platform pledged to reverse the Progressive Conservative's cuts to public health care and education, the new health care levy, and a range of other fee increases proposed by then-premier Jim Prentice. The NDP also promised an increase in the corporate tax rate from 10% to 12%, the replacement of the single 10% personal income tax rate for all income levels with a progressive tax on incomes over $125,000, a ban on corporate and union donations to political parties, a substantial hike to the minimum wage to bring it to $15 an hour by 2018, the promise of a royalty review and a new climate change plan, and programs to encourage more bitumen upgrading in Alberta.

At least in the short term, the precipitous drop in the price of oil that began last fall has not put an end to all of these proposals, but the new government is facing significant challenges resulting from low commodity prices. According to the first quarter fiscal update presented on August 31 by Finance Minister Joe Ceci, Alberta now expects a record budget deficit in fiscal year 2015/16 of at least $5.9 billion, and Minister Ceci warned that "revenues have dipped even further in these past weeks. If current conditions continue, the final deficit will be in the range of $6.5 billion."

For those of you who have followed the research of Parkland Institute over the years, the context of these staggering numbers should be well known; since the Klein era began in the early 1990s, the Government of Alberta has been determined to have the lowest – or "most competitive," as government communications preferred to call it – taxes in the country, if not in all of North America.

"Alberta clearly needs a balanced fiscal approach grounded in reality. To do so, Alberta must have an honest conversation both about sustainable levels of new, own-source taxation revenues, and a government willing to look for evidence-based opportunities to cut unnecessary expenditures."

Between 1999 and 2001, Klein’s PCs significantly reduced provincial income tax revenue, establishing a single 10% tax rate for all income levels. Between 2001 and 2006 Alberta's corporate tax rate was similarly reduced, from 15.5% to 10%. The PCs also refused to introduce a provincial sales tax or payroll taxes to shore up the government's own-source revenue. Instead, these governments relied on revenue from Alberta's abundant natural resources, and treated them as if they were tax revenue.

Successive PC governments from the Klein era on went so far as to brag about how much more revenue Alberta would collect if it were any other province in Canada. In comparison to other Canadian provinces, Alberta has forgone anywhere between $1 billion and $12 billion in revenue per year since 2001. In 2015, this so-called "tax advantage" was pegged by the government at $10.7 billion – and that is only compared to the next-lowest-taxed province in the country, which is British Columbia. If you compare Alberta to the taxation policies of the higher taxing provinces in the country, Alberta has foregone hundreds of billions of dollars in tax revenue over the past two decades – foregone revenues that would come in handy right now.

The former PC government's marketing campaign touting the "Alberta tax advantage" has become so ingrained in Alberta politics that having the lowest tax levels in the country is taken for granted by many Albertans and political commentators as being unquestionably positive and essentially non-negotiable.

However, after this week's quarterly fiscal update, it should now be clear to all political observers that the race to the bottom that Alberta has led is just that: a dangerous and unsuccessful experiment with Alberta's long-term future and fiscal sustainability that must be reversed. Despite claims at both the provincial and federal levels, decades of Conservative detaxation policies got us to this point, not the new government.

The four-month-old provincial government now faces two main challenges.

First, it must convince Albertans that taxes are a good thing, or at least that further modest increases to our level of taxation are necessary to even maintain our current levels of public services, which it's important to note are consistently middle of the pack when compared to other provinces.

Second, after reversing the planned PC cuts to health care and education after taking power, the NDP now faces the prospect of proposing significant spending cuts of its own, which may not play well with its electoral base and Albertans who voted just a few months ago for a new approach to government.

For its part, the official opposition Wildrose party won't entertain raising taxes, presumably meaning that balancing the ledger in the face of low commodity prices would need to come from "reducing and controlling" government spending. How reducing government expenditures by $6.5 billion could possibly be accomplished is an open question; to put this in context, such reductions would be equivalent to cutting almost the entire education budget, or cutting all post-secondary funding and a good portion of the human services budget as well.

Cuts of this magnitude are not only practically unrealistic, they would further decimate our provincial economy and worsen the government's current fiscal situation by removing a sizeable portion of our tax base through the elimination of thousands of jobs. The reality is Alberta's revenue shortfall is so large that cuts alone will not get the province anywhere near to fiscal balance without commodity prices recovering significantly.

Alberta clearly needs a balanced fiscal approach grounded in reality. To do so, Alberta must have an honest conversation both about sustainable levels of new, own-source taxation revenues, and a government willing to look for evidence-based opportunities to cut unnecessary expenditures.

By adopting the mantra of tax cuts as an unquestioned article of faith, past governments have been unable or unwilling to effectively communicate to Albertans the benefits of fair taxation policies to fund core services. Instead, they have subscribed to a dangerous policy that demonizes taxation, debt, and government. This is a legacy that the new government will likely find difficult to shake. Yet, the more the current government can inaugurate a new discourse on taxation in the province (and the country), the greater are the chances of righting the ship and bringing in a truly new deal for Alberta's public finances that will benefit all Albertans. 

Decades of Conservative detaxation got us into this mess. It remains to be seen if Alberta's new government will have the courage to get us out.