Fixing a spending problem with higher taxes that erode competitiveness is not a solution
Alberta’s economy is still on shaky ground as oil prices remain depressed relative to last year’s levels. Against this backdrop enters a new NDP government led by Premier Rachel Notley. While her government cannot be blamed for the economic state of the province, it can certainly influence the direction it takes from here on through economic policy.
One option is to enact policies that strengthen the investment climate and ultimately help the recovery. The other is to implement policies that tarnish competitiveness and foster investor uncertainty. The troubling early signs suggest the government is pursuing the latter.
For years, Alberta has maintained a strong investment climate vis-a-vis other provinces and this helped propel the province into an economic powerhouse. A competitive, well-designed tax regime anchored an assortment of economic policies, known as the Alberta Advantage.
It is therefore worrying that this week’s Speech from the Throne confirmed major increases to personal income and corporate taxes are on the horizon. Eroding Alberta’s tax advantages is precisely the wrong approach to address the economic challenges facing the province.
In an already challenging economic environment, the government will increase Alberta’s general corporate tax rate from 10 to 12 per cent. This 20 per cent hike sends a powerful, negative signal to both domestic and international investors about the direction of economic policy and weakens the incentives for firms to invest and create jobs.
The economics literature is clear that higher corporate taxes deter investment and dull growth. Consider a recent OECD study that analyzed the effects of different taxes on economic performance. It concluded corporate taxes are “the most harmful for growth.” Increasing corporate taxes will undermine the tax advantage the province has enjoyed over competing jurisdictions, which has helped attract investment.
On personal income taxes, the government is set to raise taxes on upper-earners, doing away with Alberta’s single tax rate of 10 per cent, a pro-growth policy that has helped Alberta attract (and retain) skilled workers and entrepreneurs over the years. As an extensive survey shows, personal income taxes – particularly high and increasing rates – reduce economic growth, investment, business formation, and job creation. The only point of debate is in the magnitude of the negative effects.
The government’s proposal to hike taxes rather than cut spending is the wrong approach for addressing Alberta’s fiscal issues. Tax increases will not only reduce competitiveness but are a fundamental misdiagnosis of the problem.
From 2004/05 to 2013/14, the provincial government increased spending well beyond the pace to keep up with inflation and population growth. Had spending been kept within these parameters since 2004/05, it would have been $8 billion lower in 2013/14. This is more than the value of the projected deficit this year. Fixing a spending problem with higher taxes that erode competitiveness is not a solution.
The proposed tax increases will shake business confidence across the provincial economy but especially in the energy sector as they come amid plans for a royalty review and new environmental regulations. As Alberta firms struggle with lower energy prices, the prospect of increased royalty payments and regulations add major (and unnecessary) policy uncertainty, deterring firms from making new investments.
Canadian Natural Resources Ltd., one of the largest oil producers in the country, has already postponed meetings with investors, stating that it could not finalize capital allocation plans given policy and regulatory uncertainty. Perhaps unsurprisingly, Saskatchewan’s energy minister recently visited Calgary and made a case for increased investment in his province, promising regulatory stability in contrast to the uncertainty in Alberta.
The economic challenges facing Alberta are real. Yet the province is much more likely to resume a strong growth trajectory if the foundations of its competitive tax regime are maintained. If the government proceeds with its plans to abandon the single rate personal income tax, increase corporate taxes, and promote uncertainty in the energy sector, it will erode policy advantages that have helped make Alberta one of the most prosperous jurisdictions in the world.
By Ben Eisen and Charles Lammam
Ben Eisen is a senior policy analyst and Charles Lammam is director of fiscal studies at the Fraser Institute.