A Sales Tax for Alberta: Why and How

Ascah, Robert L. (Ed.) Book A Sales Tax for Alberta: Why and How Provided in Cooperation with: AU Press, Athabasca University Suggested Citation: Ascah, Robert L. (Ed.) (2022) : A Sales Tax for Alberta: Why and How, ISBN 978-1-77199-298-5, AU Press, Edmonton, AB, https://doi.org/10.15215/aupress/9781771992978.01 This Version is available at: https://hdl.handle.net/10419/281241 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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Ascah Published by AU Press, Athabasca University 1 University Drive, Athabasca, AB T9S 3A3 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Cover design by Natalie Olsen, kisscutdesign.com Printed and bound in Canada Library and Archives Canada Cataloguing in Publication Title: A sales tax for Alberta : why and how / edited by Robert L. Ascah. Names: Ascah, Robert L. (Robert Laurence), 1954– editor. Description: Includes bibliographical references. Identifiers: Canadiana (print) 20220190291 | Canadiana (ebook) 20220190348 | ISBN 9781771992978 (softcover) | ISBN 9781771992985 (PDF) | ISBN 9781771992992 (EPUB) Subjects: LCSH: Sales tax— Alberta. | LCSH: Fiscal policy— Alberta. Classification: LCC HJ5715.C22 A43 2022 | 336.2/713097123— dc23 We acknowledge the financial support of the Government of Canada through the Canada Book Fund (CBF) for our publishing activities and the assistance provided by the Government of Alberta through the Alberta Media Fund. This publication is licensed under a Creative Commons licence, Attribution– Noncommercial– No Derivative Works 4.0 International: see www .creativecommons .org. The text may be reproduced for noncommercial purposes, provided that credit is given to the original author. To obtain permission for uses beyond those outlined in the Creative Commons licence, please contact AU Press, Athabasca University, at aupress @athabascau .ca. Contents List of Figures and Tables vii List of Selected Abbreviations ix Foreword xi Kevin Taft Acknowledgements xv Introduction 3 Part I No Sales Tax! Alberta’s Political and Fiscal Environment 1. Alberta Exceptionalism and Taxation as Affront 15 Robert L. Ascah 2. The Political Suicide Tax? 47 Graham Thomson 3. Alberta’s Fiscal Dilemma 55 Robert L. Ascah 4. The Revenue Push and Spending Pull: A DoubleEdged Look at the Source of Alberta’s Fiscal Ills 69 Robert L. Ascah Part II The Least Painful Solution: Why a Sales Tax Makes Sense 5. Alberta Sales Tax: An Inevitability and an Opportunity to Reset 93 Melville McMillan 6. The Volatility of Alberta’s Tax Bases: Implications for Tax Policy Choices 111 Ergete Ferede 7. Oil, Democracy, and Social Solidarity: The Case for an Alberta Sales Tax 127 Elizabeth Smythe Part III Suggestions for the Future: How to Get a Sales Tax for Alberta 8. A Disciplined PST 149 Ian Glassford 9. Join the Sales Tax Parade! PST and the Road to Alberta’s Economic Recovery 163 Kenneth J. McKenzie 10. Moving to a Sustainable Fiscal Future: Addressing Alberta’s Legacies of Denial 171 Robert L. Ascah Afterword 207 Trevor W. Harrison List of Contributors 217 vii Figures and Tables Figures 1.1 Alberta’s tax advantage, 2021– 22 41 3.1 Nonrenewable resource revenue as percentage of ownsource revenue, 1965– 66 to 2020– 21 57 3.2 Alberta’s annual deficit/surplus, 1965– 66 to 2020–21, with and without nonrenewable resource revenue 60 3.3 Government of Alberta revenue and expenditure, 1965– 66 to 2020– 21, adjusted for population and inflation 62 4.1 Major revenue sources per capita, 1965– 66 to 2020– 21 71 4.2 Investment income, 1981– 82 to 2020– 21 74 4.3 Major expenditures per capita, 1965– 66 to 2020–21 76 4.4 Alberta’s total revenue and expenditure, 1965– 66 to 2020–21 83 4.5 Percentage change in Alberta’s deficit tied to revenue or expenditures, 1965– 66 to 2019– 20 84 5.1 Nonrenewable resource revenue as percentage of household incomes, 1972– 73 to 2020– 21 and 2021– 22 forecast 94 5.2 Nonrenewable resource revenue as percentage of household incomes, 2000– 01 to 2040– 41 96 5.3 Non-renewable resource revenue as percentage of household incomes, 2015–16 to 2040–41 98 6.1 Tax revenue shares of selected provinces, 1981 to 2016 113 6.2 Tax bases per capita for selected provinces, 1981 to 2016 114 6.3 Alberta’s tax bases as a share of GDP, 1981 to 2016 115 6.4 Volatility of Alberta’s tax bases (fiveyear rolling window), 1981 to 2016 118 6.5 Volatility of Alberta’s tax bases (recursive window), 1981 to 2016 119 7.1 West Texas Intermediate crude oil prices per barrel, 2012 to 2022 129 7.2 Alberta government revenue from nonrenewable resources, 1965– 66 to 2019– 20 130 7.3 Provincial levels of income inequality, 2014 133 7.4 National support for federal carbon tax, 2015 to 2018 139 8.1 Alberta government revenues, 2009– 10 to 2019– 20 150 10.1 Alberta exports and imports, 1981 to 2019 174 Tables 4.1 Standard deviation of Alberta government revenue, 1965– 66 to 2020– 21 72 4.2 Revenue sources of selected provincial governments 75 4.3 Standard deviation of Alberta government expenditure, 1965– 66 to 2020– 21 77 4.4 Standard deviation of Alberta government revenue and expenditure, 1965– 66 to 2020– 21 78 4.5 Spending of selected provincial governments 80 6.1 Volatility of Alberta’s tax bases and GDP, 1981 to 2016 117 6.2 Correlation of tax base movement with business cycle (GDP), Alberta, 1981 to 2016 120 7.1 Federal budget revenue projections, 2018 141 8.1 PSTGDP discipline and stabilization framework 155 8.2 PSTGDP discipline and stabilization framework example 157 8.3 Historic backtesting: A hypothetical example of how this PST framework could have affected government deficits and debt if it had been implemented in 2014 158 10.1 Alberta’s major exports, 2014 to 2019 175 viii Figures and Tables xv https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Acknowledgements As this book was taking shape, I sought out the opinions of a wide array of Albertans on the subject of a sales tax. Some I interviewed, and many others shared their views in informal settings, but, regardless of the context in which they spoke, I am deeply grateful to all of them for their thoughts and candour. These are the people for whom this book is written— people whose lives are daily impacted by the state of the province’s finances. From the beginning, my wife, Linda, has been a constant ally, a wise critic, and a stalwart supporter— patient, forgiving, and willing to read whatever I threw her way. Glenn Rollans, of Brush Publishing, with whom I discussed earlier plans to write a fiscal history of the province, has continued to offer valuable counsel, and I am indebted to him for his knowledge and advice. My former colleague Robert Bhatia has been an ongoing source of inspiration. As I groped my way through various iterations of the earlier fiscal history project, it was he who pointed me toward the issue of a sales tax and then encouraged me to move beyond the question of why Alberta should have a sales tax to consider how the provincial government might be persuaded to bring one in. I have also benefited from conversations with Al O’Brien, especially with regard to the qualitative difference between revenue from the sale of public assets, in the form of nonrenewable resources, and revenue from taxes. His experience and insights have proved invaluable. As goes without saying, I owe an enormous debt of gratitude to all the contributors to this volume, for their enthusiasm, their creative ideas, their wealth of knowledge, and their commitment both to this project and to Alberta’s future. I am especially grateful to Trevor Harrison, for https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 xvi Acknowledgements his constructively critical review of an earlier draft of the manuscript and for his willingness to write an afterword for the book, and to Kevin Taft, for sharing his perspectives in his foreword to the volume. I must also extend my heartfelt thanks to two longtime friends, Virendra Gupta and Dale Moll, who provided helpful feedback on early drafts of various chapters. I am likewise grateful to the two anonymous peer readers of the manuscript for their thoughtful criticisms and suggestions, which have further enriched the volume. Assistance from Val Footz, Heather Close, and staff of the Alberta Legislature Library has also been especially valuable. Last but not least, it has been my pleasure and good fortune to work with the team at Athabasca University Press. In particular, acquisitions editor Pamela Holway has been a consistent source of encouragement, intellectual engagement, and editorial guidance. I am grateful as well to Megan Hall, the press director, for her depth of understanding and clarity of sight, to Sergiy Kozakov, for his expert redrawing of the book’s numerous charts and graphs, and to Mary Lou Roy, for her meticulous work as production editor. Perhaps above all, I am deeply indebted to Kay Rollans. Far more than a copyeditor, she worked to sharpen the focus of individual arguments and to give the book a stronger sense of forward motion, and I cannot thank her enough for her help. Sadly, we live in an era of polarization, and Alberta’s political culture is no exception. In the present atmosphere, open and informed debate around public policy issues has all but vanished. We also live in a time of growing precarity, as costs soar and incomes drop. At the same time, the province’s fiscal health remains dependent on world oil prices, which continue to fluctuate unpredictably— while the government continues to compensate for shortfalls by cuts to public services. In the face of the ongoing erosion their quality of life, Albertans have every right to be concerned about the future. But concern alone will not solve problems. It is my hope that this book will inform the public about the considerations underlying the issue of a sales tax— what it would accomplish and what the potential drawbacks are. It is my conviction that if we sincerely wish to hold government officials accountable for their actions or inactions, we must first form a clear picture of what is at stake. A Sales Tax for Alberta This page intentionally left blank 3 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Introduction Alberta is the only Canadian province that does not have a provincial sales tax (PST). For many Albertans, this is not only a point of pride, but an aspect of their identity. But at what cost? This book argues that it is time for Albertans and their political leaders to reconsider their antisalestax stance and begin to integrate new revenue bases to ensure a more sustainable fiscal future. Although the contributors to this collection span the political spectrum in Alberta, they all agree on one thing: Alberta needs a sales tax. Their reasons are simple. Some emphasize the brute economic merits of a sales tax. For instance, a sales tax is a stable source of revenue, especially when compared with royalties, personal income tax, and corporate income tax. The mechanisms of a sales tax are well known and understood. The cost to raise a dollar of sales tax is much lower than for other taxes, and sales taxes capture wealth and spending that other taxes miss. Others look at the social, moral, and environmental benefits of such a tax. A sales tax could help fund crucial public programs such as education and health care in the province in times of economic downturn, rather than subjecting them to devastating cuts. It could also support the province as the world turns toward a lowcarbon future. Taken together, this collection is a timely resource for politicians, policy analysts, and the general public. Its purpose is to support a broad, public, and informed discussion about the precarious reality of the Alberta government’s finances and the role that a sales tax might play in stabilizing them. Each chapter is motivated by one or both of the book’s central questions: First, why does Alberta need a sales tax? And second, if it does need one, how might Alberta’s political leaders bring about its adoption? https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 4 Introduction The “Whys” of Sales Tax Sales tax has historically been one of the more fraught topics of political discussion in Alberta. The debate about instituting a sales tax has simmered for a very long time, especially in times of economic downturn. It is, however, often shuffled away and conveniently forgotten when Alberta’s commoditydriven economy produces vast surpluses for Alberta Treasury. The problem is, those surpluses come and go; we can’t actually rely on commodity markets to always provide for us what we need. Most recently, the debate around a sales tax was reawakened by a steep drop in the price of oil and natural gas that began in 2014 and extended into 2016. Prices then began to recover, only to plummet again in 2020, in response to the COVID19 crisis, and since then have climbed steadily to highs not seen in over a decade. This volatility is unsurprising: it mirrors similar patterns in earlier years, although with some exaggeration. As the latest bustandboom cycle illustrates, however, the price of oil remains highly unstable. Relatively shortterm price rises will continue to confound Albertans and their political leaders into believing the vague promise that we can rely on the oilandgas fairy to show up and turn Alberta’s fiscal fortunes around. This shortterm thinking is challenged by the thorough analyses offered in these pages. Alberta’s Economic Structure and Fiscal Consequences Alberta’s economy, in spite of having features of a diversified industrialservice economy, remains based on singlecommodity production. Alberta has long been what Harold Innis ([1956] 1999, 385) termed a “peripheral economy,” supplying staples to the metropolitan regions of the world. At one time, these staples were agricultural: wheat and other grains. Prices were determined generally by supply and demand factors affected by unpredictable weather, crop yield, and occasionally financial speculation. In other words, Alberta’s finances were at the mercy of international commodity markets. Today, Alberta has different staple commodities: coal, bitumen, and natural gas. The prices of these are similarly set by international markets. This reliance on international markets tends to spell volatility for a commoditybased economy, for while there 5 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Introduction 5 are many things that a government has within its control, commodity prices are not one of them. Now here’s the kicker: the Alberta government’s revenue bases— that is, the sources from which it receives operational funds— are deeply tied to this volatile economy. The province relies on resource royalties and tax revenue from resource development corporations that operate in the province to fund its public programs. Alberta’s government and Alberta citizens are therefore left at the mercy of price swings in oil and gas. Some of this volatility could be mitigated by a solid and consistent savings strategy, but this, too, is something that has been unfortunately lacking in the province. Alberta governments have consistently failed to set aside sufficient financial reserves to weather commodity downcycles without resorting to heavy external borrowing and, often, deep expenditure cuts. Ecological and Social Concerns in Alberta Add to this the unequivocal evidence that burning fossil fuels is the primary cause of the climate crisis that we are now witnessing unfold in our back yards and around the world, and Alberta’s fiscal problems become more complex. Increasingly, governments, investors, and financial institutions are recognizing that oil and gas extraction will have to be phased out quickly in order to achieve the goals agreed on at the Glasgow 2021 climate summit. Initial steps have included new financial disclosure requirements for corporations’ emissions and detailed plans to achieve net zero. As well, a range of institutions from central banks to pension funds, endowment funds, and insurance companies have already established divestment policies. The pressure to divest from fossil fuels is also being extended to large banks who have significant loans to the sector. All of this means that it will be increasingly difficult for fossil fuel firms to get the funding to expand production. Indeed, it is clear that Alberta’s energy industry, especially oil sands producers, are facing the prospect of stranded assets alongside massive environmental liabilities. This crisis is problematic for Alberta because of its overreliance on fossil fuel extraction in achieving fiscal balance and funding its daytoday operations. Because of a trend towards lower oil prices, the Alberta https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 6 Introduction government has already been running large deficits since the early 2010s just to keep basic public programs running— and sometimes not even that. At the same time, we can only expect global trends towards decarbonization to continue to grow as the climate crisis becomes an ever more present aspect of all of our lives. This means that the mediumand longterm prognosis for Alberta’s finances will continue to grow dimmer unless the province begins to seriously look for alternative revenue sources. Were Alberta less reliant on resource revenue, its budgeting would be less affected by fluctuations in the price of oil and the province would have more stable footing from which to face the coming changes in global markets. A sales tax, for reasons detailed in this volume, would seem to be an ideal candidate for creating that stability. The “Hows” of a Sales Tax Even though many of these “whys” of a sales tax are privately accepted by politicians and many Alberta citizens, the biggest obstacle to actually implementing such a tax is Alberta’s political culture, which is widely considered to be hostile to taxes. Politicians fear electoral defeat should they ever advocate for the tax, or even consider the idea in public. This leaves the “hows” of a sales tax for Alberta somewhat difficult to pin down. I suggest that to begin to understand how the public and their elected leaders might bring about the adoption of a sales tax, we must first understand how Albertans’ attitudes towards taxes came to be. Political Development Periodic attempts by government to raise or introduce new taxes have historically been met with fierce resistance in Alberta. It is this aspect of Alberta’s political culture that makes politicians cringe at the thought of electoral retribution should they ever utter the words sales tax. Salient elements of this political culture include the myth of Alberta exceptionalism, founded on rugged individualism, resentment at government intrusion, a spirit of optimism, and a sense of victimhood towards central Canadian economic and political elites. 7 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Introduction 7 This exceptionalism has been expressed through political discourse in Alberta, which remains dominantly conservative. Opposition to public ownership, trust in market solutions, insistence on “small” government, and faith in capitalist production are beliefs reflected in mainstream media. A corollary to the idea of small government is the deepseated belief that taxes should be low. This idea is founded on two assertions: first, that big government “wastes money”; and second, that low taxes encourage capital investment, which leads to employment and, ultimately, a rising standard of living. These perspectives and others like them have been the rallying cries for organizations like the Canadian Taxpayers Federation, once led by a young Jason Kenney. To “prove” their claims, they point to Alberta’s gross domestic product per capita, a commonly used measure of wellbeing, which has historically been one of the highest in the world on average. While proof may be too strong a word in this context (as I argue in chapter 10), it is certainly true that Alberta’s reliance on resource wealth has offered limited economic evidence to persuade Alberta voters to consider the potential future need of other revenue sources such as a sales tax. Recurrent booms are mistakenly interpreted as justification for continuing low levels of taxation. As the old bumper sticker from the 1980s proclaimed, “Give me another boom and I promise not to piss it away!”— the joke being that, even in the boomiest of times, Alberta’s handling of oil revenue has not set the province up for a stable fiscal future. With the election of Ralph Klein in 1993, antitaxation beliefs were concretized in government policies and branded as the “Alberta Tax Advantage.” The Progressive Conservative brand has become so ubiquitous that even the New Democratic Party, elected to government in 2015, sang the praises of Alberta’s low taxes while in office, and were extremely reluctant to address the subject of Alberta’s deficit challenges. How to Change the Tides? Given Alberta’s political legacy around taxation, how can we begin to have a meaningful discussion about implementing muchneeded new revenue sources? The problem deepens when we consider the toll that two years of COVID19 and over six years of slow economic growth have had on political discourse in Alberta. Indeed, over the past two decades, https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 8 Introduction liberal democracies around the world have experienced a disturbing trend of polarization between conservative, traditional, and individualistic voices, and voices concerned with income inequality, racial injustice, and environmental degradation. The debate on a sales tax is fundamentally a debate about the appropriate roles that the public and private sectors should play in our lives, and about what each of these sectors can control. Is the existing size of the Alberta state optimal or should its size be reduced? Do government policies ensure Albertans are given a fair share of private industry profits in oil and gas, or does the oil and gas industry control government policy (Taft 2017; Urquhart 2018)? In terms of the tax itself, what are the fiscal objectives of a sales tax? Is a sales tax to be revenue neutral and used as a means of reducing existing taxes to boost private sector investment (Bazel and Mintz 2016; McKenzie 2000), or is its purpose to address large fiscal deficits and ensure the longterm financial sustainability of government to meet the public’s demand for government services over the full commodity price cycle (Harrison 2016; Flanagan 2011)? There are no formulae that will spit out objective answers to these questions. Politicians and voters must decide. While econometric analyses of the tax’s economic pros and cons should be fundamental aspects of these decisions, our answers will also be rooted in how we answer a moral question: What kind of Alberta do we want to build for ourselves and future generations? The Structure of the Book The first two chapters of this collection examine Alberta’s unique economic and political landscape. In chapter 1, I give a more detailed history of Alberta’s political development from the province’s beginnings to today. This history is intended to form a foundation for understanding why Alberta’s unique political culture strongly resists taxation in general, and a sales tax in particular. In the short chapter 2 that follows, veteran provincial affairs columnist Graham Thomson provides some evidence of the political consequences of this antitax sentiment, recounting how various Alberta finance ministers have been remonstrated by premiers, the media, and the public over openly musing about a sales tax. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 15 1Alberta Exceptionalism and Taxation as Affront Robert L. Ascah “No Sales Tax!” This has been the promise of Alberta politicians for roughly the past eighty years, ever since the province’s first, and highly unpopular, experiment with taxing goods ended not long after it began in 1936. But the lack of a sales tax in the province has also become a point of pride for Albertans, a mark of distinction that confirms their special status. This “Alberta exceptionalism”— Albertans’ sense of themselves as rugged individuals to whom ordinary rules do not apply— has long found expression in a serious distaste for taxes in general and a sales tax in particular. Contemporary debates around the possible introduction of a sales tax thus emerge from a rocky but wellestablished fiscal history informed by Albertans’ conviction that they deserve to receive public services such as education and health care but shouldn’t have to pay for them. This chapter sets out to explore some of the roots of this still prevalent point of view in an effort to frame it within its broader historical context. Alberta’s SelfImage Albertans understand themselves to be different than other Canadians— to be rougher, tougher, and more industrious. To be special. Since before it became a province in 1905, Alberta has been known as a place of singularly https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 16 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 majestic mountains and towering ambitions, of vast plains and bound - less opportunities for whosoever was willing to put in the work. Aritha vanHerk’s (2001) Mavericks: An Incorrigible History of Alberta recounts some of these tales of adversity, sacrifice, and hard work in the early days of western settlement. These are not stories of oil and railway barons, but of men and women whose sweat built the province’s early roadways, coal mines, and sod houses— stories of gritty labourers whose doggedness earned them their survival. These stories of hardship and sacrifice, hard work and perseverance have been passed down through several generations of Albertans, instilling in them the conviction that prosperity was the result of individual initiative, not collective, governmentorchestrated policies and programs. Closely related to these narratives of individual triumph is Albertans’ insistence on their right to independence, both from one another and from regulatory meddling. C.B. Macpherson (1953, 11– 20), for instance, characterized Alberta’s class structure up to the 1950s as dominated by independent— that is, discrete— commodity producers. Alberta’s rural residents were accustomed to functioning autonomously. While they still relied on government for basic services such as schooling, roads, telephone lines, irrigation canals, and so on, in the end they made their own decisions. This safeguarding of individual autonomy is reflected in the strongly libertarian attitudes commonplace in the province today. Take, for example, the resistance of some Albertans to wearing face masks and getting vaccinated during the COVID19 pandemic. Even at the cost of endangering others, many Albertans do not like to be told what to do, least of all by government. Flowing from this embrace of rugged individualism and a fierce independence is a third manifestation of Alberta exceptionalism: a sense of collective victimhood at the hands of federal government policy, central Canadian manufacturing, and central Canadian financial interests. Almost from the moment Alberta became a province, Albertan farmers harboured an antagonism toward central Canada’s commercial control over shipping and banking— an anger that propelled the United Farmers of Alberta (UFA) to victory in the 1921 provincial election. Attitudes did not improve with the August 1935 election victory of William Aberhart’s Social Credit 17 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 17 government, which attempted to pass legislation that would limit federal control over the licensing of banks and credit arrangements. Social Credit politicians at the time declared Alberta to be “at war” with Ottawa. More than banks and credit, this “war” was, and continues to be, about Ottawa’s power over the development of Alberta’s natural resources— power that the province views as the theft of its wealth, harming Alberta to benefit the rest of the country. This ongoing sense of victimhood is also manifest in Jason Kenney’s United Conservative Party (UCP), elected to government in 2019. Take Kenney’s Fair Deal Panel, for example, the mission of which, according to the Government of Alberta website, was to consult Albertans “on strategies to secure a fair deal in the Canadian federation and advance our vital economic interests.” Predictably, the panel’s final report, delivered in May 2020, was a survey of the outrage of those Albertans who feel that Ottawa mistreats their province. The embers of old grievances about the structure of Confederation, including equalization payments, federal regulatory policies, parliamentary representation, and federal spending in provincial jurisdictions, are continually fanned into flame. From Alberta’s early days, these three factors— individualism, independence, and victimization, whether perceived or real— combined to forge a unique sense of identity within the province. In 1935, with the election of Aberhart’s populist Social Credit government, Canada was forced to contend with Alberta exceptionalism. Exceptionalism again flourished in 1973 when the Organization of the Petroleum Exporting Countries (OPEC), headed by Saudi Arabia, instituted an oil embargo that tripled oil prices virtually overnight, making Alberta suddenly wealthy. Federalprovincial conflict over the division of the economic rents1 from higher commodity prices reinforced Alberta’s sense of victimhood, sporadically fanning the flames of an independence movement. Oil wealth led to a frantic period of state building that again included fostering unrealistic expectations for provincial government infrastructure and services throughout the province. Government largesse flowed, eliminating municipal debt, fully funding (for a time) public pension plans, building rural hospitals, expanding highways— all while lowering taxes. The Alberta Heritage Savings Trust Fund was another example of Alberta’s https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 18 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 exceptional capacity to save for future generations, and would become pride of place for many Conservative politicians decades after its founding. This largesse also fuelled a strong sense of pride in many Albertans. Two unprompted examples of this sense of specialness or exceptionalism came up in interviews I conducted on the subject of a sales tax for Alberta. 2 The first comment was made by author, retired financial planner, former banker, and fellow Albertan Inez Dyer: I go back to Saskatchewan a lot [...] and you could feel that— “You guys, you go on the big trips, and you do this, and you do that, and you don’t have to have a sales tax because the money is just floating in from the oil all the time.” There’s a resentment there, and it does make you feel kind of special. [...] We don’t have a sales tax— and it’s because of the oil. [...] I’m sort of proud of that. (interview with author, 7 December 2018) The second comment was made by Conner Peta, a graduate student in political science at the University of Alberta: I remember in school social studies that you’re told, “We’re a ‘have’ province. Alberta has oil. Then there are all these ‘havenot’ provinces. They have taxes.” I think a giant shift would have to occur for that political culture to change. The whole notion of the Alberta Advantage will have to disappear before a sales tax [could be implemented]. [...] A provincial sales tax could be interpreted as a policy of the havenots. (interview with author, 29 November 2018) While these comments represent only two individual opinions, they lend credence to the idea that, even today, Alberta’s political culture is characterized by an insider belief that there is something exceptional about this province. This belief is a key barrier to even discussing the possibility of implementing a sales tax for the province. 19 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 19 The Development of Alberta’s Tax Aversion Alberta’s period of expansion from 1905 to the Great Depression was supported by an optimism that, with individual hard work, the future would take care of itself. During this time, provincial government spending, especially on public infrastructure, grew rapidly. Both the Liberal (1905 to 1921) and the UFA (1921 to 1935) governments borrowed heavily to support a generally held belief in a limitless future. All types of public works projects— including irrigation canals, railways, public roads for the new automobile, rural electrification, and a public telephone system— were financed mainly by government debt sold in both the domestic and international markets (MacGregor et al. 1939). As Harold Innis (1933, 64– 65) pointed out, however, this rapid growth was pulled along by a sense of opportunity and ambition that ultimately risked exacting a high price on Albertans. Innis wrote, “expenditures made on the assumption that revenue will return from various directions has been responsible for the incurable and dangerous optimism which characterizes government effort. On the whole, public enterprises to which government contributes have introduced an element of uncertainty in the financial position of the government and a degree of unwholesome inelasticity.” The truth of Innis’s words was brought to bear in a Bank of Canada (1937, 34) study of Alberta’s finances: By the end of 1922, Alberta had direct and guaranteed debt (on which it was paying interest or for which it later became liable) which was some 50percent higher than in the much older province of Manitoba and more than twice as large as that of Saskatchewan, though Saskatchewan had a 30percent larger population. Substantially more than half the Alberta total debt represented accumulated losses and deficits, or socalled assets which were proving a constant drain. The unbounded optimism of the province’s business and political communities resulted in loose financial management, wildly optimistic capital expansion projects, and poor judgment on how these projects would https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 20 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 eventually contribute future revenue to the province. By the 1920s, the provincial government had racked up a heavy burden of debt, which the UFA government inherited when they came into office in 1921. Fortunately for the UFA, the 1920s were a period of strong agricultural commodity prices, which allowed the government to continue to spend freely and borrow money without increasing taxes. By the end of the 1920s, according to the Bank of Canada’s (1937) analysis, per capita taxes in 1929 were lower than the 1921 level. As it pointed out, “the province could scarcely have expected a more favourable opportunity than that presented in the years 1925– 29 to recoup itself from the rural areas for some of the large expenditures made on them. The opportunity was allowed to pass, and no reduction in the dead weight debt took place” (12). In this first period of economic growth, optimism for the future trumped good financial management. Taxation seemed unnecessary as the province’s economic future would be even bigger and better— or so Albertans fervently believed. This first period ended, of course, with the province defaulting on its debt in April 1936. It was the first and remains the only Canadian province ever to have done so. A year prior, in 1935, a new party came into power: Aberhart’s Social Credit Party. Despite the 1936 default, the Social Credit administration continued its policy of keeping taxes low for the next thirtyfive years. This approach to political management changed with the election in 1971 of a Progressive Conservative government led by Peter Lougheed. With the 1973 OPEC oil embargo and Alberta’s resultant sudden wealth, Lougheed was able to rapidly expand and modernize the provincial state (Richards and Pratt 1979). After a skirmish with the oil and gas industry over royalties stemming from the rapid rise in world oil prices, the Progressive Conservative Association of Alberta realized that, for its full political and economic goals to be realized, it had to gain more complete control over resource management. Section 92A of the federal Constitution Act, 1982, answered the party’s prayers, establishing exclusive provincial power over natural resources, including nonrenewables such as oil. Lougheed resigned from provincial politics in 1985— a welltimed exit that left his successor, Don Getty, to run the then highestspending provincial government in the country. Although Alberta had virtually 21 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 21 no debt when Getty took office, Alberta’s economy was struggling with rising unemployment levels, crashing residential and real estate markets, collapsing financial institutions, and a lack of capital investment. More importantly, nonrenewable resource royalties, which I will simply call resource revenue, fell dramatically as oil and natural gas prices plummeted from $40 per barrel in the early 1980s to $11 per barrel in July 1986. Various bailouts and illfated investment ventures resulted in a significant rise in debt and dissatisfaction among rightwing supporters of the Progressive Conservatives. Perhaps because of this alreadysmouldering dissatisfaction, and despite the province’s desperate need for cash, taxes were not materially increased during this period. Since the Alberta government’s capacity to borrow remained high, Getty chose to go into debt rather than raise taxes on Albertans. Unlike the Liberal and UFA administrations of the early twentieth century who borrowed to build the province, however, under Getty’s Progressive Conservatives, government borrowing was employed almost exclusively to simply maintain existing government programs. Enter Ralph Klein. Klein was elected leader of the Progressive Conservative Association and appointed premier in December 1992, after Getty retired. This signalled an entirely new fiscal direction for the province, specifically in terms of the ascendance of what is commonly referred to as neoliberal policies of austerity— that is, reducing government debt by cutting spending and, importantly, not increasing taxes. Conservative and even some Liberal politicians of the time could frequently be heard intoning the mantra “We have a spending problem,” essentially blaming government deficits on bloated expenditures, not insufficient tax revenue. In 1992– 93, government expenses totalled $17.6billion while revenue stood at only $14.3billion. By 1996– 97, expenses had been trimmed to $14.2billion, and revenue had grown to $16.7billion (Kneebone and Wilkins 2016, 11). In short, the province had moved away from the debt accumulation that began under Getty and, in the space of five years under Klein, had begun generating a comfortable surplus. In the eyes of the conservative government, the correlation between the spending cuts and the elimination of the deficit was rocksolid proof that government spending had previously been out of control. Evidence suggests, however, that https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 22 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 spending was far from the only factor in this economic aboutface. Arguably, rebounding oil and natural gas prices in the late 1990s played a much more critical role in the budgetary shift from red to black (Government of Alberta 2003). Resource revenues rose from $2.2billion in 1992– 93 to $4.6billion in 1999– 2000. Let’s back up for a moment to better understand the Kleinera beliefs around taxation and spending. In 1990, a new force entered the field: the Canadian Taxpayers Federation. The Alberta chapter of the organization, led by the young Jason Kenney, effectively attacked Getty’s government for gaffes committed in its twilight years, including the deeply unpopular, goldplated MLA pension plan.3 Thus was born a very effective mouthpiece reinforcing the message that “government is the problem, not the solution.” It’s easy to see how this belief fuelled the related conviction that taxes should continually decrease. If government spending is the issue— that is, if taxpayers can’t trust government to responsibly spend their money— then why give them more money to waste? By the end of Ralph Klein’s first term, the political assumptions around taxation had hardened. The only possible way that taxes could go was down. This conviction, coupled with the apparent success of the spendingcut experi - ment, laid the groundwork for a twentyyear policy of reducing corporate and personal income taxes while paying down debt. It was packaged and sold as the “Alberta Advantage.” According to successive Progressive Conservative governments, it reduced taxation and low oil sands royalties, not rising oil prices worldwide, that were responsible for the prolonged boom that extended more or less uninterrupted from the early 2000s through to 2014. To put it plainly, Alberta’s political culture displays a hostility to taxes. The belief appears to be that taxes inhibit economic growth or simply contribute to a bloated bureaucracy. Its logic goes like this: Taxation is nothing more than citizens and corporations handing money over to government to waste. Alberta’s exceptional wealth is a predictable result of the independent entrepreneurialism and individual hard work of Albertans. Taxes dampen this entrepreneurial spirit by taking away— and ultimately mismanaging— the fruits of its labour. Ipso facto, tax reductions spur economic growth. This deeply rooted political belief system has long 23 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 23 discouraged Alberta politicians, regardless of their party affiliation, from uttering the words sales tax. The Story of Alberta’s First (and Only) Sales Tax The story of Alberta’s first and only sales tax begins in 1929, when Alberta’s overreliance on agricultural staple production had become endemic. Nearly 40percent of provincial income was derived from the agriculture sector. With the collapse of equity prices on Wall Street and rising protectionism at the beginning of the Great Depression, deflationary pressures set in with a vengeance. The average price per bushel of wheat fell from $1.75 in 1928 to $0.32 in 1932. Grain farmers saw a staggering drop in their income, and the provincial government, because of the Alberta economy’s heavy reliance on grains, seeds, and hay, saw a similar drop in its revenues. By 1933, farm receipts had dropped to onequarter of their 1928 level, even though total production fell by only onethird. While other agricultural sectors also suffered, such losses were not as consequential as those experienced by singlecommodity wheat producers. Persistently weak grain prices forced the federal Conservative government to find a bandaid solution: stockpiling wheat (Ascah 1999, 54). A key worry in the 1930s was the ability of the farming community to make their loan payments. Farmers faced a crushing debt burden as grain prices plummeted and interest on their loans consumed onequarter of their estimated expenses (Government of Alberta 1938, 196– 97). They claimed that bank interest rates exceeded the legal maximum rate of interest at the time (7percent) because of the practice of discounting farmers’ promissory notes.4 At the same time, threshing charges cut deeply into their incomes, reducing the total value received by farmers by more than half— a situation not unlike the predicament of oil producers in 2018 in the face of costly rail transportation. On top of such a dismal economic situation, Albertans were living in a peripheral economic region that did not produce manufactured goods. They thus paid dearly for tariffprotected central Canadian industry. The RowellSirois Commission calculated that by 1931, the cost of tariffprotected manufactured goods had doubled in https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 24 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 the province (Royal Commission on DominionProvincial Relations 1940, 159). It was the perfect storm. Municipal and provincial finances were in disarray owing to the collapse in grain prices and resulting unemployment. In the larger cities of Edmonton and Calgary, finances were wobbling because of social relief costs, huge property tax arrears, and a shrinking revenue base caused by falling property assessments. School finances were no better. In 1934, over four hundred school districts were in default, with more than $265,000 in unpaid teachers’ wages. The province’s insufficient revenue base combined with the “dead weight” nature of the provincial government’s debt (and of the debts of municipal governments, government entities such as Alberta Government Telephones, and other guaranteed entities such as irrigation districts and railways) led Albertans to thoroughly examine their provincial and municipal taxation systems. The Alberta Taxation Inquiry Board, 1933 The Alberta Taxation Inquiry Board was appointed in December 1933 under the UFA government. Chaired by Deputy Provincial Treasurer J.F. Percival, the board was charged with assessing the productivity of Alberta’s current tax structure at both the provincial and municipal levels. Percival also examined the differential impact of taxation on various occupational groups and on urban and rural residents. The board gathered information from the business community, labour organizations, citizens groups, and manufacturers before submitting its report in November 1935, three months after the Social Credit Party swept to victory. The board recommended that the government boost taxation to the level of other provinces and impose a retail sales tax (Alberta Taxation Inquiry Board 1935, 138– 40). As the board’s report observed, a sales tax has “the merit of reaching everyone in such a way that he [sic] is conscious of the fact that he is contributing to the cost of government, and there are many who hold that it contributes to good citizenship that people should know that they are paying for government” (138). The report further noted that a sales tax is “fiscally adequate or productive; it is elastic; simple and easily understood; it is flexible, and may be readily modified. Its equity, however, is open 31 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 31 1982 to 1984 in which its real GDP fell by nearly 10percent. The economy started growing again in the mid1980s, only to be faced with a brutal real estate crash, exposing a legacy of weak regulation in financial institutions. As early as 1983, people whose home equity value was less than their mortgage simply walked away from their homes, often selling their property for a dollar (Nelson 1983). Don Getty was in charge of dealing with this crash. As it wore on, numerous Alberta financial institutions failed, including significant portions of the credit union system, dashing hope of a recovery. Notable institutional failures included Northland Bank and Canadian Commercial Bank (both federally regulated), the North West Trust Company, and the Principal Group, an alliance of investment companies. As the economy flatlined between 1990 and 1992, the popularity of the Progressive Conservatives plummeted. Getty announced his retirement in September 1992. In the ensuing leadership contest for the Progressive Conservative Association, premiertobe Ralph Klein ran against Getty’s record. With the support of Ken Kowalski, an influential rural MLA, Klein defeated the party establishment’s preferred candidate Nancy Betkowski, Getty’s former health minister. A key plank of Klein’s platform, and a key distinction between him and Betkowski, was his opposition to Gettyera bailouts. According to Klein, Getty had aimed to support businesses by handpicking “winners” who turned out to be losers. Klein saw this strategy to be a waste of money and bad fiscal policy. Appealing to Albertans’ sense of gritty independence, Klein sought instead to “get government out of the business of business,” and thereby kickstart an economy led by entrepreneurs. The 1993 election was to take place on 15 June. Leading up to the release of a preelection budget, Klein and his treasurer, Jim Dinning, acted quickly to frame the fiscal debate. On 21 January, Dinning announced the appointment of the Financial Review Commission, headed by TransAlta Utility’s former chair and director Marshall Williams. This commission, which reported back at the end of March 1993, had a mandate to investigate the province’s financial situation and accounting practices. On the report’s opening page, a heading announced that “The Need for Albertans to Support Change Is Urgent”— a message no doubt tailored to the upcoming https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 32 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 election. It billed the annual deficit as “serious” and “getting worse.” “We cannot support this level of spending,” it declared. “We have spent our savings,” and we can’t “just go on borrowing.” We must “act now” (Alberta Financial Review Commission 1993, 1– 3). The report went on to call for more timely and effective financial reporting, improved accountability, better coordinated and more streamlined systems of oversight, and the more prudent use of loan guarantees. The commission’s report came out around the same time that Alberta Treasury held a budget roundtable. According to Paul Boothe, then an advisor to Alberta Treasury, the roundtable “confirmed, as no polling results could, the willingness of Albertans to make significant sacrifices” (Boothe 2002, 4). These sacrifices ended up being two years of government cuts to services and public sector employees. Still, there was some debate over the matter of raising taxes versus cutting spending. According to Al O’Brien, “six of the ten groups that reported [to the roundtable] either supported a sales tax or supported a temporary sales tax. Most of them said we need to bring in a sales tax to get rid of the deficit and stop the bleeding and then we should eliminate it.” However, the Klein team managed to interpret this sales tax “wisdom,” as O’Brien called it, as being about “spending cuts first” (interview with author, 3 November 2018)— an interpretation made plain in the workbook prepared for the roundtable, subsequently published as Right on the Money (Dinning and Wagner 1993). Why so much emphasis on spending cuts? Federal politics of the time might give us a clue. After Prime Minister Brian Mulroney and his Conservative government implemented a federal goods and services tax (GST) in 1991, they made a historically dismal showing in the 1993 general election, losing all but two seats in Parliament. With the federal Conservative Party debacle going on in the background, O’Brien figured that Klein— like Aberhart before him— “was convinced that spending cuts and other, subtler, less controversial revenue increases were the way to go” (interview with author, 3 November 2018). The Klein Years Begin, 1993 In a classic Albertan showdown, the 1993 election saw Progressive Conservative leader Klein, a former mayor of Calgary, face off against Liberal 33 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 33 leader Laurence Decore, a former mayor of Edmonton. The parties had remarkably similar platforms of fiscal restraint. Eight years of consecutive deficits under Getty had awakened Albertans of all stripes, as well as their new political leaders, to the need for meaningful fiscal action. Albertans who had followed the goingson of the Alberta Treasury roundtable were bracing for service cuts. However, the Liberal and Progressive Conservative leaders were coy about the specifics of their fiscal plans beyond comforting the electorate that taxes would not rise. A Liberal campaign pamphlet at the time advertised a plan for the “Next Alberta”: “Cleaning Up the ME$$.” The pamphlet proclaimed the urgent need to reduce the “horrendous” $24.5billion debt, emphasizing that “reduced spending is the best way to go.” Among other things, the Liberals promised to mandate balanced budgets, cut back fat MLA pensions, introduce departmental efficiency audits, and subject existing programs to periodic review. They also proposed selling the Heritage Fund to pay down the debt. These measures would be supplemented by the implementation of a “detailed economic plan,” with a focus on technological innovation and support for small businesses, as well as a program designed to encourage rural entrepreneurs to create jobs. The Liberals further vowed to protect important programs like health and education and to “take the environment seriously,” while also holding government more accountable to voters by, for example, enabling them to recall an MLA who is “not representing them well” (Alberta Liberal Party 1993). The central feature of Klein’s election platform was a fouryear fiscal plan, laid out in May 1993. Like the Liberals, Klein’s plan emphasized the urgent need for a new economic strategy— one that would eliminate the deficit without any increase in taxes. Again like the Liberals, the Progressive Conservatives were prepared to eliminate the MLA pension plan, a plank promoted by Jason Kenney’s Canadian Taxpayers Federation. In stressing smaller government, the Conservatives promised more efficiencies and enhanced expenditure control. Other shared themes included the need to make the education system more “competitive,” to “control health costs,” to provide protection to seniors, to undertake measures “to help people get off social assistance,” and to offer support for rural development. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 34 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Unlike the Liberals, however, Klein’s fouryear plan specifically pledged “No Sales Tax” (Progressive Conservative Association of Alberta 1993). The silence of the Liberals on the sales tax was a key factor in the Progressive Conservatives winning fiftyone of the available eightythree Legislative Assembly seats on 15 June 1993. The Liberals won the other thirtytwo. Soon after its election, the Klein government established the Alberta Tax Reform Commission, which issued its Report to Albertans in February 1994. Seemingly at odds with the Progressive Conservative Association’s stance, the commission acknowledged that a sales tax would form part of an “ideal” mix of revenue in the future; however, it was unequivocal in its recommendation to not impose a sales tax “at this time,” noting that “Albertans, and most Canadians, don’t like sales taxes” (Alberta Tax Reform Commission 1994, 39). Before a sales tax could be introduced, the report said, the government must balance the budget. Even then, the commissioners said they could only support a sales tax if it would lead to a comparable reduction in personal and corporate income taxes— taxes that the commissioners regarded as disincentives to employment growth. Finally, the commission recommended that, even if those conditions were met, any proposed sales tax should be debated and subject to a referendum. In other words, the report’s conclusion was pretty much an antisalestax recommendation. The Alberta Taxpayer Protection Act, 1995 This brings us back to the 1995 Alberta Taxpayer Protection Act (SA 1995, c. A-37.8), a very brief (oneanda-halfpage) document that begins: WHEREAS the people of Alberta want to maintain the Alberta Advantage; and WHEREAS Alberta is the only province in Canada that does not have a general provincial sales tax; and WHEREAS a general provincial sales tax is not a desirable tax; and WHEREAS the opinion of the people of Alberta should be obtained directly before any legislation that levies a general provincial sales tax is introduced; [...] 35 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 35 Although the second recital— that is, the second “WHEREAS”— is factually correct, the other three recitals were opinions of the victors of the 1993 campaign. In the legislative debate that ensued around the bill, the Liberals were generally sympathetic to those fiscal messages. The claim that a sales tax was not a desirable tax was a value statement that reflected Albertans’ aversion to taxes in general. The act continues: THEREFORE HER MAJESTY, by and with the advice and consent of the Legislative Assembly of Alberta, enacts as follows: Referendum required 1. A member of the Executive Council may introduce in the Legislative Assembly a Bill that imposes a general provincial sales tax only if, before the introduction of the Bill, the Chief Electoral Officer announces the result of a referendum conducted under this Act on a question that relates to the imposition of the tax. Holding a referendum 2. The Lieutenant Governor in Council may order the holding of a referendum that relates to the imposition of a general provincial sales tax. Question to be asked 3. The question or questions to be put to the electors at a referendum held under this Act shall be determined by a resolution of the Legislative Assembly on the motion of a member of the Executive Council. Procedure 4(1). Sections 4 to 11 of the Constitutional Referendum Act apply to a referendum held under this Act. (2). An order under section 2 of this Act is deemed to be an order under section 1 of the Constitutional Referendum Act for the purposes of section 5 of that Act.5 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 36 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 In its fledgling state as Bill 1, Treasurer Jim Dinning told the Legislative Assembly that the Alberta Taxpayer Protection Act would be a pinnacle achievement of democratic government that would “call upon the people of this province to make the ultimate final decision” on a sales tax— a decision that he hoped would “never be made but could only be made with the full consent of the people of the province.”6 The bill’s introduction in the Legislature reaffirmed the government’s preelection commitments to reduce spending and reinforced a lowtaxpolicy environment by preventing future “taxandspend” governments from “picking Albertans’ pockets.”7 It’s interesting, then, that Bill 1 was introduced a full two years after the Progressive Conservatives’ election. Perhaps Klein’s government wished to hedge their bets, not knowing whether the provincial economy would begin to rebound in those first two years. In the end, it did. By 1995, an economic recovery was emerging and the government probably felt it could again rely solely on oil industry revenue to reduce the deficit. Liberal finance critic Mike Percy rebutted Dinning’s rhetorical flourishes by reminding him that he had endorsed Nancy Betkowski’s, not Klein’s, candidacy for the Progressive Conservative leadership in 1992. Betkowski’s platform, unlike Klein’s, had included the consideration of a sales tax. Percy also pointed to the government’s own Alberta Tax Reform Commission, which Percy interpreted as having recommended a sales tax— a somewhat liberal interpretation of the commission’s actual “not at this time” conclusions. Percy went on to question the rationale for allowing Albertans the right to vote on a sales tax but not on other standard government levies such as income taxes, user fees, or healthcare premiums. After reviewing the advantages and disadvantages of a sales tax, Percy concluded: “The reality is that every tax has positive and negative features, and you can’t single out a particular tax as undesirable... because all taxes by their nature are undesirable from the perspective of individuals who pay them.”8 Peter Sekulic, another Liberal MLA, was supportive of the bill, but expressed concern about the more than 220 new user fee and license fee increases that had been levied since the Conservatives were elected in 1993, commenting that “what we’ve seen in this province is in fact taxation 37 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 37 by regulation.”9 In other words, according to Sekulic, the Conservative government was simply hiding their tax increases under another name. As the debate continued on 8 March, another member of the Liberal opposition, Terry Kirkland, asserted that the Conservatives had stolen the referendum idea from the Liberals’ 1993 election platform. He then went on to describe Bill 1 as “nothing more than a political trick” and “redundant,” noting that it “certainly will not achieve anything that in fact won’t be achieved with good government.”10 Critiques aside, the Liberals were in a difficult position. How could they oppose a bill that gave back to voters the power to decide whether a particular tax could be imposed? How could they vote against a bill that was part of their preelection policy? Well, the most compelling reason for voting against such a bill was that it was total poltroonery. Coming from a government that clearly had no intention of imposing a sales tax, Bill 1 pretended to, in the words of Liberal MLA Gary Dickson, “bind the hands of governments in the future.” 11 Its actual ability to do this, however, was a myth: according to the doctrine of parliamentary sovereignty— which is generally accepted in Canada— any law enacted by one legislature can be repealed by a succeeding legislature. Even though Liberal MLAs largely supported the bill, then, Dickson and several others observed during the bill’s second reading on 11 April 1995 that the legislation was purely symbolic. As Dickson put it, “I always have difficulty with the proposition, Mr.Speaker, that by legislation now we somehow pretend that we’re going to elevate this to a level of some kind of a constitutional constraint.”12 Liberal MLA Lance White made a similar comment. “One government doesn’t bind all governments thereafter,” adding that any belief to the con - trary was “presumptuous.”13 White further pointed to the basic principle of representative democracy— namely, that elected leaders are expected to acquire a depth of knowledge and understanding that the broader public generally lacks and then make informed decisions on behalf of those they represent. “There is only one reason to support this Bill,” he declared, “and that is because it looks good. If we want to simply look good and not act well, then I guess we’ll have to support the Bill.”14 Despite the Liberals’ stated reservations— indeed, despite castigating it as “insidious” and, later, “cynical,” “flawed,” and a “charade”15— the https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 38 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 bill passed its second reading on 11 April 1995 by a unanimous vote of 42 to 0. Interestingly, the Liberals proposed an amendment to the bill at the Committee of the Whole debate that would require personal tax increases to also be subject to a referendum; the amendment was defeated by a vote of 33 to 12.16 Bill 1 received its third and final reading without a recorded vote on 11 May 1995, and was subsequently passed. The passage of the Alberta Taxpayer Protection Act solidified the Progressive Conservative brand as the party of low taxes and economic prosperity. Increasing resource revenues throughout the 1990s and early 2000s created the illusion that the government’s low taxes led to wealth and prosperity— an idea that was nurtured by the Klein government through its branding of the Alberta Advantage signifying Alberta’s low corporate and personal taxes and the absence of a sales tax. But the idea that elected representatives under our Westminster system of government should push their responsibility to set tax policy back on the electorate— that is, the idea at the centre of the Alberta Taxpayer Protection Act— is debatable, to say the least. Nevertheless, this sleight of hand was accepted by an electorate more exercised about paying more tax than about preserving government services— and one that, crucially, was led to believe that low taxes, in Alberta’s case anyway, were causally responsible for a thriving economy, bottomless resource revenues for the government, and abundant public services. The problem is, without the return of high natural gas prices, this illusion would not have worked. Alberta Exceptionalism in the TwentyFirst Century The subject of a sales tax, and the issue of provincial revenue sources, continued to be a highly charged third rail of Alberta politics during the final years of the Klein era. In 2002, a new financial commission report— this one from the Alberta Financial Management Commission, chaired by David Tuer 17 — was released. Entitled Moving from Good to Great: Enhancing Alberta’s Fiscal Framework, this report effusively complimented the Klein government’s “outstanding” financial management— but it also observed that government needed to reduce the province’s reliance on resource 39 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Exceptionalism and Taxation as Affront 39 revenues (Alberta Financial Management Commission 2002, 1, 4). Noting that nearly onehalf of the provincial economy was associated directly or indirectly with the energy sector, the commission recommended that only “an appropriate and sustainable level of resource revenue be spent on an annual basis” (8). Klein’s successor, Ed Stelmach, appointed his own council in 2009: the Premier’s Council for Economic Strategy, chaired by former federal cabinet minister David Emerson. Stelmach’s challenge to the council was presented as follows: • What must Albertans begin to do now to sustain prosperity through the next three decades and beyond? • How can we ensure our children and grandchildren enjoy even greater opportunity than we have— that we hand future generations a legacy of “a better Alberta”? • What will it take to make the Alberta of 2040 the place for creative and committed citizens to live, work, raise families, contribute to and enjoy society? (Premier’s Council for Economic Strategy 2011, 2) In their report, the council drew a bead on Alberta’s vaunted tax advantage, saying that “the true Alberta Advantage is not the ability to create a lowtax environment by underwriting a significant portion of government services with funds received from the sale of energy assets. Rather, the advantage lies in the opportunity to use the proceeds from natural resource wealth to intentionally invest in shaping an economy that is much less dependent on natural resources” (96). In other words, the government should be an intelligent steward of the province’s natural resource wealth, taking into account longterm economic and demographic trends. Since 2002, Alberta government budgets have contained a graph illustrating what has been branded Alberta’s Tax Advantage. These graphs illustrate how much more residents of the province would pay in taxes if the Alberta government taxed at the same rates as other provinces and had a sales tax. Seen in a different light, the graphs show how much predictable revenue the Alberta government is choosing to forego. The 2021– 22 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 40 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Tax Advantage graph is shown in figure 1.1. The numbers, when framed as individual savings, are impressive. When framed as lost revenue, they lead us to ask: Has the existence of this tax advantage served Albertans well? From the viewpoint of Stelmach’s Premier’s Council, the answer is “no.” The government was simply selling off its natural resources and consuming the wealth immediately rather than investing for the future. That being the case, a further question— a moral one— is raised: When, if ever, will the Alberta government turn away from repeated spending cuts in response to volatile oil prices, and towards a more stable revenue mix? When, that is, will it prioritize predictable funding for crucial public programs over its obsession with maintaining its “tax advantage”? This question remains open. Even with the 2015 election of Rachel Notley’s NDP— the most leftleaning party with a chance of forming government in the province— Alberta exceptionalism and aversion to taxation remain solidly woven into the fabric of Alberta politics. Indeed, after coming to power, the NDP adopted the Alberta Advantage in its own provincial budget documents. If antitaxation can become firmly entrenched in NDP policy, it’s reasonable to ask: How could any discussion of alternatives to spending cuts ever be broached in this province? These episodes in Alberta’s fiscal history confirm conventional political wisdom that taxes are “bad.” This political mythmaking partly explains why politicians even today do not wish to speak publicly on the merits, or even the disadvantages, of a sales tax. The words themselves are taboo. Perhaps the introduction of a sales tax is not, in the eyes of an Alberta premier or finance minister, worth the complications of administering such a task or the reputational costs of politically defending it. As Al O’Brien told me, “It’s a tough thing in a fouryear period to address all these things at once. Premiers don’t have a lot of time to develop and to think about how this [sales tax] would happen. Premiers don’t have to raise money— it’s not top of mind. And treasurers come and go, and a new treasurer has not, typically, thought about the revenue side” (interview with author, 7 November 2018). https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 47 2The Political Suicide Tax? Graham Thomson It is the forbidden fruit of Alberta politics. And for a succession of finance ministers, it has proved to be something of a banana peel. They have stepped on it at their peril by musing about the possibility of introducing a PST. Ted Morton slipped on it in 2010; Lloyd Snelgrove, as Treasury Board president, in 2009. Other ministers did their own pratfalls, including municipal affairs minister Doug Griffiths who, during his career, stepped on this slippery subject so many times he should have worn a helmet to work. A classic case in point was Ron Liepert, who, as finance minister in 2011, told reporters the idea of a PST had come up repeatedly during budget consultations with taxpayers. “In Alberta, we can’t continue to rely on resource revenues and I think we should have that conversation sooner instead of later,” Liepert said (quoted in Lamphier 2011). It was a measured, thoughtful response. But Liepert’s caution was rewarded the following day with a frontpage headline: “Sales Tax Back on Alberta’s Agenda” (Lamphier 2011). That prompted Liepert to issue a written statement of “clarification,” published as a news release under the impossibletomisinterpret headline “No Provincial Sales Tax for Alberta.” To make sure everybody understood, Liepert talked to reporters again. “I was asked about a sales tax in Alberta,” he said. “My response was that the issue was raised at several of our round table discussions this month. Further, https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 48 Thomson https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 I then stated it was a conversation Albertans needed to have sooner or later. I needed to be more clear in stating the conversation needed was about taxation in general” (Leipert 2011). It is almost a rite of passage for Alberta finance ministers to muse about the possibility of a sales tax one day and then totally disown the idea the next. In 2010, it was Ted Morton who said the government would not introduce a sales tax for the time being. He also said, however, that “in the medium to long term, looking at all the options is a good idea” (quoted in D’Aliesio and Fekete 2010). This earned him his own frontpage headline: “Sales Tax on Table in Alberta” (D’Aliesio and Fekete 2010). Morton then had to stand in the Legislature and say categorically that when it came to a sales tax, “the short answer is no, the medium answer is no, and the long answer is no.”1 In 2009, Snelgrove did more than talk vaguely about a sales tax; he said a 5percent tax could bring in as much as $8billion a year to the treasury (Thomson 2009). This irritated Premier Ed Stelmach, who then sent a “very clear message” to his caucus declaring that the government was against not only a sales tax, but any tax increase of any kind. To underscore his point, Stelmach unilaterally scrapped a new tax hike on beer, wine, and liquor, costing the treasury $180million in foregone revenue (Fekete 2009). In early 2015, just ahead of the provincial election, thenpremier Jim Prentice floated the idea of a sales tax: “I don’t think Albertans generally advocate a sales tax, but I’m prepared to be educated and to hear from people” (quoted in Ibrahim 2015). At that time, the math looked neat, simple, and tempting as a way to solve a major fiscal problem. Prentice was predicting the provincial treasury would lose $7billion over twelve months because of the depressed price of oil. Echoing Snelgrove’s math from six years previously, government officials thought introducing a 5percent sales tax would bring in about $7billion (Ibrahim 2015). Problem solved. On paper, at least. But then the Prentice government opened up an online consultation, albeit cautiously, to see how Albertans thought the government should deal with the anticipated $7billion drop in revenue. Some of the options included introducing a PST; raising PIT; raising CIT; reintroducing healthcare premiums; and raising taxes on gasoline, cigarettes, or liquor (or all three). The public response to a PST was decidedly 49 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Political Suicide Tax? 49 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 negative. Realizing he was getting himself in trouble by even floating the idea of a PST, Prentice immediately undercut the survey by declaring that any suggestion of a sales tax is “effectively” dead and “it would be unwise at this point to increase our corporate income tax” (quoted in Bennett 2015). A Complicated Relationship A sales tax makes good sense, both economically and fiscally. Finance ministers know this. So do economists. Just about every economist who has studied the issue in Alberta has come to the conclusion that it’s time the province introduced a PST. Groups as disparate as the Calgary Chamber of Commerce and the Parkland Institute have argued in favour of a PST. Jack Mintz (2011), founding director of the University of Calgary’s School of Public Policy, delivered a lecture at the University of Alberta in which he advocated for a PST. Even the Premier’s Council for Economic Strategy (2011) argued the province must stop using revenue from oil and natural gas to fund its daytoday operations, and should cover those expenses through a revamped tax system including, potentially, a sales tax. Yet in Alberta, PST has come to mean “political suicide tax.” The province even has a law in place— the Alberta Taxpayer Protection Act (SA 1995, c. A-37.8)— that dictates that the government must hold a referendum before introducing a sales tax. Why, then, do Alberta politicians have such a complicated relationship with PST? Although the tax makes perfect sense in the ivory tower of academia, in the political arena the notion is— to put it mildly— problematic. Alberta politicians realize that adopting a consumption tax would be about as popular with voters as importing Norwegian rats into Alberta (a proudly ratfree province). What’s more, the moment a government raises the notion of a PST, even in the most cautious terms, it is assailed by its opposition. As a result, Alberta politicians have, by and large, taken a simplistic, handsoff approach to even talking about a sales tax. This despite the fact that, if a government could ever survive its implementation, a sales tax might solve the provincial deficit and once and for all help smooth out the resource revenue rollercoaster ride that is Alberta’s budgeting process. A sales tax must be to a finance minister what a neighbour’s unsupervised swimming https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 50 Thomson https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 pool is to an eightyearold child: an attractive nuisance, seductive but potentially fatal. Finance ministers can look but they aren’t allowed to touch. After she was elected premier in 2015, NDP leader Rachel Notley seemed willing, for a time, to buck this trend. In 2016, she dipped a toe into the PST swimming pool by saying she might be willing to talk about it in the 2019 election campaign. “We would have to in some fashion have a pretty upfront conversation with Albertans about the fiscal framework,” said Notley. “I don’t think, given the history of this province, that it would be respectful to voters to not talk to them about the issue if it was something that we were seriously looking at. I think that only makes sense” (quoted in Thomson 2016). However, by December 2018, after facing fierce opposition to the province’s new carbon tax, Notley began to sound more like her Progressive Conservative forebears. Asked in a television interview with CBC News about her previous musings on a PST, Notley (2018) was definitive. “No, no, no— I haven’t been talking about that,” she said. “Now is not the time to bring something like that in.” Despite all this, some political parties in Alberta have, over the years, embraced the notion of a PST. In 2017, for example, Greg Clark, when he was still leader of the Alberta Party, said that “all options should be on the table” to increase government revenue, including looking at a sales tax. “I’m absolutely open to considering that,” he said. “We can no longer afford to avoid difficult conversations or to rule anything out, even if it’s politically unpopular” (quoted in Thomson 2017). Clark raised the notion of a dreaded PST for its shock value, if nothing else. He wanted to attract attention to the oftenoverlooked Alberta Party, apparently subscribing to Oscar Wilde’s oftcited dictum: “There is only one thing in the world worse than being talked about, and that is not being talked about” (Wilde [1890] 2015, 2). Provincial Survival Tax After winning the 2019 provincial election and becoming premier of a UCP government, Jason Kenney offered a fullthroated opposition to a PST, borrowing a mantra from the late former premier Ralph Klein: “We don’t have a revenue problem, we have a spending problem.” Like 51 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Political Suicide Tax? 51 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 the many Conservative leaders before him, Kenney met the government’s volatile revenue streams with cuts, cuts, and more cuts. Then, in 2020, the COVID19 pandemic began. The price of oil dropped so low as to go negative for a time. The province’s deficit ballooned to a record $24billion and the accumulated debt skyrocketed toward a record $100billion. As Kenney pointed out repeatedly, Alberta was facing an economic crisis even greater than the Great Depression (see, e.g., “Premiers Seeking $70B” 2020). As it turns out, fiscal and economic distress can do funny things to hardhitting Conservatives. The pressure on Kenney was so great it appeared to put a crack, however small, in his antiPST armour. When asked pointblank whether it was time to introduce a PST, Kenney (2020) replied, predictably, “I do not believe that the right response in the midst of that economic crisis is to impose a new tax.” But then he added a caveat: “Now, when we get through all of this, I’ve said to Albertans that there will be a fiscal reckoning. Our government had committed in our [election] platform to have a tax reform panel at some point during our mandate. So that will be a debate that Albertans will have in the future.” For Kenney, any decision on a PST would have to be made by referendum, as per the Alberta Taxpayer Protection Act— but by admitting that such referendum was a possibility for the future, Kenney stopped short of slamming the door shut to a PST. In fact, it seems he may have even left it open a crack. Some Conservatives— and stalwart ones at that— appear to agree with Kenney; a few have even advocated that the door be knocked down entirely. In an oped column during late summer 2020, former Wildrose Party leader Danielle Smith startled observers by calling for a fiscal overhaul of the government’s finances. Unsurprisingly, she supported cuts to health care and education. Surprisingly— nay, astoundingly— she also advocated for a PST. “Yes, a provincial sales tax,” she wrote. “Let’s not kid ourselves about that, either” (Smith 2020). The year 2020, with its pandemic and seemingly endless litany of bad news, sent an economic shockwave through Alberta that arguably rattled the province more than any other jurisdiction in Canada. In this economic climate, to label a PST as inherent political suicide is to take a decidedly defeatist point of view. As Kenney’s and Smith’s comments seem https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 52 Thomson https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 to suggest, political opinion is, once again, edging ever closer to publicly contemplating the merits of such a tax. What we need now is for the voting public to do the same. They could, for instance, mull over the fact that an Albertan PST comparable to that of, say, British Columbia, could generate, as Snelgrove calculated, more than $7billion a year for Alberta— a detail that is available for all to see in the UCP government’s own annual budget documents. The thing is, it is used there as a rhetorical tool to emphasize how fortunate Albertans are to live in a province with the lowest tax system in the country: $7billion fortunate. Looked at from a different perspective, though, and the picture is less rosy. Without a PST, Alberta is passing up $7billion a year in stable, predictable revenue. This revenue could solve many of the province’s fiscal problems, not least among them avoiding fiscal catastrophe in tough economic times. The economic upheaval of 2020 has demonstrated the shortcomings of Alberta’s current fiscal policy. In 2020, the federal government sent more money in transfers to Alberta than it collected from the province in taxes— the first time this has happened since the mid1960s. More than this, Alberta saw the greatest per capita increase in federal spending of any province in the country (Dawson 2021). Clearly, when the global economy goes haywire, resource revenues alone can’t keep the province afloat. Perhaps now Alberta’s political leaders will at last begin to look upon the PST as a life raft— not a “political suicide tax,” but a “provincial survival tax.” Note 1 Alberta Legislative Assembly, Hansard, 27th Leg., 3rd Sess. no.36 (1 November 2010, afternoon sitting) at 1026. References Bennett, Dean. 2015. “Corporate Tax Hike Not an Option for Fixing Budget Shortfall: Prentice.” Edmonton Journal, 4 February 2015, A4. D’Aliesio, Renata, and Jason Fekete. 2010. “Sales Tax on Table in Alberta.” Calgary Herald, 26 August 2010, A1. Dawson, Tyler. 2021. “For the First Time in More than 50 Years, Alberta Received More Money from Ottawa than It Sent.” National Post, 10 November 2021. 53 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Political Suicide Tax? 53 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 https:// nationalpost .com/ news/ politics/ for -the -first -time -in -more -than -50 -years -alberta -received -more -money -from -ottawa -than -it -sent. Feteke, Jason. 2009. “Premier Promises No Tax Hikes.” Calgary Herald, 9 July 2009, A1, A4. Ibrahim, Mariam. 2015. “Prentice Willing to Talk Sales Tax.” Edmonton Journal, 14 January 2015, A1. Kenney, Jason. 2020. “Coronavirus Outbreak: Now Is Not the Time to Impose a New Tax: Kenney.” Interview by Mercedes Stephenson. The West Block, Global News, 3 May 2020. https:// globalnews .ca/ video/ 6896548/ coronavirus -outbreak -now -is -not -the -time -to -impose -a -new -tax -kenney/. Lamphier, Gary. 2011. “Sales Tax Back on Alberta’s Agenda.” Edmonton Journal, 16 November 2011, A1. Leipert, Ron. 2011. “No Provincial Sales Tax for Alberta.” Government of Alberta news release, 16 November 2011. https:// www .alberta .ca/ release .cfm ?xID = 31530AD3A1B08 -F761 -A0C5 -0A4DA0B8BD1F165A. Mintz, Jack. 2011. “The VAT as GameChanging Tax Policy in the US and Alberta Contexts.” Eric Hanson 17th Memorial Lecture, Institute for Public Economics, University of Alberta, Edmonton, AB, 27 September 2011. https:// era .library .ualberta .ca/ items/ 0e946ba7 -d3db -49b4 -93d5 -405ef912603b. Notley, Rachel. 2018. “Why There Won’t Be an Alberta Sales Tax Any Time Soon, and Who’s to Blame for Provincial Pipeline Paralysis.” Interview by Stephen Hunt. CBC News, 18 December 2018. https:// www .cbc .ca/ news/ canada/ calgary/ rachel -notley -year -end -interview -pst -carbon -pricing -trans -mountain -trudeau -1 .4952511. Premier’s Council for Economic Strategy. 2011. Shaping Alberta’s Future: Report of the Premier’s Council for Economic Strategy. Available from https:// open .alberta .ca/ publications/ report -of -the -premiers -council -for -economic -strategy. “Premiers Seeking $70B for Health Care.” 2020. Calgary Herald, 19 September 2020, NP3. Smith, Danielle. 2020. “Alberta Needs to Hit Reset on Our Finances.” Edmonton Journal, 4 September 2020, A8. Thomson, Graham. 2009. “Gov’t Peddles Fear to Make Us Buy Cuts.” Edmonton Journal, 2 July 2009, A14. ———. 2016. “There’s a Price for All of This Change.” Edmonton Journal, 30 April 2016, B3. ———. 2017. “Alberta Party Makes Some Noise with Pitch on PST.” Edmonton Journal, 28 February 2017, A1– A2. Wilde, Oscar. (1890) 2015. The Picture of Dorian Gray. Minneapolis, MN: Lerner Publishing. This page intentionally left blank https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 55 3Alberta’s Fiscal Dilemma Robert L. Ascah The people of Alberta have long grown accustomed to a relatively generous array of public services. In the early years of the province, these services were relatively simple— the provision of education, unemployment relief, and law enforcement, along with the construction and upkeep of roads, telephone lines, public buildings, and assorted public works. Since then, however, the range of government services has steadily expanded, partly in response to the growing complexity of modern life (Ascah 2013, 158– 62). All of these services cost money. Albertans are not alone in expecting government services to keep pace with their needs but, Albertans do seem to be uniquely opposed to paying for those services through taxes. They seem allergic even to the mention of tax increases or new taxes— and to a sales tax, in particular. This, then, is Alberta’s fiscal dilemma: how to respond to two contrary expectations on the part of voters: the first that services will expand and the second that taxes will remain low. In other words, how can the Alberta government spend more money without raising more money? An answer to this question— one that still guides fiscal policy in the province today— arrived in 1947 when oil was discovered not far south of Edmonton, near the town of Leduc. The province soon found itself in possession of newfound wealth in the form of unanticipated royalties. It was not long before the government began to draw on this income https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 56 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 instead of taxes to cover the cost of expanded and enhanced public services and other public projects. This trend continued during the recession in the early 1980s and then gradually became entrenched in Alberta’s fiscal culture. As oil and gas industry executives and industryfriendly elected officials never fail to make clear, public infrastructure in Alberta is paid for in no small part by the energy sector. In other words, Alberta’s longstanding, taxaverse fiscal policy makes the province dependent on oil and gas through thick and thin. What does the Alberta government’s heavy reliance on nonrenewable resource royalties actually mean for the province? In part, it means unpredictability. The actual revenue generated by these royalties is highly unstable. As figure 3.1 illustrates, since the mid1960s (when the data begins), the percentage of Alberta’s ownsource revenue 1 that comes from nonrenewable resources has zigzagged from 70percent to less than 10percent, with the overall trend headed downward. I am certainly not the first person to raise alarms about Alberta’s volatile revenue problem. Way back in 2002, for example, L.S. Wilson published an important edited collection of essays exploring the topic: Alberta’s Volatile Government Revenues: Policies for the Long Run. More recently, in an analysis of Alberta’s longterm fiscal future, Trevor Tombe (2018, 26– 28) explored the consequences that the province’s reliance on such a highly volatile source of revenue has had on its capacity to repay debts, as measured by the ratio between its debt and its GDP. In a projection to the year 2040, Tombe finds that if Alberta continues with its customary revenue mix of low taxes and high dependence on nonrenewable resource royalties, the range of possible future outcomes for its net debttoGDP ratio is very wide. Compared to Ontario, which lacks a similarly volatile component but does include a sales tax, Alberta’s future is extremely difficult to predict. In short, the greater the stability of revenue sources, the more predictable future fiscal outcomes become. The volatility of nonrenewable resource revenue causes problems for Alberta’s ability to plan for its future— but it is not the only factor that puts Alberta’s fiscal future into question. This volatility is compounded by the manner in which the government has chosen to use nonrenewable resource revenue. As Al O’Brien, a former deputy finance minister in 63 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta’s Fiscal Dilemma 63 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 contractors, investors, bondholders, and taxpayers. Such a sustainable, longterm fiscal policy would eliminate the need for the types of abrupt changes to spending or revenue policies that define Alberta’s current fiscal politics— changes that are deeply disruptive to all Albertans. What Can Governments Control? Alberta’s fiscal dilemma— how to spend more money without reliably making more money— is not just a matter of making the math work. It is a political problem at heart. Part of the problem lies in government policies and messaging that obscure what governments are and are not able to control in terms of their jurisdiction’s finances and economy. Another part of the problem is that one of the solutions is to raise taxes— a move that makes politicians and their parties vulnerable to losing seats in a general election. Most politicians believe their numberone job is to create or preserve employment for their constituents. Under Don Getty’s Progressive Conservatives and Rachel Notley’s New Democrats, this task was approached in an activist manner through royalty holidays, subsidies, and loan guarantees. Ralph Klein’s government pursued the employment goal by creating a fiscal regime conducive to luring investment capital through low taxes, generous royalty policies, and limited regulation without picking economic winners and losers, as he understood Getty to have done. Both approaches shared the belief that through government policy, the province’s fiscal capacity would ultimately be enhanced. Premier Jason Kenney and his Economic Recovery Council are adhering to the mantra that governments are somehow the sole creators of economic growth. Kenney has doubled down on his bet to rescue Alberta’s beleaguered economy with more corporate tax cuts, a failed bet on the Keystone XL pipeline project, and higher infrastructure spending. This belief that government policies are the main drivers of economic growth is not unique to Alberta. Governments throughout Canada’s history have seen themselves as drivers of economic development, and in many ways they have been. The building of the Canadian Pacific Railway was literally a nationbuilding project. Similarly, TransCanada Pipelines and the St. Lawrence Seaway projects have been enterprises enjoying tacit https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 64 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 government support or direct public investments (Kilbourn 1970). But in today’s global investment world, governments must be careful they are not competing against each other as global corporations play one jurisdiction against another.3 These types of approaches risk being particularly misguided in Alberta in that they tend to reinforce dependency on nonrenewable resource revenue by concentrating their incentives on the nonrenewable resource extraction sector. Revenue from nonrenewables is not just vola - tile; it also depends on private corporations to carry out the extraction and production. Continuing production therefore is dependent on the cash flow of these corporations, which in turn depends on two principal factors: oil and natural gas prices and continued capital investment to sustain and grow production. Oil and gas extraction and production are highly capital intensive and historically have relied on foreign capital. As Alberta’s Recovery Plan (Government of Alberta 2020a, 2020b) confirms, Alberta’s political and corporate leaders admit the province is essentially hostage to international and domestic finance capital: External sources of capital have become the largest source of investment into Alberta and a critical contributor to Alberta’s economic growth. Much of the economic adversity experienced by Alberta since 2014 is tied to the flight of tens of billions of dollars of capital investment. To reverse this trend, and bring back jobcreating investment, Alberta’s government will create Invest Alberta, a dedicated investment promotion agency that will lead our investment attraction strategy in a new direction with better capital markets communications, proactive investment promotion targeting key companies and sectors, and concierge service for prospective investors seeking to navigate through regulatory and other hurdles. (Government of Alberta 2020a, 11) In effect, Premier Kenney, his cabinet, and his Economic Recovery Council (headed by Jack Mintz) are admitting that Alberta does not have the homegrown capital to nurture economic growth. A distinction between what is and is not actually financially and economically within the government’s control is pertinent to political 65 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta’s Fiscal Dilemma 65 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 narratives and public discourse. Understanding the difference is particularly important when, as we often find, governmentsponsored initiatives make promises beyond the limits of their control, and then predictably do not achieve their revenue goals. The absence of clarity about that for which the government can actually be held accountable is a major obstacle in the public’s understanding of the province’s fiscal circumstances. All too often, however, the media and opposition do not follow up on the failures of these untenable promises. It is, therefore, useful to be able to recognize such promises as fanciful from the beginning. There are many significant economic, jurisdictional, and financial factors outside the control of the Alberta government. These include oil and natural gas prices; Canadian dollar exchange rates; interest rates; financial market returns; regulation of, among other things, interprovincial pipelines, banks, bankruptcy and insolvency, railways, and telecommunications; and equalization payments. Though not exhaustive, this list may well be enough to make a provincial politician feel helpless— What’s the point? Why did I run for office? If we can’t control these things, how can government effectively create a climate hospitable for capital investment and jobs? Instead of publicly acknowledging the helplessness around the many factors outside their control— including, notably, the price of oil— political leaders in Alberta tend to choose to appear in control, investing their energy in “fighting,” in the name of their constituents, the external actors from whence these uncontrollable factors come, attempting to wrestle them into economic submission. The energy that politicians put into these fights could instead be concentrated on using the tools at their disposal to manage the economic factors over which the government does have influence— for while the Alberta government cannot control the price of oil, it can influence policy outcomes in instances where its voice would legitimately be considered (for instance, Trans Mountain pipeline project). Beyond this, there remains a great deal that the provincial government can control on both its revenue and expenditure side. For instance, while the provincial government cannot control the price of oil, bitumen, and natural gas, it does have the power to establish royalty rates and dictate the pace and scale https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 66 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 of oil sands development. Some other tools and factors at the Alberta government’s disposal include the following: • Healthcare premiums • Public sector salaries and benefits • Appointment of senior officials, agency boards • Operating programs • Capital spending • Debt management policies • Investment policies • Minimum wage • Occupational health and safety • Labour relations (except for federally regulated enterprises) • Municipal affairs • Energy and environmental regulation • Revenue (PIT, CIT, and taxes and fees related to tobacco, alcohol, cannabis, gambling, fuel, carbon) Here’s the catch. The degree to which a government can actually control these things depends on it maintaining a strong mandate from the voting public. The political theatre of fighting factors that are outside of our control allows Albertans to maintain their sense of exceptionalism and entitlement, which they have come to take for granted. Catering to this exceptionalism does much to bolster a government’s popularity and increase its chances of reelection. However, if a government were to spend more of its energy focussing on the factors within its control— for instance, by asking Albertans to pay more for or accept new taxes to fund the services they require— it would challenge this sense of exceptionalism. This would be very unpopular. Alberta’s fiscal dilemma is characterized by a chronic mismatch of steadily rising spending needs with volatile revenue caused by overreliance on nonrenewable resource royalties. It is also characterized by 67 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta’s Fiscal Dilemma 67 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 another chronic issue: Alberta exceptionalism and a political hesitancy to challenge it. To ameliorate the first issue, political will, political capital, and political leadership must focus on managing key levers within the government’s policy tool box. The main tools are controlling operating and capital spending, maximizing returns to the province from resource development (subject to strict environmental accountabilities), and setting appropriate revenue policy. However, without an open discussion of the tradeoffs between voters’ appetite for public services and their capacity and willingness to pay for these services, the fiscal dilemma will remain, and it will continue to fester. Without such a discussion, Alberta’s government will continue to create the illusion of solving its fiscal dilemma with messianic promises on which it cannot deliver without the divine help of the global market gods. When that help is not forthcoming, politicians turn to reducing spending on public services and infrastructure instead of risking Albertans’ wrath by speaking the word tax. Notes 1 Ownsource revenue refers to revenue other than federal transfers. 2 The Alberta Heritage Savings Trust Fund was created in 1976 to save a portion of nonrenewable resource revenue in order to benefit future generations of Albertans. It was based on the assumption that the provincial government needed to save money because revenue from nonrenewables would decline over time as the resource was depleted. The transfer of resource revenues to the Heritage Fund was reduced from 30percent to 15percent in 1982– 83 and eliminated entirely in 1987– 88. 3 The example of Amazon “tendering” its second head office to the highest bidder is a recent example. This behaviour is often termed a “race to the bottom.” See Wong (2018). References Alberta Financial Management Commission. 2002. Moving from Good to Great: Enhancing Alberta’s Fiscal Framework, chaired by David Tuer, 8 July 2002. Edmonton: Alberta Financial Management Commission. Ascah, Robert L. 2013. “Savings of NonRenewable Resource Revenue: Why Is It So Difficult? A Survey of Leaders’ Opinions.” In Boom and Bust Again: Policy https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 68 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Challenges for a CommodityBased Economy, edited by David L. Ryan, 151– 98. Edmonton: University of Alberta Press. Ascah, Robert L., and Robert Bhatia. 2013. “Does the Budget’s New Math Add Up?” Edmonton Journal, 13 March 2013. Government of Alberta. 2020a. Alberta’s Recovery Plan, June 2020. Available from https:// open .alberta .ca/ publications/ albertas -recovery -plan. Government of Alberta. 2020b. Alberta’s Recovery Plan: Economic Statement, June 2020. Edmonton: Government of Alberta. Available from https:// open .alberta .ca/ publications/ albertas -recovery -plan. Kilbourn, William. 1970. Pipeline— TransCanada and the Great Debate: A History of Business and Politics. Vancouver: Clarke, Irwin and Company. Kneebone, Ronald, and Margarita Wilkins. 2018. “50 Years of Government of Alberta Budgeting.” University of Calgary School of Public Policy Publications 11, no.26. https:// doi .org/ 10 .11575/ sppp .v11i0 .53364. Tombe, Trevor. 2018. “Alberta’s LongTerm Fiscal Future.” University of Calgary School of Public Policy Publications 11, no.31. https:// doi .org/ 10 .11575/ sppp .v11i0 .52965. Wilson, L.S., ed.2002. Alberta’s Volatile Government Revenues: Policies for the Long Run. Edmonton: Institute for Public Economics, University of Alberta. Wong, Julia Carrie. 2018. “What Cities Offered Amazon: Helipads, Zoo Tickets, and a Street Named Alexa.” Guardian, 15 November 2018. https:// www .theguardian .com/ technology/ 2018/ nov/ 14/ amazon -next -headquarters -losing -city -bids -what -offered. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 69 4The Revenue Push and Spending Pull A DoubleEdged Look at the Source of Alberta’s Fiscal Ills Robert L. Ascah The fiscal history of Alberta is a story of feast and famine dependent on the fortunes of a small number of commodities— largely grains, oil, bitumen, and natural gas (Ascah 2021). This overreliance has imperiled Alberta’s financial health on a recurring basis, and yet the province doesn’t seem to learn its lesson: relying so heavily on volatile revenue sources is a recipe for an unpredictable and unstable future. Successive governments have failed to intentionally shape a collective, sustainable future by remaining passively hostage not only to fluctuating prices of globally traded commodities but also to past governments’ financial decisions to spend or save, to raise or lower taxes, or to borrow. Add to this the unrelenting evidence of international financial capital divesting its fossil fuel investments, and the problem deepens. We and our political leaders have lived in near constant denial of the fragile state of Alberta’s economy and public finances. As a result, Alberta’s economic future is persistently clouded. How do we wake up from this denial? How do we clear the clouds away? In other words, where do we begin in solving Alberta’s fiscal dilemma— with spending or revenue? https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 70 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 This chapter asks you, the reader, to delve into the numbers with me. My goal here is to examine the variability of the Alberta government’s revenue and spending structures over fifty years to show that Alberta doesn’t have a spending or revenue problem; it has a spending and revenue problem. I also examine Alberta’s historical failure to save, and the implications of this on the province’s current fiscal situation. By charting the key revenue sources and major spending areas of the Alberta government since the mid1960s (adjusted for inflation and population) and running some simple statistical tests to compare longterm trends, I attempt to better understand where Alberta’s economic woes lie, and how to fix them. Provincial Revenue Figure 4.1 provides an overview of the sources of revenue over which the Alberta government has some control. The two major sources of revenue for the provincial government are nonrenewable resource revenue and PIT. Although nonrenewable resource revenue has dominated revenue sources since the mid1960s and before, it is also the most volatile revenue source. This volatility is shown in figure 4.1 by the steep peaks and dips in the resource revenue line, which represent periods when the prices for oil and natural gas have had a significant impact on resource revenue. For example, we see sharp rises in the 1970s caused by the OPEC (Organization of the Petroleum Exporting Countries) embargo and Iranian revolution. Similarly, in the 2000s, resource revenue rose rapidly because of price increases, especially for natural gas, and because of growing production in the oil sands. Unlike volatile resource revenue, we see a relatively smooth, steady growth in PIT over time. CIT also shows growth that is relatively stable compared to resource revenue, though more variable than PIT and growing at a slower rate. PIT and CIT revenues were about equal in 1965; by 2020, CIT represented less than onethird of PIT revenue, adjusted for population growth and inflation. There is, of course, no line for a sales tax. Figure 4.1 clearly shows the instability of nonrenewable resource revenue. What is especially dramatic is the fact that nonrenewable resource revenue exceeded PIT revenue from 1965– 66 through to 1986– 87. This 71 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Revenue Push and Spending Pull 71 dominance resumed for a shorter period between 2000– 01 and 2009– 10. In other words, an unstable source of revenue exceeded personal tax revenues in thirtyseven of the past fiftyfive fiscal years. At the turn of the millennium in particular, the resource revenue floodgates opened. It is this type of resource bounty that successive Alberta governments have banked on to pay for a significant portion of spending on public services and infrastructure and, at certain times, to reduce or at least not raise taxes. Table 4.1 shows the results of measuring the volatility of each major revenue source for the fiscal years 1965– 66 to 2020– 21. The table shows the standard deviation measures for the full period between 1965 and Personal income tax Corporate income tax Natural resource revenue 1965–66 1969–70 1973–74 1977–78 1981–82 1985–86 1989–90 1993–94 1997–98 2001–02 2005–06 2009–10 2013–14 2017–18 2020–21 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Figure 4.1. Major revenue sources per capita, 1965– 66 to 2020– 21 (2002 $millions) Sources: Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data— All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http:// www .policyschool .ca/ publication -category/ research -data/; Statistics Canada, “Table 1810000501: Consumer Price Index, Annual Average, Not Seasonally Adjusted,” released 20 January 2021, https:// doi .org/ 10 .25318/ 1810000501 -eng; Statistics Canada, “Table: 1710000901: Population Estimates on July1st, by Age and Sex,” released 29 September 2021, https:// doi .org/ 10 .25318/ 1710000501 -eng. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 72 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 2021, as well as for seven tenyear slices within that period. Standard deviation is the degree by which each data point diverges from a data set’s mean, or average, value. A low standard deviation measure indicates that the values within a single population sample tend to be close to the mean value of that sample; a high standard deviation indicates the opposite. Said differently, the lower the standard deviation, the lower the volatility of the numbers in a sample. In this case, those numbers are the annual changes, in percent, to Alberta’s three major revenue sources: PIT, CIT, and nonrenewable resource revenue. The data in in table 4.1 reveal that resource revenue, when considered across the full time period in question, is on average about 2.5 times more volatile than PIT and about 1.25 times more volatile than CIT. This result is tied to the fact that many of the largest corporate taxpayers in Alberta are oil and gas companies whose profitability varies significantly over time with the prices of oil, bitumen, and natural gas, which are themselves, of course, very volatile.1 Generally unknown to most Albertans is another source of unstable revenue, unrelated to fluctuating oil and natural gas prices and oil patch Table 4.1. Standard deviation of Alberta government revenue, 1965– 66 to 2020– 21 Years Personal income tax Corporate income tax Nonrenewable resource revenue 1965–66to1974–75 0.108 0.312 0.336 1975–76to1984–85 0.063 0.276 0.087 1985–86to1994–95 0.068 0.144 0.166 1995–96to2004–05 0.071 0.143 0.353 2005–06to2014–15 0.153 0.090 0.129 2011–12to2020–21 0.031 0.099 0.225 1965–66to2020–21 0.103 0.209 0.261 Source:Author’scalculationsbasedonRonaldKneeboneandMargaritaWilkins, “CanadianProvincialGovernmentBudgetData—AllProvincesUpdatedto2019/20 andSometo2020/21”(Excelspreadsheet),October2021version,available fromUniversityofCalgarySchoolofPublicPolicy,“ResearchData,”http://www .policyschool.ca/publication-category/research-data/. 79 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Revenue Push and Spending Pull 79 Labour groups like to compare public spending to either GDP or personal disposable income. Business groups like to compare per capita spending and salaries of one provincial government to those of other provincial governments. Some analysts compare Alberta’s spending levels against a provincial average; others prefer to compare Alberta spending or revenue with that of other major provinces (British Columbia, Ontario, and Québec) or against to Alberta’s neighbours (Saskatchewan and British Columbia). It’s easy to see how politicians could be confused by all the differing conclusions reached about the same spending or revenue numbers, but one thing is for sure: wages and spending have been spiralling upwards in Alberta for decades. Kevin Taft told me he expects that this will eventually “turn into a downward spiral. The wealth flowing into the private sector will start to decline, [which will] reduce the upward pressure on public sector wages.” But this isn’t necessarily a bad thing. Looking at comparative services between British Columbia and Alberta, Taft remarked, “I often ask myself if I go to British Columbia— Vancouver, Victoria, or whatever: Do I see perceptively worse public services there? The roads aren’t worse, the cities are clean, the infrastructure’s good. University of British Columbia and University of Victoria are excellent universities. Hospitals are good. You can run a province with lower spending and still do a very good job” (interview with author, 26 November 2018). Experts delving into the jurisdictional comparisons soon discover that data availability, accounting peculiarities, time periods chosen, and widely varied government budget structures make it difficult to create meaningful longitudinal comparisons (Busby and Robson 2014; Kneebone and Wilkins 2016). Panel A of table 4.5 offers snapshotintime comparisons among Alberta, British Columbia, Ontario and, Québec for per capita spending based on 2019– 20 and 2020– 21 public accounts information.2 Additional aggregate information is provided in panel B. Table 4.5 confirms the view that Alberta spends more per capita compared to other major provinces— provinces with whom Alberta normally competes for investment and jobs. 3 However, one would be mistaken to think that the claim of cutting spending alone addresses the deeper question of Alberta’s fiscal sustainability. Take, for instance, the claim that per capita spending in Alberta is too high because public sector wages have been https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 80 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 historically, and unnecessarily, higher than the rest of the country (MacKinnon 2019, 44– 50). Cut the wages, solve the spending problem, right? Not necessarily— but this is not to say that the argument has no merit. Onehalf of operating spending goes to wages and benefits in Alberta. One reason typically given to justify high public sector wages is that Alberta’s public sector employers must “compete” with Alberta’s private sector, which is dominated by the highpaying oil and gas sector. Another often cited reason is that these high wages are necessary to compensate for higher costs of living in Alberta compared to other provinces. It is argued that these factors make it necessary to have higher public sector salaries to attract employees, including those from outside the province or country, Table 4.5. Spending of selected provincial governments (current $) Panel A: Per capita spending of selected provinces, 2020– 21 Spending per capita Alberta British Columbia Ontario Québec (2019– 20)* Health†5,377 4,963 4,151 5,294 Education 3,198 2,897 2,824 2,893 Socialservices†1,339 1,510 1,177 1,237 Agriculture,resource management,andeconomicdevelopment 729 812 1,239 774 Generalgovernment 637 759 299 – Protectionofpersons andproperty 445 438 340 389 Transportation, communications,and utilities 341 651 – 582 Regionalplanningand development 557 – – – Recreationandculture 72 – – 192 Environment 187 – – 676 Housing 63 – – – Debtservicingcosts 562 528 839 895 Other 90 551 – 399 Total 13,597 13,109 10,869 13,332 81 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Revenue Push and Spending Pull 81 to the public service. Arguments about high cost of living in Alberta tend, however, to ignore the absence of a sales tax, the absence of healthcare premiums, lower marginal tax rates, and higher income tax exemption levels. In other words, these arguments tend to leave out the fact that Albertans pay very little in taxes compared to other major provinces. Add to this the fact that Alberta’s housing costs today are lower than those in Vancouver, Toronto, Montréal, and Ottawa, and the costofliving argument is on thin ice. Perhaps Albertans in the public sector are paid too much. Mueller (2019) disagrees. He has argued that while there are some areas where public sector pay appears to be disproportionately high (notably in municipalities), the “excess compensation” argument is overblown. Using real earnings for public administration, education, health care, and social assistance, Mueller has shown that while Alberta public sector workers’ Panel B: Total spending, population, and total per capita spending, 2020– 21 Spending Alberta British Columbia Ontario Québec Totalspending ($billions) 60,099 67,624 181,297 114,364 Population(1July2020) 4,420,029 5,158,728 14,745,712 8,578,300 Percapitatotalspending ($) 13,597 13,109 12,295 13,332 Sources:GovernmentofAlberta,Annual Report: Government of Alberta 2020– 21, availablefromhttps://www.alberta.ca/government-and-ministry-annual-reports .aspx;GovernmentofBritishColumbia,Public Accounts 2020/21,availablefrom https://www2.gov.bc.ca/gov/content/governments/finances/public-accounts; GovernmentofOntario,Public Accounts of Ontario: Annual Report and Consolidated Financial Statements 2020– 2021,availablefromhttps://www.ontario.ca/page/ public-accounts-ontario-2020-21;GouvernementduQuébec,Consolidated Financial Statements of the Gouvernement du Québec,vol.1,Public Accounts 2019– 2020,http://www.finances.gouv.qc.ca/documents/Comptespublics/fr/CPTFR _vol1-2019-2020.pdf;StatisticsCanada,“Table17-10-0009-01:PopulationEstimates onJuly1st,byAgeandSex,”released29September2021,https://doi.org/10.25318/ 1710000501-eng. *2020–21percapitaspendingdatawerenotavailableattimeofwritingfor Québec;2019–20datahasbeenusedinstead. †ThecategoriesofhealthcareandsocialservicesarecombinedintheQuébecdata. Thiscombineddatahasbeenrecordedinthe“health”categoryforQuébec.Thesocial servicescategoryforQuébecshowsMinistryofFamilyspending. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 82 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 earnings relative to Ontario, British Columbia, and Québec have indeed been higher in the past, the difference as measured in 2018 has become much smaller (26– 31). Moreover, while Alberta spending per capita is, in general, high relative to other provinces, the gap has been narrowing, in particular between Alberta, Québec, and British Columbia. A Spending or Revenue Problem? While there are conflicting data on the sources and the extent of spending excesses, one cannot fairly say we do not have a spending problem. Rather, the straightforward answer to the conflicting data is that Alberta has both a spending and a revenue problem. Alberta’s revenue is volatile and unpredictable. Its per capita spending, though much less volatile than its revenue, tends to be higher than that of other provinces. The relative stability of spending is in large part due to the fact that spending is by and large more controllable than revenue. This is perhaps why spending is regarded by conservative governments as the source of the problem: it’s easier to solve a problem over which you have control than one over which you don’t. However, this doesn’t mean the need for spending is easily controlled. In practical terms, spending proceeds incrementally as new programs are instituted to respond to new needs. Staff must be hired and operating rooms must be properly furnished. Citizens rely on government programs and expect services to be provided, often in unpredictable waves. Since users of government services vote, politicians must respond to demands that private sector organizations would reject unless they saw a financial benefit. In short, since spending cannot be adjusted dramatically from year to year without political consequences, it stands to reason that governments should have a revenue strategy that ensures a set of steady, predictable revenue sources to avoid cutting services and incurring the wrath of the citizenry. Figure 4.4 maps Alberta’s total per capita spending and revenue adjusted for inflation. The figure illustrates the volatile revenue streams Alberta governments have been unable to effectively manage. Rather than save a significant proportion of nonrenewable resource revenue and grow the savings through reinvestment of earnings, successive 83 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Revenue Push and Spending Pull 83 governments have chosen to build the province’s financial foundation on the sands of a volatile revenue base, expensive government infrastructure, and program spending that is vulnerable to cuts when resource prices fall. Increases in revenue, usually the result of rising oil and gas prices, draw spending up, too. As resource revenue levels off, this higher spending produces budget deficits, creating fiscal pressures on provincial treasurers. This levellingoff of revenue is typically (though not always) followed by revenue declines, spending cuts, and rising debt. 4 As figure 4.4 shows, this pattern of revenue push / spending pull occurred in the late 1970s, the beginning of the 2000s, and briefly during the short Redford period from 2011 to 2014. Rising energy prices lead to a rush of funding requests as predictable as the spring thaw. As we used to say in Alberta Treasury, “When things go well, they go really well— when things are bad, they are really bad.” 1965–66 1967–68 1969–70 1971–72 1973–74 1975–76 1977–78 1979–80 1981–82 1983–84 1985–86 1987–88 1989–90 1991–92 1993–94 1995–96 1997–98 1999–00 2001–02 2003–04 2005–06 2007–08 2009–10 2011–12 2013–14 2015–16 2017–18 2019–20 Total revenues Total expenditures 0 10,000 20,000 30,000 40,000 50,000 60,000 Figure 4.4. Alberta’s total revenue and expenditure, 1965– 66 to 2020– 21 (current $millions) Source: Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data— All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http:// www .policyschool .ca/ publication -category/ research -data/. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 84 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Figure 4.5 gives us another way of visualizing the pushpull dynamic of spending and revenue in Alberta. The graph shows the degree to which the change in Alberta’s surplus or deficit (whether that change is positive or negative) is affected by a change in Alberta’s revenue stream or spending structure (again, whether positive or negative) between 1965 and 2020. The predominance of the black bar in any given year records a period of either significant revenue decline or revenue increase. In Alberta, such decline or increase is principally associated with fluctuations in oil and/ or natural gas price changes. The predominance of a grey bar in any given year shows a period of spending pressure or spending reduction. Taken as a whole, figure 4.5 is a longterm picture of the degree to which Alberta’s debt situation depends on revenue versus spending. Figure 4.5. Percentage change in Alberta’s deficit tied to revenue or expenditures, 1965– 66 to 2020–21 (2002 $) Source: Author’s calculations using data from Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data— All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http:// www .policyschool .ca/ publication -category/ research -data/. 0 40 20 60 80 100 1966–67 1968–69 1970–71 1972–73 1974–75 1976–77 1978–79 1980–81 1982–83 1984–85 1986–87 1988–89 1990–91 1992–93 1994–95 1996–97 1998–99 2000–01 2002–03 2004–05 2006–07 2008–09 2010–11 2012–13 2014–15 2016–17 2018–19 2020–21 Change in deficit due to revenue Change in deficit due to expenditure 85 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Revenue Push and Spending Pull 85 Fiftyfour percent of the bar space shows changes in Alberta’s deficit tied to revenue; the remaining 46percent shows changes tied to expenditures. This is consistent with our finding above that revenue sources are more volatile than spending. But these percentages don’t tell the whole story; they mask the cumulative dollar amounts at play over the full fiftyfiveyear period. Total yeartoyear revenue changes (i.e., the absolute value of the increases and decreases) were $94.5billion (59.3percent) with expenditure changes totalling $64.8billion (41.3percent). These findings underline the critical importance that revenue plays in the overall dynamics of the province’s income statement and balance sheet. It’s not, then, just a matter of understanding that we have both a spending and a revenue problem; it’s a matter of understanding how these two problems are intertwined. Of course, electoral competition remains ideological and depends on political parties presenting simple, compelling narratives to differentiate their “visions” from those of other political parties. In some governments— for example, the Getty and Notley periods of 1985– 92 and 2015– 19, respectively— the answer was increasing spending. This led to accumulating deficits, increasing public debt, and, consequently, rising debt servicing costs. In the StelmachPrentice period (2006– 15), drawdowns of the Stabilization/Contingency Account allowed the government to respond to spending pressure while ignoring the need for adjustments to spending and/or revenue. This drawdown in savings continued for a short time under the Notley administration as well, until these savings evaporated. At the time of writing, the UCP are in government. The combination of rising debt servicing costs and the public’s aversion to debt and taxation has led the UCP to convey their “vision” by first freezing then cutting spending, notably on postsecondary education— this despite the fact that it is Alberta’s volatile revenue sources that account for a majority of cases in which the province has moved between surplus and deficit. Around we go again in the pushpull dynamic of spending and revenue. We have seen this movie before, and they seem to just keep coming out with sequels. The thing to note is that these simple, political narratives all have something in common: They’re onesided. Alberta’s fiscal dilemma, however, is not. The problem runs much deeper than just spending or revenue, and thus https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 86 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 cannot be solved by simplistic fixes that appeal to only one side of the issue. The way we have allowed our spending structure to be constantly dictated by our revenue mix is a systemic issue. Those who put forward simplistic platforms to address the issue, then, also have something in common: their willful ignorance of the endemic problems in Alberta’s larger fiscal picture. Alberta’s Savings Problem On top of everything, when Alberta does run into tough times under its current fiscal policy structure (i.e., when its problem spending can’t be covered by its problem revenue) it has a habit of spending its savings— that is, when it has any savings to spend. In 1976, Premier Lougheed introduced the Alberta Heritage Savings Trust Fund, a public savings account with the stated goal of saving a certain amount of oil and gas revenue for future generations. This is, in principle, a great idea, especially for a province that relies on volatile revenue. However, Alberta’s fiscal propensity to spend was already too deeply entrenched for the Heritage Fund to really develop to its full potential. By 1982, Lougheed abandoned his vision of an intergenerational savings fund, adopting instead a “spend now, pay later” fiscal philosophy. This was accomplished by rebranding the Heritage Fund as a “rainy day” account— and it was raining just prior to the 1982 election. Consequently, the fund was used to finance significant increases in expenditure in 1982– 83. For the first time, the government withdrew all investment income from the Heritage Fund, thereby preventing the fund from growing through reinvestment of earnings. Had Premier Lougheed left the investment income to compound without any further resource revenue deposits, my calculations show that the Heritage Fund would be worth something in the order of $260billion today. Lougheed’s new approach to mining the Heritage Fund to make up for revenue deficits rather than adjusting the province’s revenue mix or spending structure was inherited by his successor, Don Getty, and later governments. Between 1947 and 2020, according to data from the Canadian Association of Petroleum Producers, Alberta’s oil and gas sector producers had cumulative revenue of $2.07 trillion. 5 In the same period, Alberta received $205billion in royalties, for 10percent return. These cumulative 87 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Revenue Push and Spending Pull 87 figures suggest Alberta could have accessed a bigger piece of the revenue but demurred from taking a larger share. 6 The biggest stumbling block to receiving a higher share has been the industry’s case that unless royalties remained competitive, industry will not continue to invest. But even at this rate of return, if the Government of Alberta had continued to place 30percent of its resource revenue in the Heritage Fund and keep all the reinvested earnings there, the fund would be worth over $400billion today.7 More than just spending and revenue problems, then, Alberta has a twopart savings problem. On the one hand, because it relies so heavily on resource royalties to balance its budget— and because it keeps those royalties low— it doesn’t contribute much to its savings in the first place. On the other hand, because of its general lack of fiscal discipline, the province never seems to leave its savings to accrue for very long. As a result— as we’ve seen with Kenney’s UCP government— the province ends up essentially living from oil paycheque to oil paycheque and adjusting its spending in kind. Having inherited an unruly trinity of volatile revenue sources, a paltry sum of savings to address current budget needs, and an accounting policy that arguably overstates resource revenues, Kenney’s government is back at the game of cutting spending in a time of need— what Finance Minister Travis Toews (2020) has called the “triple black swan event” of COVID19, oil price correction, and an economic shutdown. The government is hoping against hope for its revenue luck to change. As far as savings are concerned, I believe Alberta’s savings project has failed to fulfill its original mandate of being an intergenerational savings account meant to meet the province’s fiscal needs when the oil has run out. The Heritage Fund has provided flexibility for fiscal policy purposes, but its size is now less than onethird of Alberta’s current spending. It may be a source of pride for some Albertans but if the Heritage Fund is no longer an intergenerational savings vehicle, it should be wound down. Solving the Dilemma Fixing Alberta’s fiscal dilemma requires a balanced approach that ensures that spending accomplishes its intended objectives and that there is a https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 88 Ascah https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 sufficient and stable revenue stream available to pay for government services. There is also a need to thoroughly examine revenue sources with a view to making a more resilient revenue stream, which essentially means making revenue more stable. And that entails looking at a sales tax. A balanced approach is something new for Alberta— a whole new fiscal policy culture. Until now, this culture has been marked by an empty, binary debate about whether the province’s fiscal challenges lie in a problem of spending or revenue, and a series of political sleights of hand that cloud the precarity of Alberta’s fiscal situation. Fiscal policy during the Klein years was helped out by rising natural gas prices and the effects of very loose monetary policy of the early 2000s. The Kenney government has continued to stress its belief in cutting spending, maintaining low per - sonal and corporate taxes, and trying to attract outside capital investment to the oil industry as the means of eradicating deficits. These strategies ignore the evidence presented in this chapter, which shows that revenue diversification to stabilize spending is at least as pressing an issue as lowering taxes and cutting spending. They also ignore urgent and unrelenting evidence that international financial capital is divesting from fossil fuels. The nonrenewable resource that Alberta relies on so heavily as a revenue source may well disappear from the global market before oil dries up in the ground. Alberta governments will be forced to make difficult fiscal and economic choices in the very near term as climate change becomes an evergreater factor in global investment decisions. Alberta’s fiscal solutions require a toptobottom review of its revenue, spending, and savings policies with the objective of ensuring fiscal stability and longterm fiscal sustainability. Alberta’s public service has gone through enough feastfamine cycles already— it is time to reimagine a new future. Notes 1 An attachment to a 14 March 1980 memo from Deputy Provincial Treasurer A.F. Collins to Treasurer Lou Hyndman with the subject heading “Royalty Tax Credit Abuses” revealed that five companies paid 24percent of gross tax collections, all of which were oil and gas corporations. Ten 95 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Sales Tax 95 contribution, averaging 7.3percent. When the global financial crisis hit in 2008– 09, Alberta saw a drop in natural gas prices, due in part to the emergence of fracking technology and shifting locations of energy developments. This resulted in resource revenues dropping to 4.4percent of household incomes. The collapse of oil prices in 2014 and 2015, and the resulting industry problems led to resource revenues dropping again, this time to an average of 1.8percent of household incomes from 2015– 16 to 2019– 20. The COVID19 crisis led to resource revenues falling to 1.2percent of household income in the 2020– 21 fiscal year. Importantly, figure 5.1 shows that resource revenues between 2015 and 2020 have been the lowest they’ve ever been relative to household incomes (and, just as importantly, to the government’s budget) since 1973. However, oil and natural gas prices have increased markedly during 2021 and, as of August 2021, the provincial government’s resource revenues for 2021– 22 are projected to be more than three times the 2020– 21 level (Government of Alberta 2021a). Nevertheless, that resource revenues will only amount to 3.8percent of household income. The impacts of these changes on provincial finances are substantial. While the longer story is interesting, the focus in this chapter is the period post2000. As resource revenues improved following the turn of the century, the Alberta government accumulated a Sustainability/ Capital/Contingency Fund that reached $17billion in 2007– 08. Thereafter, those funds were drawn down to support government operating and capital expenditures. Borrowing grew during the recession, and the province ran a sequence of (typically small to modest) deficits until 2015– 16, when another collapse of oil prices further negatively impacted the provincial budget. From 2015– 16 on, deficits have been large and the extent of the province’s borrowing has greatly expanded. The 2020 COVID19 pandemic has created an additional fiscal shock. The 2020– 21 deficit rose from a projected $7.3billion to an actual $17billion and the total taxpayersupported debt reached $93billion by the end of the 31 March 2021 fiscal year (Government of Alberta 2021a, 2021c). Illustrative of the deteriorating fiscal situation, the province’s net financial assets have fallen from a positive $31.8billion to a negative $59.5billion https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 96 McMillan https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 since 2008– 09— a decline of $91.4billion, or $20,500 per capita at the 2021 population. Will resource revenues recover and restore budget balance without further taxes or substantial expenditure reductions? Despite the 2021 improvement, the prospects are not optimistic. Projections appear in figure 5.2 for fiscal 2021– 22 forward. To demonstrate the unpredictability of resource revenues, two projections appear for the years 2021– 22 to 2026– 27. The lower of the two is a projection I generated in the fall of 2020. At that time, the province had provided no postCOVID19 budget projections or economic assumptions, so I generated projections of resource revenues and household incomes to 2026– 27 from other sources.3 Fiscal 2026 is the year that Trevor Tombe (2020) expects that the Alberta government would be able to balance its budget without increasing taxes, if it continues to freeze expenditures (excluding those related to COVID19 and recovery from the pandemic) at $56billion. The upper line is the sixyear projection based on the Government of Alberta’s (2021a) projection that 2021– 22 resource revenues will be $9.76billion. At the time of writing, the province has not yet provided projections beyond 2021– 22. Resource revenues might improve but, given that oil futures indicate that oil prices are expected to decline to Actual High medium-term projection Low medium-term projection Long-term projection 2000–01 2002–03 2004–05 2006–07 2008–09 2010–11 2012–13 2014–15 2016–17 2018–19 2020–21 2022–23 2024–25 2026–27 2028–29 2030–31 2032–33 2034–35 2036–37 2038–39 2040–41 0 2 4 6 8 10 12 Figure 5.2. Nonrenewable resource revenue (actual and projected) as percentage of household incomes, 2000– 01 to 2040– 41 Source: Projections from fiscal 2022 to fiscal 2026 are the author’s own. Projections from fiscal 2027 on are based on Tombe (2018). 97 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Sales Tax 97 $65 per barrel over the next three years, resource revenues might not be sustained (ARC Energy Research Institute 2021). Given the uncertainty, I simply assume that resource revenues will continue to be $10billion each year until 2026– 27. The two projections imply quite different mediumterm futures, but both lead to the same end. The more optimistic forecast is positive in that it implies that Alberta avoids a slow resource revenue recovery and a prolonged period of exceptionally low resource revenues. However, both projections lead to Tombe’s 2027– 28 projection. At that time, resource revenues are expected to amount to 3.15percent of household income— still well below pre2015 levels. Hence, it appears unlikely that nonrenewable resource revenues will recover to levels experienced during the first decade of the century when the economy boomed and provincial government budget surpluses were the norm.4 What about the long term? While resource revenues are notoriously difficult to predict, Trevor Tombe (2018) has ventured a look at Alberta’s fiscal future to 2040. Figure 5.2 shows the predicted contributions of resource revenues relative to household incomes to 2040 using my projections from 2021– 22 to 2026– 27 and Tombe’s projections from 2027– 28 on. The graph also shows the percentages back to 2000, for comparison.5 The projections assume that a restoration of the energy market and improved resource revenues would be accompanied by improvements in household incomes. As figure 5.2 shows, the longterm projections for the contributions of resource revenues are rather gloomy. Resource revenues as a percentage of household incomes are not predicted to increase beyond the government’s projected 2021– 22 level of 3.8percent. Indeed, under the more optimistic mediumterm projections (which assume that resource revenues are steady at $10billion per year to 2026– 27), the percentage simply gradually declines to 2.8percent in 2040– 41. From 2027– 28 to 2040– 41, the average is only 3.0percent. This is somewhat less than onehalf the 6.4percent average from 2000– 01 to 2014– 15 and about twothirds of the average from 2009– 10 to 2014– 15, with the latter being a period during which the province was already experiencing fiscal problems. This longterm projection is even well below the 4.4percent average experienced during the lows of the late 1980s and throughout the 1990s (see figure 5.1). https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 98 McMillan https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Thus, these projections suggest that growing resource revenues alone will not restore the fiscal comfort Alberta enjoyed before 2015– 16. Projections are uncertain and are the product of the underlying assumptions. As is typical, a range of assumptions were used in deriving the longterm projections presented here. The 2027– 28 to 2040– 41 projections reported in figure 5.2 are the average of eight specifications. Those eight are the result of Tombe’s (2018) baseline and optimistic resource revenue projections in combination with four of my household income projections. It is also interesting to look at the range of outcomes that the set of specifications imply. That range is determined primarily by the difference in the assumptions about resource revenues.6 Figure 5.3 presents the high and low projections of resource revenues relative to household incomes for the years 2027– 28 to 2040– 41 along with, for perspective, the mediumterm projections for the previous five years (as outlined in figure 5.2) and the actual levels from 2015– 16 to 2020– 21 (as outlined in figure 5.1). The low longterm projection line links to the low mediumterm projection shown in figure 5.2 in 2027– 28. The low longterm projection for 2027– 28 is actually, at 2.84percent, the highest level of that series. It then declines to 2.45percent by 2040– 41. Actual High medium and long-term projection Low medium-term projection Low long-term projection 2015–16 2017-18 2019-20 2021-22 2023-24 2025-26 2027-28 2029-30 2031-32 2033-34 2035-36 2037-38 2039-40 0 0.5 1 1.5 2 2.5 3 3.5 4 Figure 5.3. Nonrenewable resource revenue (actual and projected) as percentage of household incomes, 2015– 16 to 2040– 41 Source: Longterm projections are based on Tombe (2018). 99 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Sales Tax 99 Over the thirteenyear longterm projection period, resource revenues average 2.68percent of household incomes in the low projection scenario. The high projection scenario looks rather different. It starts with the sharp increase in resource revenues projected in August 2021 for 2022– 23, which are assumed to continue to 2026– 27 (Government of Alberta 2021a). That mediumterm projection transitions smoothly into the beginning of the longterm high projection in 2027– 28, which is the beginning here of Tombe’s optimistic projections. Though optimistic and being a considerable improvement from the six years of fiscal 2015 to fiscal 2020, the 3.5percent level in 2027– 28 is still modest compared to the percentages before fiscal 2015. In addition, while the percentage is projected to almost be maintained until 2031– 32, it thereafter declines gradually to 3.0percent in 2040–41. The average over the thirteen years is 3.29percent. The differences between the low and high projections are not dramatic. Indeed, they are probably disappointingly small, especially given that even the high estimate is only about half of the 6.4percent level that resource revenues generated over the first fifteen years of the century prior to the 2015– 16 recession. Hence, even if resource revenues considerably exceed baseline expectations, they will still be insufficient to generate enough provincial government revenues to match even the moderate, let alone the high, levels of the past. Hence, it appears that even in recovery Alberta will be facing an extended period of relatively low resource revenues. During this time, resource revenues will be unable to contribute nearly as generously to provincial budgets as they have previously. It is possible that future resource revenues might exceed current expectations and, specifically, Tombe’s (2018) projections post2021– 22. For one thing, as Tombe notes, his projections do not include (or do not fully include) the transition of oil sands projects from preto postpayout phases of the royalty system because of a lack of information. For another, Tombe is not the only one making projections. In 2017, the Canadian Energy Research Institute projected oil sands (bitumen) royalties to 2036 (Millington 2017, figure E7). Those estimates had royalties exceeding $20billion in 2023. It’s worth noting, however, that this amount was about twice the $10.4billion that the province projected for that year in its “Path to Balance” in the 2018 budget (Government of Alberta 2018, 86).7 More recently (although it does https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 100 McMillan https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 not include projections of government revenues), the Canadian Energy Research Institute also put forward a less rosy view, projecting oil sands production to 2039, with two of three scenarios allowing for setbacks in longterm output (Millington 2020a, 2020b). 8 Also, the US Energy Informa - tion Administration in its Annual Energy Outlook 2020 reduced its nominal forecasts of West Texas Intermediate oil prices for the 2021 to 2040 time period by an average of $27.28, from a twentyyear average of $124.10 in 2018 to $96.81.9 In its Annual Energy Outlook 2021, the Energy Information Administration’s reference case projected oil prices returning to 2019 levels ($57 per barrel) after 2025. Clearly, projections can differ widely.10 For consistency, the analysis here relies on Tombe’s (2018) estimates. What impact might lower resource revenues have upon provincial government expenditures in the absence of generating additional revenues (i.e., taxes) if the budget is to be balanced? The answer is substantial spending cuts. Since 2000, Alberta’s program expenditures have averaged 21.7percent of household incomes with little yeartoyear variation. Resource revenues contributed an average of 6.4percent of that 21.7percent (or just under onethird) before 2015– 16. If future resource revenues amount to 3.0percent of household income rather than 6.4percent, that implies a revenue gap of 3.4percent of household income that must be met by expenditure reductions in order to balance the provincial budget. That decrease alone implies that a reduction of 15.7percent in program expenditures is needed if additional revenues are not to be raised from other sources. However, larger debt requires that more interest also be paid, which means that, for the budget to be balanced, program expenditure must be reduced further. Using 2022– 23 as an example, additional interest will increase the demand for funds by at least 1.0percent of household income. Combined, the loss of resource revenues plus the higher interest costs would necessitate a 20.3percent reduction in program spending (i.e., to 17.3percent of household incomes) in order to balance the budget by 2022– 23. The UCP government laid out a plan in its October 2019 and February 2020 budgets to achieve budget balance in 2022– 23 (Government of Alberta 2019, 2020b). Taking the findings of the MacKinnon Report as justification (Blue Ribbon Panel on Alberta’s Finances 2019), the plan was (and still appears to be) to hold total expenses constant at approximately 101 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Sales Tax 101 $56billion.11 The COVID19 crisis has upset those plans, but the subsequent budget documents and accompanying pronouncements suggest that post2021– 22, the expenditure freeze will effectively continue, though the timing of budget balance will be delayed (Government of Alberta 2020a; 2021a; 2021c, 7 para. 5).12 Tombe (2020) predicts that this strategy could result in budget balance in 2026– 27. Overlooking the blip due to COVID19 and recovery plan expenses in 2020– 21 and 2021– 22, what are the consequences of freezing total expenditures? That is, what would happen to the expenditures that fund public goods and services for Albertans if total expenses are held constant at approximately $56billion until 2026– 27? To answer these questions, we first have to account for the fact that population will continue to grow— specifically, from 4.43million in 2020 to an estimated 4.76million in 2026 (based upon Alberta’s expected mediumterm population growth path). Over that time, per capita program expenditures would decline from $12,576 to $10,832 (a nominal reduction of 14percent). At the same time, we must consider that prices will continue to increase. Accounting for inflation, real per capita program expenditures would fall to $9,503 in 2020 dollars (a 24percent drop). Household incomes will also change over the six years. Comparing program expenditures to predicted household incomes, the percentage would decline from 21.8percent to 16.8percent (a 23percent drop). The consequences of balancing the budget by freezing total spending for a sustained period, then, are large reductions in real program expenditures and thus in the provincial services available to Alberta residents. Given the current plans, how might Alberta’s program spending compare with that in other provinces? Here, the comparison is limited to looking forward to 2023– 24 because that is the year to which several provinces forecast revenues and expenditures.13 Assuming that Alberta is back on its spending target path in 2023– 24 and it and other provinces are past their pandemicrelated expenditures, Alberta in 2023– 24 plans to spend $12,191 per capita (in nominal dollars) on programs. Interestingly, this amount is essentially equal to British Columbia’s planned expenditure of $12,361 per person in that year. 14 The comparison with British Columbia is of interest because it is one of the three “big” provinces with which the MacKinnon Report made comparisons, the others being Ontario and https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 102 McMillan https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Québec (Blue Ribbon Panel on Alberta’s Finances 2019). Québec anticipates 2023– 24 spending of $14,174 per person. There is no2023– 24 Ontario forecast in the November 2021 tables, but the Royal Bank of Canada September 2020 report recorded $10,231 per capita for 2022– 23. 15 Thus, by 2023– 24 Alberta would achieve program spending per person equal to the average per capita spending in the other three big provinces. 16 In addition, it is very likely that by 2026– 27 the spending freeze will result in only Ontario spending less per capita than Alberta (and Alberta might even be lower than Ontario). Making interprovincial comparisons through the lens of household income provides further insight. Program spending as a percentage of household incomes in Alberta has been essentially equal to that in British Columbia and Ontario extending back to at least 2005– 07 (McMillan 2018). Typically, program expenditures in Alberta (at about 21.7percent) represent essentially the same share of household incomes as those in the two lowestspending provinces. In the other seven provinces, the shares have been much larger, averaging 29.1percent. Pursuing an expenditure freeze to 2026– 27 would reduce Alberta’s program expenditure share to 16.8percent of household income, or about 20percent lower than recent levels in British Columbia and Ontario. How might Albertans respond to substantial reductions in provincial government expenditures and services in a persistent lowresourcerevenue environment? If resource revenues materialize much as projected, and alternative revenues (e.g., expanded tax revenues) are not employed, anticipated real reductions in program expenditures in the order of 20 to 25percent will be necessary to balance the budget.17 The idea that Albertans will prefer reductions of this magnitude seems remote for various reasons. One reason is that such cuts would leave Alberta— a highincome (if not the highestincome) province and definitely the province with the lowest tax— at the bottom of the provincial spending ladder. Another is that Alberta tested low spending during the early Klein years when public program expenditures reached a low of 19percent of household incomes in 1998– 99, but that level was abandoned within two years to move closer to the 21.7percent post2000 average. The estimated budgetbalancing cuts would reduce program expenditures to about 17percent of household incomes, a level that Albertans have not experienced within the last 103 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Alberta Sales Tax 103 fifty years at least. Currently, Albertans are being asked to absorb the entire reduction in resource revenues as a reduction in provincial services. Experience suggests that it is unlikely that, at least after adjusting fully to the alternatives, Albertans will prefer that option. Consumer theory supports the argument. A decrease in resource revenues effectively increases the tax price (or tax cost) of provincial services. Consumer behaviour suggests that when faced with a higher price of an important product in the budget, they normally reduce the consumption of that product somewhat but also reduce expenditures on other products to some degree. Not all of the cut is made to expenditures on the more expensive product. In the public finance context, this suggests that citizens will prefer some reduction in government goods and services in combination with some reduction in private goods and services— that is, some tax increase. What might such a service reduction– tax increase tradeoff look like? To illustrate, if Alberta was to levy a 5percent harmonized sales tax (HST), which would be the lowest rate among all other provinces, it would generate revenue amounting to about 2.1percent of household incomes. Of the 3.4percent budget gap expected to be left by diminished future resource revenues, that amount would leave 1.3percent (or just over onethird) to be met by reduced expenditure, and in turn reduced service.18 For a more specific example, consider an HST in the context of the 2019– 20 fiscal year. A 5percent HST in 2019– 20 would have generated about $5.3billion. That revenue would have reduced the budgeted deficit of $8.7billion to $3.4billion.19 If the 5percent HST had been combined with $3.4billion in expenditure reductions— a 60:40 split of tax revenue to spending cuts— the budget would have been balanced. Even with $5.3billion of additional tax revenue, Alberta would have maintained a significant tax advantage over every other province and, notably, a tax advantage of $8.2billion over Ontario, the nextlowesttaxed province. 20 Yes, even with a 5percent HST, Albertans would still have paid $8.2billion less in taxes than if taxed under the Ontario system. The already reduced and projected low contributions of resource revenues to the Alberta government will make the province’s revenue base more similar to those of other provinces. Even if the mediumterm improvement forecast offers some relief, the longterm picture is unchanged. In this https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 104 McMillan https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 situation, it is reasonable to expect that Alberta’s tax structure will need to, and will, become more like those of the other provinces. Besides resource revenues, the obvious difference between Alberta and other provinces is Alberta’s lack of a general sales tax. Also, pursuing alternative sources (such as PIT or CIT) for equivalent revenues appears generally economically and politically unappealing. Hence, when fiscally squeezed, an Alberta sales tax seems the logical and, indeed, the inevitable choice. As demonstrated earlier, energy prices and government resource revenues are notoriously difficult to predict. Hence, resource revenues might exceed our expectations. If so, Albertans would be delighted. Although this possibility exists, we should still address the existing and projected budget gaps quickly through both tax and fiscal restraint measures to restore budget balance. This call to action has only been reinforced by the additional negative fiscal consequences of the COVID19 crisis. Making the adjustments and, in particular, introducing a modest HST, would open neglected opportunities. The good fortune of unexpectedly large resource revenues resulting in unexpected surpluses would create an opportunity for Alberta to adopt a fiscal strategy supportive of a province richly endowed with resources but experiencing large resource revenue and economic volatility. Surpluses arising from any new, bountiful resource revenues should be allocated towards reducing provincial debt, accumulating a stabilization fund to avoid borrowing during cyclic downturns, augmenting the Alberta Heritage Savings Trust Fund to cover population increases and inflation (that is, maintaining it in real, per capita terms), and establishing a program to distribute earnings to Albertans should saving become adequate.21 To put it plainly, should the province be so blessed as to realize resource revenues beyond those projected here, it should not relapse into devoting those revenues to expenditure increases and/or tax reductions. Instead, it should use them to reset its fiscal course and direct funds to a suite of (probably modest) savings alternatives. The Alberta government’s nonrenewable resource revenues have shrunk in relative importance as they have failed to keep up with population growth, price change, and real income growth. Since 2015, these revenues have hovered at record lows. The sharp boost in resource revenues expected in 2021– 22 will not solve Alberta’s immediate fiscal problems and https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 111 6The Volatility of Alberta’s Tax Bases Implications for Tax Policy Choices Ergete Ferede Over the last two decades, on average, the largest single source of revenue for Alberta’s government comes from nonrenewable resources when oil and natural gas prices are high, while PIT and CIT provide the second and third major sources of revenue for the government. 1 Resourcedependent economies such as Alberta rely heavily on resource revenue to fund their various public services and infrastructures. As a result, their budgets are often exposed to the vagaries of fluctuating world commodity prices. Previous analyses of Alberta’s resource revenue volatility focus on finding ways to reduce the volatility of this type of revenue (Landon and Smith 2010). This chapter focusses instead on the crucial role that taxes can and do play in providing stability for government budget planning. Such a study is crucial for Alberta in particular, given its current economic and fiscal prospects. The amount of tax revenue that a provincial government collects depends on both its tax rates and tax bases. A tax base is the income or consumption that is (or, the case of sales tax in Alberta, could be) liable to taxation. The three major tax bases I will be focussing on are CIT, PIT, and PST.2 In the absence of tax rate changes, the stability of government https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 112 Ferede https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 tax revenue depends on how the tax bases respond to the business cycle. The business cycle refers to the fluctuations in output, or GDP. One main feature of business cycles is that most macroeconomic variables such as the various tax bases tend to fluctuate together. Thus, the business cycle poses an important challenge to policy makers and budget planners as it can have a significant effect on tax bases, and thus on government tax revenues. The main objective of this chapter is to assess the volatility of Alberta’s major tax bases by looking at how, exactly, they respond to the business cycle. Ultimately, the chapter aims to answer the question: Could the provincial government lessen the adverse impacts of revenue volatility by changing the tax mix? Taxation in Alberta The Alberta government spends on various essential public services such as health care, education, infrastructure, social services, and so on. The sources of funds for these services come from tax revenue, nonrenewable resource royalties, various fees, and federal grants. Between 1981 and 2016— the sample period used throughout this chapter— around twothirds of Alberta’s revenue come from taxes. The amount of tax revenue that the government can collect significantly depends on the overall performance of the economy. This is because the various tax bases tend to fluctuate with the economy. Like other Canadian provinces, Alberta imposes CIT and PIT on tax bases that are generally consistent with the federal government’s definition of tax bases. However, unlike all other provinces, Alberta does not levy a PST. Figure 6.1 shows the shares of ownsource revenue (excluding resource revenue) accounted for by Alberta’s various tax revenue sources, as well as those of Alberta’s two neighbours, Saskatchewan and British Columbia, and for Ontario and Canada as a whole.3 Aside from resource royalties and nonrenewable resource revenue, PIT accounts for the largest share of Alberta’s revenue over the period under consideration: about 32percent. The comparable figures for British Columbia, Saskatchewan, and Ontario over the same period were 31, 36, and 33percent, respectively. 113 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Volatility of Alberta’s Tax Bases 113 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 CIT accounts for the second largest share of the province’s tax revenue, averaging 13percent over the 1981 to 2016 period— the highest in the country. The remaining 55 or so percent of Alberta’s revenue over the same period comes from other ownsource revenue such as investment income, net income from government business enterprises, and other revenue including premiums, fees, and licenses. Figure 6.1 shows the average actual revenue accounted for by different taxes in Alberta and other selected provinces. This is, however only one way to understand potential variations in provincial governments’ tax revenues. Another way is to look at tax bases. Figure 6.2 shows the per capita tax bases for Alberta and other selected provinces over the same sample period. Again, we include British Columbia, Saskatchewan, Ontario, and Canada as a whole for comparison purposes. As figure 6.2 shows, during the period under consideration, Alberta has the highest CIT and PIT bases per capita when compared to the other 0 5 10 15 20 25 30 35 40 British Columbia Alberta Saskatchewan Ontario Canada Personal income tax Corporate income tax Provincial sales tax Figure 6.1. Tax revenue shares of selected provinces as percentage, 1981 to 2016 Source: Author’s calculations using data from Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data— All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http:// www .policyschool .ca/ publication -category/ research -data/. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 114 Ferede https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 provinces and to the Canadian average. Alberta also has the largest PST base, even though the province does not currently levy a PST. Figure 6.2 thus suggests that Alberta has huge tax revenue potential, particularly if it taps into the hitherto unused PST base in the province. It should be noted that tax bases are sensitive to tax rate changes. Thus, the government’s tax rate choices impact tax revenue through both changes in the tax rate and their resulting effects on the tax base. Generally, an increase in a tax rate results in decrease of the tax base. Similarly, when governments lower tax rates, there will be more economic activity and the tax base can expand (Dahlby and Ferede 2012). The Alberta government introduced a flatrate income tax system in 2001, which significantly lowered the progressivity of the PIT system in the province. Other things remaining the same, this change resulted in less volatility in PIT revenue. However, there are more factors than just tax rate that effect tax base changes, meaning that we cannot rely on tax rate changes alone to eliminate tax base volatility. It is important to see how tax bases vary over time. Since we are interested in assessing the volatility and responses of tax bases to the business cycle, it is better to look at how 0510 15 20 25 30 35 40 45 50 Saskatchewan British C olumbia Ontario Alberta Canada Personal income tax Corporate income tax Provincial sales tax Figure 6.2. Tax bases per capita for selected provinces, 1981 to 2016 ($thousands) Source: Author’s calculations using data obtained from Department of Finance, Canada, workbooks used in the calculation of equalization entitlements, provided at the author’s request for data. 115 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Volatility of Alberta’s Tax Bases 115 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 the tax bases evolve over time relative to the business cycle, measured in terms of fluctuations in GDP. Looking at tax bases as a percentage of GDP allows us to see the size of the tax base compared to the total GDP at a given time, as well as how the size of the tax base changes relative to GDP over time. Figure 6.3 shows the three tax bases as a share of GDP in Alberta over the sample period. We can glean the following facts about Alberta’s tax bases and GDP from figure 6.3. First, although there are temporary ups and downs, the tax bases are shown to be somewhat stable relative to GDP. Throughout the period under consideration, the share of the CIT base in GDP is the lowest. Prior to 1988, the PST base had the highest share. In 1988, there was a dramatic jump in the PIT base due to that year’s major federal income tax reform, which eliminated several exemptions and deductions. As provincial tax rates were, at the time, given as a percentage of the federal rate, this reform significantly expanded the PIT base in every province, including Alberta. Consequently, since 1988, the PIT base has been higher than both PST and CIT bases. 0% 10% 20% 30% 40% 50% 60% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Personal income tax Corporate income tax Provincial sales tax Figure 6.3. Alberta’s tax bases as a share of GDP (percent), 1981 to 2016 Sources: Author’s calculations using data obtained from Department of Finance, Canada, workbooks used in the calculation of equalization entitlements, provided at the author’s request for data; Statistics Canada, “Table 3610022201: Gross Domestic Product, ExpenditureBased, Provincial and Territorial, Annual (× 1,000,000),” released 9 November 2021, https:// doi .org/ 10 .25318/ 3610022201 -eng. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 116 Ferede https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Relation of Tax Bases to Business Cycle in Alberta This section assesses the volatility and comovement of Alberta’s tax bases and GDP during the business cycle. Tax Base Volatility As is common in the literature, volatility is measured using the standard deviations of variables: the higher the standard deviation, the higher the volatility of the variable. To understand the volatility of Alberta’s tax bases, however, we must look at them in relation to fluctuations in the province’s GDP, or business cycle. These fluctuations— the cyclical component of the GDP— are called the “output gap”: the deviation of an economy’s actual GDP from its full potential GDP, or what it would achieve it if were producing at its full capacity. The output gap is not an observable variable and therefore must be estimated. There are a number of different techniques we can use to filter the data in order to isolate the cyclical components of all of our variables of interest, including the estimated output gap. The specifics of how these calculations are carried out are not important here. The point is that each technique isolates the cyclical fluctuations in our variables in different ways, and thus sees them from different perspectives. The simplest of all these methods is log differencing, which simply uses the growth rates of GDP and the tax bases to assess how they fluctuate over time. Another strategy is logquadratic detrending, which isolates the cyclical components in the data by removing the effects of changes in trend, or mean, over time. This method thus shows you only the fluctuations in the data, undistorted by trends.4 Arguably, however, the most commonly used method of filtering these datasets is the HodrickPrescott (1997) technique, or HP filter. The HP filter involves using a sophisticated statistical procedure to isolate shortterm fluctuations related to the business cycle, allowing us to see cyclical fluctuations separate from longterm trends. In table 6.1, I use these techniques to filter Alberta’s CIT, PIT, and PST base datasets over the sample period. I then calculate the standard deviations of this filtered data to shed light on their volatility from different perspectives. The results in table 6.1 show that, no matter how you filter the data, 117 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Volatility of Alberta’s Tax Bases 117 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 CIT, PIT, and PST bases are more volatile than GDP, with the CIT base showing the highest volatility and the PST base showing the least volatility. Knowing the standard deviations of these variables for the whole sample period gives us a quick glance at the general volatility of each repeated variable in the long term, but it doesn’t allow us to look at this volatility in any detail. We may, for instance, want to know how the volatility of the tax bases evolve over time. To this end, figures 6.4 and 6.5 chart the standard deviations of each variable on an annual basis over the course of the sample period (using HPfiltered data, as this method is more commonly used in the literature). There are various ways of computing standard deviations for the purpose of assessing volatility. In figure 6.4, I use standard deviations computed using a rolling windows method. This method does not flatten out outlier data, and thus allows us to see in detail all of the spikes and dips of the business cycle over time. By contrast, the recursive or sliding window method, which I use in figure 6.5, is not influenced by the presence of outlier observations. It therefore provides a better picture of the general trends of Alberta’s tax base volatility over time. Table 6.1. Volatility of Alberta’s tax bases and GDP, 1981 to 2016 Cyclical components measured using: Log differencing method Logquadratic detrending method HPfilter method Grossdomestic product 3.4 4.1 2.9 Corporateincometax 16.9 31.2 14.8 Personalincometax 9.6 14.4 8.7 Provincialsalestax 7.5 8.8 6.9 Source:Author’scalculationsusingdataobtainedfromDepartmentofFinance, Canada,workbooksusedinthecalculationofequalizationentitlements,provided attheauthor’srequestfordata;StatisticsCanada,“Table36-10-0222-01:Gross DomesticProduct,Expenditure-Based,ProvincialandTerritorial,Annual (×1,000,000),”released9November2021,https://doi.org/10.25318/3610022201-eng. Note:Volatilityismeasuredbystandarddeviation(inpercent)ofthevariously calculatedcyclicalcomponentsofeachvariable. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 118 Ferede https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Again, higher standard deviation indicates higher volatility. As figures 6.4 and 6.5 show, while all the three major tax bases are generally more volatile than GDP, Alberta’s CIT base shows the highest volatility and its sales tax base exhibits the lowest volatility. This is broadly consistent with the general perception that sales taxes are relatively more stable than other tax bases— yet Alberta, with its highly volatile resource revenues, is currently the only province in the country that does not rely on PST. These findings suggest that Alberta could benefit significantly in using sales tax bases as a reliable and stable government tax revenue source over the course of the business cycle. 0 5 10 15 20 25 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Gross domestic product Personal income tax Corporate income tax Provincial sales tax Figure 6.4. Volatility of Alberta’s tax bases (five-year rolling window), 1981 to 2016 Sources: Author’s calculations using data obtained from Department of Finance, Canada, workbooks used in the calculation of equalization entitlements, provided at the author’s request for data; Statistics Canada, “Table 3610022201: Gross Domestic Product, ExpenditureBased, Provincial and Territorial, Annual (× 1,000,000),” released 9 November 2021, https:// doi .org/ 10 .25318/ 3610022201 -eng. Note: Volatility is measured by standard deviation (in percent) of the HPfiltered variables. 119 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 The Volatility of Alberta’s Tax Bases 119 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Tax Base Comovement During the business cycle, many macroeconomic variables including tax bases tend to grow and decline together. In this section, I check whether the movement of our variables of interest are correlated. Comovement among variables is often measured by the correlation coefficient: a numerical measure between −1 and +1 that describes the linear relationship between two variables. A strong correlation can either be positive or negative, with +1 describing a strong linear relationship in the same direction, −1 describing a strong linear relationship in opposite direction, and 0 describing the strongest possible disagreement. In the context of this study, I’m interested in whether there are positive correlations between the growth and decline of tax bases and the growth and decline of GDP. Table 6.2 presents the correlation coefficients of each tax base’s movement with GDP movement. GDP itself is not presented in the table because 0 2 4 6 8 10 12 14 16 18 20 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Gross domestic product Personal income tax Corporate income tax Provincial sales tax Figure 6.5. Volatility of Alberta’s tax bases (recursive window), 1981 to 2016 Sources: Author’s calculations using data obtained from Department of Finance, Canada, workbooks used in the calculation of equalization entitlements, provided at the author’s request for data; Statistics Canada, “Table 3610022201: Gross Domestic Product, ExpenditureBased, Provincial and Territorial, Annual (× 1,000,000),” released 9 November 2021, https:// doi .org/ 10 .25318/ 3610022201 -eng. Note: Volatility is measured by standard deviation (in percent) of the variables. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 120 Ferede https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 in such a comparison, the movement of GDP would have +1 correlation with itself. The first three columns in table 6.2 describe “static correlation”— the correlation between the growth rate of tax bases with different ways of measuring the business cycle. The first column measures the correlation between the growth rates of tax bases with the growth rate of GDP. The second column shows the correlation coefficient between the growth rates of tax bases and the business cycle, this time measured by the output gap obtained through logsquare detrending of GDP (Mendoza 1991). The third column shows the correlation coefficient between the growth rates of tax bases and the business cycle measured by the cyclical component of the HPfiltered GDP series. These correlations are consistent with the discussion of the volatility of tax bases and GDP that we already saw in table 6.1 and figures 6.4 and 6.5. All the tax bases show similar positive comovement with the business cycle in these three scenarios. The fourth column of table 6.2 shows the correlation coefficients for HPfiltered GDP and HPfiltered tax bases. When all variables are HPfiltered, their correlation is referred to as “dynamic correlation” Table 6.2. Correlation of tax base movement with business cycle (GDP), Alberta, 1981 to 2016 Correlations computed based on: Growth rates of all variables Output gap and tax base growth HPfiltered GDP and tax base growth All variables, HPfiltered Corporate incometaxbase +0.50 +0.50 +0.36 +0.37 Personalincome taxbase +0.30 +0.24 +0.41 +0.26 Provincialsales taxbase +0.01 +0.15 +0.35 +0.11 Source:Author’scalculationsusingdataobtainedfromDepartmentofFinance, Canada,workbooksusedinthecalculationofequalizationentitlements, providedattheauthor’srequestfordata;StatisticsCanada,“Table36-10-022-01: GrossDomesticProduct,Expenditure-Based,ProvincialandTerritorial,Annual (×1,000,000),”released9November2021,https://doi.org/10.25318/3610022201-eng. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 127 7Oil, Democracy, and Social Solidarity The Case for an Alberta Sales Tax Elizabeth Smythe The COVID19 pandemic generated extraordinary challenges for governments and for communities. It has revealed and amplified the extent and impact of inequality in both health outcomes and livelihoods in Canada. The accompanying economic crisis has also posed enormous fiscal challenges for both federal and provincial governments. Nowhere has this been more evident than in Alberta, where an already weak economy was further buffeted by the collapse of oil prices and the soaring costs of dealing with the crisis. Even before the pandemic, the Alberta government faced tough choices in how to deal with its budgetary challenges due to weak oil prices and a recession. As we look ahead to the province’s future, we need to look at how Alberta could rebuild its economy and society in a way that is more equal, democratic, environmentally sustainable, and just. I will argue that one element of accomplishing this is a revision of the province’s tax policy that moves away from its dependence on nonrenewable resource revenues and protects important programs such as education and health care from massive cuts made in the name of addressing revenue shortfalls and a growing deficit. Such cuts would further erode social solidarity— that is, our sense of interdependence as a https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 128 Smythe https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 community with a shared desire to enhance wellbeing and meet the needs of all. Major cuts to health and education— the two biggest programs in terms of Alberta’s budget— hit the most vulnerable the hardest, as do cuts to other programs. Such a revision of tax policy, for reasons I outline below, should include a PST. It should also, however, look to restore tax fairness, lessen inequality, and address the looming crisis of climate change. The social costs of income inequality have been well documented, as have the power imbalances that are created when income inequality levels are high— imbalances that ultimately erode democracy and undermine our sense of social solidarity as citizens. The environmental and human costs of climate change are, at this point, so abundantly clear that no one can seriously question the need for action. As matters currently stand, however, neither federal nor provincial policies promise adequate solutions to address these two very pressing problems.1 If we, as Albertans, were to succeed in meeting the challenges of climate change and income inequality, what would our province look like? It would have • a diversified and sustainable economy that provides the province with stable sources of revenue, including a sales tax, thus allowing for reliable budget forecasting; • an energy plan enabling a swift transition away from fossil fuels; • public services and programs that support human health and wellbeing and promote social and economic equity; and • a tax system and revenue stream that are not vulnerable to the boombust cycle and are distributionally fair. Sadly, that is not the Alberta we have today. Why is that? In my view, if we, as socially conscious Albertans, wish to narrow the income gap and reduce our contribution to climate change, we must be willing to reconsider the sources of revenue on which the provincial government currently relies to fund policies and programs. I will argue that a PST, while not without its drawbacks, would offer a predictable source of revenue that could be 129 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Oil, Democracy, and Social Solidarity 129 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 used not only to fund the vital public services and programs on which Albertans rely, but also to help reduce the deficit and pay down the debt. More than this, by freeing the province from its historical dependence on the oil industry and royalty revenues, a sales tax would be a small step toward restoring democracy and would allow Alberta to develop a credible policy on climate change. The Problem: Volatile Oil Prices, Volatile Revenues As figure 7.1 indicates, volatility is the norm with oil prices. Particularly since the latter half of 2014, we have seen gluts of oil on the market cause dramatic changes in the price of crude oil— plummeting, for instance, from well over $100 per barrel to under $30 by early 2015. As figure 7.2 illustrates, the share of Alberta government revenues that derive from the exploitation of nonrenewable resources is equally unstable. For example, the crash in oil prices that occurred in the fall 20142012 2016 2018 2020 2022 $140 $120 $100 $80 $60 $40 $20 $0 Figure 7.1. West Texas Intermediate crude oil prices per barrel, 2012 to March 2022 (US $) Source: “Crude Oil Prices: 70 Year Historical Chart,” Macrotrends, accessed 10 November 2021, https:// www .macrotrends .net/ 1369/ crude -oil -price -history -chart. Note: West Texas Intermediate is a light crude oil that serves as a global benchmark reference price. Other oils are priced in relation to it, depending on their characteristics. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 130 Smythe https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 of 2014 was reflected in a dramatic drop in resource revenues to what journalist Robson Fletcher (2016) characterized as a “historic low.” In a province so heavily invested in the fossil fuel industry, these sometimes radical fluctuations in global oil prices can thus have serious ramifications for the health of the Alberta economy overall. How Did We Get Here? Comparative political scientists have been studying states where resource extraction has become the overwhelmingly dominant sector in the economy for years, noting the paradox that the huge wealth generated by production in most circumstances does not reduce poverty, increases inequality, and impedes the development of democracy. Sometimes called 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 1965–66 1967–68 1969–7 0 1971–7 2 1973–74 1975–76 1977–78 1979–80 1981–82 1983–84 1985–86 1987–8 8 1989–9 0 1991–92 1993–94 1995–96 1997–98 1999–00 2001–02 2003–04 2005–0 6 2007–08 2009–10 2011–1 2 2013–1 4 2015–16 2017–17 2019–20 Figure 7.2. Alberta government revenue from nonrenewable resources, 1965– 66 to 2019– 20 ($millions) Sources: Ronald Kneebone and Margarita Wilkins, “Canadian Provincial Government Budget Data— All Provinces Updated to 2019/20 and Some to 2020/21” (Excel spreadsheet), October 2021 version, available from University of Calgary School of Public Policy, “Research Data,” http:// www .policyschool .ca/ publication -category/ research -data/; Government of Alberta, 2019– 20 Annual Report, available from https:// www .alberta .ca/ government -and -ministry -annual -reports .aspx. 131 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Oil, Democracy, and Social Solidarity 131 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 the oil curse, the development of petrostates is widely seen, as Taft (2017, 125) notes, in countries where the rapid expansion of resource sector production occurred in the context of weak state institutions.2 Although historically this has not been the case in Alberta, there is persuasive evidence that the oil industry functions as a “deep state”— one in which power operates independently of overt political processes in accordance with its own agenda, such that the mechanisms of democracy no longer serve their purpose. In such a situation, the will of the people is overridden by other interests and the autonomy of government is compromised, producing what is sometimes called a “captive” state. In an economy that is heavily dependent on the oil industry, “the distinction between the government and the corporation gets blurred” (Taft 2017, 107). The privileged position of capital in a liberal democracy and the structural power it gives corporations over public policy has long been recognized (Lindblom 1977). As Urquhart (2018) argues, this structural aspect of power has been accompanied by discursive power reflected in a set of ideas variously called “free market ideology,” neoliberalism, or neoconservativism. These ideas have become, since the ReaganThatcher decades, a form of “market fundamentalism.” Critics from George Soros to Joseph Stiglitz note proponents of neoliberalism have a quasireligious faith in the unqualified benefits of unregulated markets (even in the absence of confirming evidence) and a zealous hostility to government intervention and regulation over the activities of forprofit corporations. The dominance of market fundamentalism since the 1980s has been reflected in changes to tax regimes in many countries that belong to the OECD (Organisation for Economic Cooperation and Development), where there has been a marked shift away from progressive PIT and CIT and toward taxes based on consumption as major sources of government revenues. This accelerated in the 1990s because of changes to technology and trade agreements that further integrated global markets (Eggar, Nigai, and Strecker 2016). The result has been an enhanced mobility of capital and highincome individuals and a perception among governments that they must compete for investment. Not surprisingly, this has further resulted in a growing level of income inequality across many countries, including Canada (OECD 2011). The Conference Board of Canada (2012) https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 132 Smythe https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 ranked Canada twelfth out of seventeen comparable countries on inequality, giving it a score of C in addressing the issue. In terms of the Alberta government, the petroleum sector, and its corporations, the shift to market fundamentalism is reflected in the contrast between the Lougheed era and subsequent Alberta governments. The Lougheed government showed some willingness to intervene in the economy and took the view that the province and its people owned the resource and should get a greater share of the economic rent. In addition, Lougheed’s government legislated that a portion of nonrenewable resource revenue should be put aside for future generations in the Alberta Heritage Savings Trust Fund, created in 1976. As a result, royalties on production were increased. In contrast, by the midto late 1990s, a much different regulatory and royalty regime had been put in place, which spurred the rapid expansion of the tar sands. These changes were accompanied by the introduction of a discourse of competitive tax regimes geared toward attracting and retaining corporate investment in Alberta. As Ralph Klein proclaimed in 1993, “Unlike some others, my government will not try to buy prosperity through higher taxes. Instead, it will build on Alberta’s existing advantage of low taxes and its free enterprise spirit to develop the most competitive economy in North America. The government will strengthen the Alberta Advantage and sell it aggressively around the globe” (quoted in Eisen, Lafleur, and Palacios 2017, 5). Along with this new royalty regime came a set of tax changes, including a flat tax of 10percent on personal income and the progressive reduction of the corporate tax rate from 15.5percent in 2001 to 10percent in 2006, where it remained until the lengthy Progressive Conservative reign ended in 2015. The Klein government tax changes, as Kathleen Lahey (2015) shows, not only contributed to increasing income inequality in Alberta overall but also widened the inequality gap in income between men and women. As figure 7.3 shows, as of 2014, Alberta had the highest level of income inequality of any province in Canada. Nonrenewable resource royalty rates have also proved difficult to increase. In addition, contributions of nonrenewable resource revenues to the Heritage Fund stopped in 1987. Thus, as Taft (2017, 124) notes, royalties became “a politically addictive way to cut taxes and subsidize services” 133 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Oil, Democracy, and Social Solidarity 133 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 in Alberta, but one that relied on narrow sources of revenue. Such a policy has proved to be disastrously volatile in the wake of the priceproduction war between Russia and Saudi Arabia and the economic impact of the COVID19 pandemic. According to the Government of Alberta’s (n.d.) regularly updated data, by April 2020, the price per barrel of West Texas Intermediate had dropped from US$63.86 in April 2019 to US$16.55, while Alberta’s Western Canadian Select had plummeted in the same period to US$3.50 per barrel from US$53.25 the year before. 0 2 4 6 8 10 12 PEI NB QC NS NL MB SK ON BC AB Figure 7.3. Provincial levels of income inequality (decile ratio), 2014 Source: Conference Board of Canada, “Income Inequality,” accessed 15 March 2021, https:// www .conferenceboard .ca/ hcp/ provincial/ society/ income -inequality .aspx. See the graph headed “Alberta and BC Have the Highest Income Inequality Using Data on Decile Ratios,” which draws on raw data from Statistics Canada. Note: These rankings are based on decile ratios for each province— that is, the ratio of the share of income garnered by the top decile of the population (the wealthiest 10percent) to the share garnered by the bottommost decile. https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 134 Smythe https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Petro- , Captive, or Deep State: The Influence of the Oil Industry Oil companies and organizations such as the Canadian Association of Petroleum Producers have had strong and growing influence, especially since the 1990s, over both provincial and federal government policies and regulations, even when governments shifted in a direction that appeared to be less sympathetic to the industry. As both Taft (2017) and Urquhart (2018) indicate, this power is manifested in aggressive lobbying (documented by CayleyDaoust and Girard 2012), financial campaign contributions, and backroom influence at both the provincial and federal party levels. In addition, the industry accounts for a significant portion of Alberta’s GDP and is a major employer with the mining, oil, and gas extraction industries accounting for 140,300 jobs in 2017 (Government of Alberta 2017). Still, oil and gas is by no means the largest employer even with the efforts of the industry lobby, and those sympathetic to it, to exaggerate the indirect employment effects (Barney 2017). Alberta, as the owner of the nonrenewable resource being extracted within its borders, has a stake in resource exploitation given that resource rents generate revenues for the government that, while unstable, are a significant source of income. This is unique to states where resource extraction dominates. In some such states, that income flows into the pockets and Swiss bank accounts of corrupt leaders or elites. In other cases, such as Alberta, it has allowed for lower levels of corporate and other income taxation; at the same time, with limited alternative revenue sources, it has created a government dependence on the industry and expanded levels of production. Reliance on this revenue and expanded production, given increasingly volatile oil prices, has directly transmitted the risk and uncertainty of oil price fluctuations onto the provincial budget and ultimately onto the funding of provincial programs and services. Two instances of failed efforts to increase royalty rates in the past provide evidence of the influence of the industry over governments. The first occurred under the premiership of Ed Stelmach, a northern Alberta politician who replaced Ralph Klein as the leader of the Progressive 135 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Oil, Democracy, and Social Solidarity 135 https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 Conservatives in 2007. Stelmach pledged, as had most of his rival leadership candidates, to initiate a royalty review considering rising oil prices and criticisms, including from the Auditor General, that the province was failing to get its fair share. Despite an open and transparent review process and a panel that was knowledgeable and credible even to the oil industry, its fairly modest recommendations, which included creating an oil sands severance tax, were met with fierce opposition from the companies and the Canadian Association of Petroleum Producers. Together, they laid out a scenario of cutbacks to capital investment, slow growth, and major increases in unemployment. The government blinked and permitted a behindcloseddoors “consultation” with industry on the recommendations. The resulting changes were minimal. Along with corporate tax changes, this effort left the industry in a place as good as or better than where they were prior to the review. As Urquhart (2018, 194) observes, “perceptions of oil’s growing scarcity, Alberta’s political stability, a welleducated Canadian labour force, and the province’s proximity to the American market” in 2007 should have provided leverage to extract a greater proportion of the economic rent, yet the government was unable to do so. In the second case of failed royalty rate increases, the prospects for a significant change seemed likely with the 2015 election of an Alberta NDP government under Rachel Notley. As an opposition MLA to the previous government, Notley had sponsored a private member’s bill to create a Resource Owners Rights Commission. Echoing the language of Lougheed, Notley’s proposed commission would have involved broad representation of different groups and would have engaged in regular monitoring of the royalty regime. During the 2015 election campaign, however, Notley’s position on this commission became increasingly ambiguous as the party gained momentum (Urquhart 2018). Postelection, the promise to review the royalty regime was implemented in the form of a oneshot royalty review. The review lacked transparency and reflected not the perspective of the owners of the resource but the impact of any royalty changes on the Alberta Advantage and on oil sands investment and competitiveness. Any serious commitment to overhauling the regime evaporated with the 2015 oil price crash. With a failure to raise royalty rates and tax changes https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 136 Smythe https:// doi .org/ 10 .15215/ aupress/ 9781771992978 .01 that enhanced dependence on nonrenewable resources, a case could be made that other sources of revenue needed to be found in the tax system. Raising taxes, however, has long been a politically fraught topic in Alberta. Has Tax Become a FourLetter Word? In their 2013 edited collection Tax Is Not a FourLetter Word, Alex and Jordan Himmelfarb argue that, while citizens in general do not like taxes, historically there was a recognition among Canadians that taxes, however irksome, are the price we pay for civilization and a better future, for the privilege of living in Canada and the opportunities that provides. While there are legitimate disputes regarding how much tax and of what sort, we have generally accepted higher taxes as a way of funding valued public goods and services, redistributing income to avoid the worst excesses of inequality, and shaping the future to the extent we can. (Himmelfarb and Himmelfarb 2013, 1) However, as the Himmelfarbs note, with the dominant discourse of market fundamentalism, “tax has gone from irritant to fourletter word, not to be uttered in public and certainly not to be discussed favourably in politics” (1). As part of this transformation, “the notion that taxes are somehow separate from the services and goods they buy is now a part of our political culture” (3). In addition, increasing levels of distrust of government in many liberal democracies, including Canada, has contributed to the negative view of taxation. The discussion of taxation is part of a bigger conversation about the role of government and, in particular, questions of community, equality, fairness, and justice. Those wanting to shrink the role of government have used the discourse of keeping taxes low and cutting taxes to achieve that end, even though they may claim some other justification. A good example is the federal government 2008 cut of the GST rate from 7percent (implemented in 1991) to 5percent. While fulfilling a 2006 Conservative Party election promise, this cut had little or no support among economists or public finance experts. It led, however, to over $14 billion in