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Why raising taxes is a dumb idea

The last time Alberta was in a fiscal mess due to low energy revenues and over-the-top government spending, some politicians and pundits said what Albertans really needed was higher taxes. That was back in the late 1980s and early 1990s. Those voices were wrong then and they are wrong now.

For one thing, any fantasy that a tax hike will solve Alberta’s fiscal woes is the preserve of people who dream in tax-happy Technicolor.

Sure, tax reform is desirable. A provincial sales tax would be smart economic policy since sales taxes are some of the least harmful imposts.

However, that would be a smart move only if other, more damaging taxes, were reduced or scrapped to offset the new sales tax revenue, i.e., if it were revenue neutral.

But many sales tax proponents like it not because of its efficiency, but because they want higher overall taxes, rather than deal with Alberta’s spending problem.

Back in the last red-ink era, the government did raise taxes. In particular, in 1987 the province introduced new taxes and raised others by $1 billion, equivalent to 12.5 per cent of then-existing (own-source) revenues.

If the province upped taxes by 12.5 per cent today, the tax hike would amount to $4.4 billion. (I’m crunching the numbers based on the 2012-13 budget. The province no longer updates its revenue projections every quarter.)

To put that in terms the average person might care about, a $4.4-billion tax increase would mean one of the following: A 39 per cent hike in resource royalties; or a 47 per cent hike in provincial personal income taxes; or a doubling of corporate income tax; or a 250 per cent hike in the provincial portion of your property tax.

So pick your poison.

The Alberta tax talk, and dreams — for politicians — of new revenue, is based on some flawed assumptions. One is that behaviour doesn’t change if new and higher taxes come into play.

But remember when then-premier Ed Stelmach tried to raise resource royalty rates? That didn’t bring in the intended extra cash, because when you make some wells uneconomic to drill, any higher percentage of an undrilled well amounts to zero in actual dollars.

That doesn’t mean royalty rates can never be revisited; it does mean a government cannot impose a “rent” that defies the economic reality of a necessary return on investment. That return must trump what might result from putting cash in a bank, or from exploring outside of Alberta.

Another wrong assumption is that, because new Albertans create a demand for new infrastructure, higher taxes are a necessity.

However, new Albertans also pay taxes; it’s not as if they are freeloading.

The need for new schools and hospitals could more easily be serviced if the province was prudent on program spending (and thus created room for capital expenses).

For example, program expenditures are the largest portion of the provincial budget. In the 2011-12 fiscal year, the province spent $45.1 billion (program, capital and interest payments combined). Of that, one per cent was spent on debt interest with 13 per cent for capital expenditures; fully 86 per cent went to programs.

More capital spending could be afforded with current tax levels if the government didn’t continually overspend on the operating side of things.

Imagine, for example, if, over the past five years, the province had awarded inflation-only raises to teachers instead of raises that were double the rate of inflation.

Or, on the corporate side, imagine if the government had chosen not to subsidize carbon capture to the tune of $682 million between 2011 and 2015. Money would have been freed up for infrastructure.

But such moderation has not been a hallmark of Alberta’s government for some time. After accounting for inflation and population growth, per capita program spending rose to $10,526 in this current budget year. That’s up almost 10 per cent from 2005 levels ($9,594 per person).

Look back a bit further to 2000, and program spending is up by 26 per cent (from $7,808 per capita). Again, that’s the increase after inflation and population are factored in.

Those who seek higher and new taxes might recall this basic truth about human beings: people do not naturally flock to a place where the temperature can plunge to -30, or where it can snow in June. People come to Alberta, historically, because it provides opportunities.

If Alberta’s overall tax burden shifts to the level of British Columbia or Ontario (where four seasons exist), the province might find itself in a nasty pickle: less economic activity and less revenue than expected but higher taxes — and an irritated population.

After all, if you’re going to be heavily taxed by a profligate government, you might as well stay, or move to, where the weather is better.

Mark Milke is the director of Alberta policy for the Fraser Institute. This column was supplied by Troy Media (www.troymedia.com).

 

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