Tag Archives: Fiscal Responsibility Act

Alberta can’t afford to ignore the Provincial Sales Tax

rat2.jpg.size.xxlarge.promoRat-free, PST-free and Liberal-free” has been a Conservative mantra in Alberta since the reign of Pierre Elliott Trudeau. But is this trifecta now in jeopardy?

The decline of government revenues caused by the drop in the price of oil has once again sparked the discussion around resource diversification and tax increases in Alberta. And with talk of economic doom and gloom, Premier Jim Prentice is managing expectations and preparing Albertans for the upcoming provincial budget and likely a Spring provincial election.

Jim Prentice Premier of Alberta

Jim Prentice

Will the budget include deep funding cuts or tax increases? Under most circumstances, deep budget cuts would be the natural choice for the long-governing Progressive Conservatives, but there is growing speculation that Mr. Prentice could be softening the ground for the introduction of a Provincial Sales Tax (PST) in Alberta.

At a 2013 provincial fiscal summit, economist Bob Ascah suggested that a 1 per cent sales tax could raise $750 million in annual revenue for the provincial government. Diversifying income sources with a five or six per cent sales tax could help soften the blow of the dreaded $7 billion gap that Mr. Prentice has warned will face the provincial budget if oil prices do not increase by next year.

Late last year, Mr. Prentice declared in a speech to the Calgary Chamber of Commerce that he would not consider introducing a PST, but the Premier has changed his tune in 2015, saying that everything is on the table.

This is not the first time PST has been at the centre of discussion in Alberta. Few Albertans may know it, but Alberta did have a two per cent sales tax for a short period ending in 1937.

Alberta Premier Peter Lougheed

Peter Lougheed

In the aftermath of the last major economic downturn in June 2008, when the price of oil dropped from a high of $145 per barrel in July to a low of $30 per barrel in December 2008, PC cabinet ministers like Doug Griffiths openly mused about PST. When prices increased, resource royalties once again poured in provincial coffers and Alberta’s political class moved away from the PST discussion.

Facing a decline in the price of oil in 1984, Premier Peter Lougheed publicly mused about introducing a sales tax, but did not act on it.

The Alberta Taxpayer Protection Act, introduced by Premier Ralph Klein in 1995, states that a referendum must be held before a Provincial Sales Tax can be introduced. The PCs have shown in the past that they have no problem sweeping away old laws like this one. In 2009, the PC government amended their much touted Fiscal Responsibility Act which prohibited deficit budgets in order to pass a deficit budget.

Relying on a boom-bust economy, a real lack of long-term financial planning has been the biggest weakness of the 43-year governing PC Party.

Ted Morton MLA

Ted Morton

The introduction of a PST would be a bold and courageous move – one that could land Mr. Prentice in Alberta’s history books beside statesmen like Mr. Lougheed and Ernest Manning. And while under normal circumstances this would be a kiss of death to a Premier’s political career, we may now be witnessing a once in a lifetime opportunity to introduce a sales tax.

The Wildrose Opposition is both leaderless and in complete disarray, and the opposition New Democrats and Liberals could have a difficult time protesting a move that could majorly diversify the government’s revenue stream. And with the departure of Derek Fildebrandt late last year, the local Tax Outrage Industry is lacking a major spokesperson.

The move also comes with the support of former Finance Minister Ted Morton, a member of the right-wing Calgary School, who recently penned an opinion-editorial in the Calgary Herald calling for a PST. And while he was teaching at the University of Alberta, Mr. Prentice’s Chief of Staff Mike Percy admitted that a “sales tax gives you greater stability.”

Kevin Taft Liberal Party MLA Alberta

Kevin Taft

As reported on David Climenhaga‘s blog, Conference Board of Canada chief economist Glen Hodgson also weighed in on Alberta’s tax dilemma: “Not having a provincial consumption or sales tax is highly popular and has been great politics, but it denies the provincial government a steady and stable source of revenue through the business cycle.”

To get a grasp of how embarrassingly low our tax rates current are in Alberta, Kevin Taft in his 2012 book, Follow the Money, says that Alberta could increase its tax rates by $11 billion and would still have the lowest tax rate in Canada.

Critics will argue that a sales tax would unfairly penalize low income Albertans, and they are right. The government should also scrap the short-sighted flat tax and return to a real progressive income tax system. Alberta is currently the only province with a Flat Tax, the odd-ball brain child of former Treasurer Stockwell Day.

While Albertans look with envy at Norway’s $900 billion petroleum fund, it could be decades before our government imposes meaningful increases in natural resource royalties. The PCs bowed to political pressure from the oil and gas industry and paid a significant political price when trying to implement meaningful increases to resource revenues in the late 2000s.

The strongest opposition to the introduction of a PST may come from inside the PC caucus. Many PC MLAs are said to be unconvinced that Albertans would support a PST, and the presence of 11 anti-tax former Wildrose MLAs in the government caucus could stiffen the opposition from within. Skeptical MLAs would probably be correct that they will receive a blowback from Albertans in the short-term, but the right decisions are not necessarily the most popular when they are initially implemented. And without a credible government-in-waiting, now could be the the only time the PCs could implement a PST.

Alberta should strive to remain rat-free forever, but on the revenue front, we need to break our dependency on resource revenues that cripple our provincial government each time there is a hiccup in the market.

Alberta is always in Tough Economic Times

“They don’t know what to do with tough economic times. It was easy enough to govern when the money was flowing in, when things were going well. They took all the credit for it at that time. It’s much harder to govern, and the mark of a good government is how they handle it, when times get difficult.” – Ray Martin, Leader of the Official Opposition (June 13, 1986)

Jim Prentice Premier Alberta

Jim Prentice

Despite Alberta’s prosperity, Premier Jim Prentice is warning we could be heading into tough economic times. The decline in the world price of oil has spooked the 43-year governing Progressive Conservative establishment and the corporate elites in downtown Calgary.

The perilous “price trough” has led Mr. Prentice to warn of a potential $7 billion revenue shortfall if oil prices remain at lower than expected levels for the entire 2015/2016 fiscal year. According to a government spokesperson, some of the missing $7 billion could come from revenue streams such as land leases, but at this point the number is largely based in speculation and politically spin.

Mr. Prentice’s prophetic $7 billion shortfall becomes more startling when learning the Alberta Government is projected to collect only $7.5 billion in crude oil and bitumen royalty revenue in the 2014/2015 budget year. This projected revenue is based on the price of Western Canada Select (WCS) oil remaining at $77.18 per barrel. Although the yearly average price is $84.02 per barrel the current price of WCS  has dropped to $48.44 per barrel.

Ray Martin NDP MLA School Trustee Edmonton Alberta

Ray Martin

If the “tough economics times” message sounds vaguely familiar, that is because it is. In oil-rich Alberta, we hear a lot from our political leaders about tough economic times, even when times are prosperous. In most cases, our politicians are managing voters’ expectations and positioning themselves to take credit as ‘prudent fiscal managers’ when the world-wide price of oil inevitably increases.

Meeting the Challenge of Tough Times” was the name of the three-year economic plan launched by Premier Ed Stelmach’s PC government in 2009.

Bitumen Bubble Alberta

Bitumen Bubble

The sharp decline of natural gas royalty revenue and that year’s world-wide recession, which felt more like a mild economic pause in Alberta, even convinced the Tories to amend the Klein-era Fiscal Responsibility Act to allow the government to pass deficit budgets.

And in January 2013, Premier Alison Redford used a televised address to warn Albertans that a $8 billion shortfall in the provincial budget was being caused by an ominous “bitumen bubble.” Ms. Redford’s bubble was then used as justification to slash funding to colleges and universities by 7% in that year’s budget.

Alberta Finance Minister Ron Liepert

Ron Liepert

But the PCs have not always predicted “tough economic times.” In 2012, then-finance minister Ron Liepert told the Calgary Chamber of Commerce to expect $16 billion in projected resource revenues by 2015. A huge jump in revenue would certainly increase the likelihood of Mr. Prentice calling a provincial election in early 2015.

Alberta’s government has heavily depended on revenue from cyclically priced resource commodities for decades. After years of unrestrained growth, no one should be surprised that Alberta’s economy could slow down.

The question is how we respond to actual tough economic times in Alberta. Was NDP Official Opposition Leader Ray Martin correct in 1986 when he said that “they don’t know what to do with tough economic times”?

While some right-wing think tanks call for a return to brutal slash and burn fiscal policies, the implementation of real long-term financial planning would probably be a more mature solution.

Alberta Norway Oil Fund Money Savings

Comparing Alberta’s Heritage Fund and Norway’s Petroleum Savings Fund.

Norway, a country with 5.1 million people, invests oil revenues into the Government Pension Fund Global and contains more than $857 billion. The fund was established in 1990 to smooth out the disruptive effects of highly fluctuating oil prices. Oil-rich jurisdictions like Norway prove that economies can be both economically prosperous and environmentally green.

Alberta Premier Peter Lougheed

Peter Lougheed

Alberta, a province of 3.6 million people, launched the Alberta Heritage Savings Trust Fund in 1976. Under the leadership of Peter Lougheed, the Heritage Fund initially received 30% of government resource revenues and was worth $12.7 billion in 1986. The Heritage Fund is now worth only $17.4 billion.

Facing tough economic times in 1987, the PC government of Don Getty halted all transfers to the Heritage Fund. Zero deposits were made between 1987 and 2004.

This week, PC MLAs passed Bill 11: Savings Management Repeal Act, which repealed the Savings Management Act, which was enthusiastically passed by the same group of PC MLAs in March 2014. The earlier bill would have diverted resource revenue to the newly created Alberta Future Fund, Social Innovation Endowment account and Agriculture and Food Innovation Endowment. The bill passed this week eliminates those new funds.

Kevin Taft Liberal Party MLA Alberta

Kevin Taft

Despite talk of revenue diversification, it is questionable whether the governing PCs would seriously consider increasing resource royalties, reinstating a progressive taxation system or introducing a provincial sales tax.

While many politicians view tax increases as politically unpalatable, a slight tax increase would not destroy the our province’s economy. “If Alberta increased its tax rates by $11 billion our province would still have the lowest tax rate in Canada,” Kevin Taft wrote in his 2012 book, Follow the Money.

Dr. Taft’s book breaks down government spending patterns over the past 30 years and details how corporate profits have skyrocketed in Alberta at the same time the PC Government has struggled with deficit budgets.

As a province with decades worth of dependence on revenues from natural resource royalties, it should not be a shock that we need to be smarter about how we plan and finance our government spending. Maybe our only problem is not our over reliance on cyclical natural resources revenues, but that the Progressive Conservatives are just bad fiscal managers.


Primetime Politics this week…
On this week’s Alberta Primetime politics panel, I joined Rob Breakenridge, Roberto Noce and host Michael Higgins to discuss the Gay-Straight Alliance debate, Moe Amery‘s texting-while-driving-demerits bill, and Bill 2: Alberta Accountability Act.