9 Join the Sales Tax Parade! PST and the Road to Alberta’s Economic Recovery

Kenneth J. McKenzie

“Even talking about introducing a sales tax in Alberta would be political suicide.” These words were spoken to me by Alberta Premier Ralph Klein during a personal meeting in his office in 2003. I think few would disagree that this sentiment has been taken as gospel in Alberta for a long time—but I also think the situation is changing.

To be clear, when I speak about a sales tax, I mean a broadly based tax applied to a wide range of goods and services, with few exemptions. More specifically, I mean a value-added tax: a tax that is only applied at the final consumption stage, and not on business inputs. Our federal GST is an example of this kind of tax. Therefore, when I speak about sales tax, I mean a tax that can be fully harmonized—that is, combined—with the federal GST.

The question of whether a sales tax should be part of the revenue mix has been well studied by economists, and the economic merits of sales taxation are well established. For one thing, a sales tax is significantly less costly than other forms of taxation. It’s cheap to implement. In economic speak, it is less distortionary, and its marginal cost of public funds (MCF) is low. MCF measures the full economic cost of a tax “at the margin”—that is, the cost of raising one dollar in revenue by way of a given tax. Because taxes change prices, they cause people’s behaviour to change, resulting in “lost transactions” that consumers, firms, workers, and so on would have presumably engaged in were the tax not there. These lost transactions are a real economic cost to society.

In a paper written for the University of Calgary’s School of Public Policy, Ferede and Dahlby (2016) measure the MCF of the three largest revenue sources for Canada’s provinces: PIT, CIT, and PST. For Alberta, they calculate the MCF for PIT as $1.41, and for CIT as $2.91. This means that raising one more dollar in revenue by way of the PIT costs the Alberta economy $1.41, consisting of the $1.00 in tax revenue raised plus 41 cents. The 41 cents represent the value of the transactions lost to the tax’s implementation, primarily in the form of foregone work. Though startling, this is nothing compared to the $2.91 MCF of the CIT. As Ferede and Dahlby rightly emphasize in their article’s title, this makes the CIT “the costliest tax of all.” In stark contrast to PIT and CIT, the MCF associated with a PST in Alberta is only $1.00. This is because the province doesn’t currently have a sales tax, and no tax means no lost transactions. In the provinces that do have a PST—by which I mean every other province—Ferede and Dahlby still found the MCF to be lower than that of either of the other taxes. While this is just one study, this basic result is widely established in economics—a broadly based, value-added sales tax is the least costly way to raise revenue. The sales tax is the cheapest tax of all!

In October 2000, I wrote a paper for the Canada West Foundation entitled Replacing the Alberta Personal Income Tax with a Sales Tax: Not Heresy but Good Economic Sense (McKenzie 2000). In that paper, I argued that because sales taxes are economically much less costly than PIT, Alberta would be well served by eliminating the PIT altogether and replacing it with a sales tax. I calculated at the time that a sales tax of about 8 percent would largely replace the PIT in Alberta. I argued that the resulting increase in incentives to work, save, and invest would result in faster economic growth and higher living standards for Albertans. That paper garnered quite a bit of attention at the time (including a rather long and somewhat prickly interview with Mary Lou Finlay on CBC’s radio show As It Happens). Others have since undertaken similar analyses. For example, Mintz and Bazel (2013) argue that implementing an Alberta sales tax of 8 percent would eliminate the PIT for the majority of Albertans and generate a sizeable increase in economic activity.

A common argument against sales taxes from a social equity standpoint is that they are considered to be regressive, imposing a greater burden on low-income individuals than high-income individuals. From this perspective, a progressive tax—one that imposes a higher tax rate on those with a greater ability to pay—is more desirable. However, the regressivity of sales taxes is actually debatable. A person’s ability to pay taxes is determined by their standard of living, which is often measured in terms of current income. Many economists argue that consumption is in fact a better measure of an individual’s standard of living than income. This is because money that may not be captured by an income tax—inherited wealth, for example, or offshore income not reported to tax authorities—is still subject to sales tax if it is used to consume goods and services within a given jurisdiction. Moreover, increased reliance on sales taxation can shift some of the burden of taxes away from younger generations struggling to earn a living in a floundering economy to older generations who have benefited from previous periods of buoyant economic growth, and who will benefit from publicly funded health care as they age. Finally, and importantly, even if sales taxes are somewhat regressive, a refundable tax credit similar to the federal GST credit could mitigate the tax’s impact on low-income earners.

The economic arguments for the introduction of a sales tax into the tax mix in Alberta are, in my view, well established and compelling. Moreover, Alberta’s governments are, and have long been, well aware of these arguments. Klein, for instance, was aware of my 2000 Canada West Foundation paper. When I met with him in 2003, he even claimed to have read it. This began a lengthy conversation about the possibility of a sales tax in Alberta (so lengthy in fact that I missed my plane home, and Klein wrote a note of explanation to my wife on Office of the Premier letterhead). The premier indicated that he was personally sympathetic to the idea of having a conversation about a sales tax in Alberta, but politically he couldn’t commit. Indeed, for years Alberta’s premiers have considered it “political suicide” to even talk about a sales tax in the province. Why is that? The answer is lack of public support. As Klein told me, he did not see a parade forming in support of a sales tax—though if he ever did, he would be happy to jump in and lead it.

As Labby (2020) says, the circumstances for such a parade are emerging. The economic environment in Alberta in 2021 is very different than it was in 2000 when I wrote my Not Heresy paper. Alberta has been hit by a series of body blows that have coalesced into the dual crisis of the COVID-19 pandemic and systemic challenges facing the non-renewable resource sector. Historically, we have been able to rely on non-renewable resource royalties as a major source of revenue, which has allowed the government to spend more and tax less than other provinces. This reliance has manifested in a tax mix that has not had to include a sales tax.

While resource revenues have always been volatile, their volatility has been driven home in the late 2010s and early 2020s more forcefully than ever before. Even before the onset of the COVID-19 pandemic, Alberta was dealing with the challenges accessing tidewater by way of pipelines, the associated large discounts for Alberta oil, the prospect of declining resource revenues associated with technological change (e.g., shale oil production in the United States), and looming environmental concerns. While predictions of peak oil demand are highly uncertain, some argue that structural economic changes precipitated by COVID-19 will accelerate the inevitable flattening and eventual decline in the curve. But we do know one thing for certain: regardless of what lies ahead, the Alberta of the future will not look like the Alberta of the past.

We also know that Alberta’s fiscal situation is more vulnerable than it has ever been, and this is not likely to change. In its fiscal sustainability report for 2017, the federal Office of the Parliamentary Budget Officer indicated that “current fiscal policy in Alberta is not sustainable over the long term,” estimating that “permanent tax increases or spending reductions amounting to 4.6 percent of provincial GDP ($14.1 billion in 2020 dollars) would be required to achieve fiscal sustainability” (72). This would amount to “a permanent 25 percent increase in the tax burden (including federal transfers) or a 20 percent reduction in program spending” (72). These findings are buttressed by Trevor Tombe (2018, 2021), who undertakes long-term projections of resource royalties, federal transfer payments, investment income, property taxes, and other sources of revenue and spending. Like the Parliamentary Budget Officer, Tombe concludes that Alberta’s fiscal policies are unsustainable, and that the provincial deficit could grow to a historically high $40 billion by 2040.

Jason Kenney’s UCP government has pledged to put the province on the road to fiscal sustainability. Shortly after taking office in 2019, the Kenney government established a financial review panel to report on some of these issues: the Blue Ribbon Panel on Alberta’s Finances (2019). Little could be done to implement the panel’s recommendations, however, before the pandemic hit. The COVID-19 pandemic changes the outlook for Alberta’s economy, and not for the better. In its August 2021 fiscal update, the Alberta government announced that its deficit (including capital spending) for 2020–21 was $16.96 billion. Debt is projected to hit $105.7 billion by the end of March 2022, for a debt-to-GDP ratio of 19.6 percent. Even if the fiscal situation improves with oil prices rising as we emerge from the pandemic, this is likely to be a short-run phenomenon and does not change the underlying long-run unsustainability built in to the Alberta budget.

Since the pandemic began, the Government of Alberta (2020) has released Alberta’s Recovery Plan to create jobs, boost investment, and grow Alberta’s struggling economy. Post-pandemic economic recovery is important, but sustainable economic recovery is crucial. The province should not forget that if it wants to set itself up for a sustainable economic and fiscal future, this recovery will require more than spending cuts and hope for a jump in resource revenues. It will require adjustments to the province’s revenue sources, as well. On the revenue side, in my opinion, the days of wine and roses are over. Alberta can no longer afford to be the sole province without a sales tax. Previous studies that argued for sales tax, including my 2000 paper, focussed on using it to replace or reduce existing tax revenue sources in Alberta, such as the PIT or CIT. While this remains a legitimate line of attack to explore even in the current environment, with Alberta’s resource revenues on a downward trend, this model is becoming less and less feasible. The conversation is instead turning toward using a sales tax not to replace, but to supplement existing sources of revenue to address the fiscal pressures. At the time of writing, however, the Kenney government has adopted neither of these approaches. Indeed, it has done little in terms of adjusting government revenue aside from accelerating a previously announced reduction to the provincial CIT rate—something that will ultimately work to reduce the province’s revenues, putting them under even more pressure in the short and intermediate terms than they already are.

In a recent paper, Daria Crisan and I argue that “the choices may be difficult, but the math is simple” (Crisan and McKenzie 2021, 21). We show that a 6 percent sales tax coupled with the repatriation of the consumer-level carbon tax (both with targeted credits for low-income households) and modest expenditure restraint that brings Alberta in line with the other provinces on a per capita basis would put Alberta’s finances on a sustainable path. In light of the province’s historic deficit and what is predicted by most to be a long, slow climb out of economic malaise, it is difficult to imagine how Alberta could achieve fiscal sustainability in the long run without introducing a sales tax into its revenue mix. As the public becomes more aware of Alberta’s fiscal situation and more open to alternative sources of revenue, conditions may well be developing in the province for a sales tax parade to begin, whether we like it or not. The government would do well to lead it.