Afterword

Competing Schools, Confronting Myths

There is no single interpretation of the cause of Alberta’s fiscal problems. From the collection of different explanations, however, two distinct (and opposing) views can be discerned. One school of thought focusses on government spending—or, as some aver, overspending. Because the definition of any problem conceals its own solution, this argument’s proponents contend that the solution to Alberta’s fiscal woes lies in major, if not brutal, cuts in public expenditures—a phrasing with which Albertans of a certain age are themselves majorly and brutally familiar, having lived through the Klein government’s cuts in the early 1990s. The policies of the so-called Klein revolution—corporate tax cuts, public sector layoffs, privatization, and deregulation—mirrored similar actions taken by New Right politicians elsewhere at that time, especially in the United States and Britain. Within Alberta, at least, the impact of these cuts has since taken on a mythic status.

A second school of thought focusses on government revenues, specifically Alberta’s lagging tax effort, including, as this volume underlines, the absence of a sales tax. While there are valid points on both sides, I suggest that this second school forwards the more empirically defensible argument. The smoking gun for this argument is the well-known Alberta Tax Advantage figure from Alberta Treasury Board and Finance, replicated by Robert Ascah in chapter 1 (figure 1.1). It shows that Alberta collects over $14 billion less in revenue than Canada’s next-lowest-taxing province, Ontario. Even Alberta’s conservative-minded next-door neighbour, Saskatchewan, taxes an equivalent of $15.1 billion more than Alberta. One can still argue the need for responsible and accountable spending, but the idea that Alberta can cut its way to prosperity is a beggar’s belief, and indeed will continue to beggar the province.

Having a frank discussion about Alberta’s revenues, and the need for a sales tax specifically, first requires the sweeping away of some deeply held beliefs—particularly, as both Kevin Taft (foreword) and Ascah (chapter 1) articulate, the belief that Alberta is somehow exceptional compared to other provinces, and that taxes are an insult. These beliefs, ensconced within a broader subscription to small government—even while deferent to Alberta’s Big State (Harrison 2005)—have a long history, going back to the province’s founding in 1905. But, as Ascah shows (chapter 3), Alberta’s low tax regime has been possible only because of revenues from non-renewable natural resources. As Taft (foreword) notes, in recent decades, as much as 40 percent of Alberta’s economy has directly or indirectly depended on the petroleum industry.

Indeed, Ascah’s figures in chapter 3 show that, except for resource revenues, Alberta’s books have not balanced since the mid-1960s. The mantra of low taxes—christened as the “Alberta Advantage” during Klein’s 1993 election run—took on a mythic status after the Klein years in part by ignoring this reality. It is factually correct that, a couple of years after Klein’s election, Alberta eliminated both its deficits and its trifling debt. Indeed, the province sported a series of healthy surpluses while continuing to boast of the lowest taxes in Canada. The thing is, Alberta’s low tax “advantage” had little to do with these outcomes. The self-congratulatory boosterism built around the Alberta Advantage myth specifically ignores the role of non-renewable resource revenues in Alberta’s fiscal turnaround after 1997—a turnaround resulting largely from increased demand for, and thus a rise in the global price of, oil. In this equation, Alberta is a price taker, not a price setter. During the Klein years, Alberta merely rode the boom to the top before falling (again) during the next inevitable bust. This is a cycle familiar to all staples-driven economies.

The mythology of the Alberta Advantage has interfered with an honest and critical evaluation of economic policy within Alberta, specifically the role of taxes in this policy. It has inverted the causal relationship between Alberta’s prosperity and its taxes. Low taxes have often been cited as a major cause of Alberta’s prosperity, but in reality their contribution to the province’s wealth is largely incidental—a minor cause at most. It is more correct to see them not as a cause, but as a consequence of the province’s prosperity. Inverting this causal relationship has had the unfortunate result of delaying a serious long-term discussion of the role of non-renewable resource revenues in Alberta’s future.

Taxes and the Resource Curse

Harold Innis was writing about the problems faced by staples-based economies such as Alberta’s as early as the 1930s. He argued that such economies risk getting caught on the rollercoaster of boom and bust—something that Melville Watkins (2014, 151) later called the “staples trap”—but that this need not be their inevitable fate. Escaping the trap, Innis said, was possible with good political stewardship.

Alberta had a chance to make its escape years ago, when the province tried to take a different approach to both saving and investing for the future. After 1971, the newly elected government of Peter Lougheed employed the powers of the state to develop the oil sands. (They did so, Albertans tend to forget, with the help of the federal government.) Lougheed said Albertans should act like owners of the resource, and not as mere passive rentiers, as had been the practice under the previous Social Credit government. Lougheed’s Progressive Conservative government engaged in an aggressive policy of “province building.” Especially important to the issue of tax policy was the creation of the Alberta Heritage Savings Trust Fund. Lougheed argued for a royalty take of at least 35 percent, a large portion of which would go into the fund.

Unfortunately, the best laid plans of politicians go awry when faced by a recession. This was certainly true in the early 1980s, when the Lougheed government strayed from its original dictum. After that decade’s midpoint, as Melville McMillan notes (chapter 5), the percentage of resource revenues contributing to government revenues sharply declined. Fearful of asking voters to fill the fiscal hole with tax money, Alberta governments beginning with Lougheed instead began dipping into the sacred Heritage Fund. Common sense would dictate that this habit be reversed when good times returned, switching from draining the fund to replenishing it, but common sense has not prevailed. The temptation to use resource revenues to appease the appetites of voters has been hard for Alberta’s politicians to resist.

There are two important points to note here. The first is that Alberta’s governments since the Klein years have engaged in a policy of procyclical spending—that is, spending like drunken sailors when the revenue ship comes in, but throwing passengers overboard without life jackets when the ship leaves again. This policy is precisely the reverse of what economists going back to John Maynard Keynes would recommend for dealing with volatility in the economy. The second point is related to the first, and deals with arguments made in the MacKinnon Report (Blue Ribbon Panel on Alberta’s Finances 2019). The report focusses on government expenditures—specifically public sector wages, which tend to be high in comparison with workers in other provinces—as the root of all Alberta’s fiscal woes. This is an argument seconded by some of this book’s authors, and is correct as far as it goes. But there is an important codicil to this argument that needs some attention: just because a jurisdiction’s economy is reliant on resource revenues does not mean that the government must be, too.

Take Norway, for example. As Ergete Ferede notes in chapter 6, Norway—which, like Alberta, has a resource-based economy reliant upon oil revenues—has both a sales tax (a value-added tax) and a revenue stabilization fund. In fact, Norway’s Government Pension Fund Global, established in 1990, was modelled in part on the Alberta Heritage Savings Trust Fund. As of August 2021, the value of the Norwegian fund is US$1.4 trillion; Alberta’s Heritage Fund, meanwhile, is sitting at US$14.7 billion. The crucial difference between Norway’s fund and its Albertan counterpart is that Norway’s government spends little of its resource revenues, instead adding them to the fund’s earnings and reinvesting them abroad in nine thousand companies across seventy-four countries (Norges Bank, n.d.). This practice hasn’t changed since the fund was established. Norway thus doesn’t spend its resource revenue dollars to pay for public programs within the country, relying instead on tax revenues. By doing this, the country effectively exports its inflation. By contrast, Alberta has kept inflation at home by spending its royalty windfall within the province rather than investing it abroad. A by-product of this practice, to the chagrin of many Albertan employers, is the need to pay workers very high wages: workers, whether in the private or public sectors, must negotiate high wages in order to cope with Alberta’s high—and volatile—cost of living. But this is not inevitable. The Norway model shows how resource-dependent governments can get around chasing the inflation tail: invest non-renewable resource revenues abroad and tax appropriately for necessary, and predictable, government services at home.

Despite obvious counterexamples such as Norway, the myth that Alberta’s low taxes are the source of the province’s prosperity remains strong. Immediately after coming to power in 2019, Premier Kenney’s UCP government commissioned the Blue Ribbon Panel on Alberta’s Finances. The panel’s mandate was to examine government expenses only, not revenues. Not surprisingly, then, its final report did not focus on revenues either, and concluded that Alberta had a spending problem that could, once again, be cured by a heavy dose of public sector cuts (Blue Ribbon Panel on Alberta’s Finances 2019).

The report also states, however, that the level of cuts needed to eliminate Alberta’s deficit would go far beyond anything seen during the Klein era, and would raise the question of how much pain Albertans are willing to endure. Beyond the raw politics of austerity, one needs to consider the larger socioeconomic implications of severe cuts in further depressing aggregate demand in the short-term and causing irreparable harm to the economy’s chances in the long-term. Already, anecdotal evidence suggests Alberta’s best, brightest, and youngest are fleeing to locales where services and opportunities are better. Moreover, such cuts can only exacerbate the severe social deficits faced by the most vulnerable in the province.

The school of through that perpetuates the myth of government overspending as the source of Alberta’s fiscal ills remains powerful. Though perhaps not entirely believed by its purveyors, it nonetheless constitutes a psychological and, more importantly, political barrier to arguments presented by a second school of thought. This school, while not arguing against efficiencies in government spending—who would?—contends that Alberta’s fiscal difficulties stem from instabilities, and even insufficiencies, in its revenue streams, which have drawn over many years upon the non-renewable resource sector.

What, then, is to be done?

The Benefits of a PST—and How to Get There

If, as the assembled authors in this collection argue, relying on spending cuts alone will not solve Alberta’s fiscal problems and will risk damage in the short and long term, the question then turns to revenue reform. As this book argues, a necessary part of this solution is a PST. None suggest, however, that a PST is the only solution. Elizabeth Smythe (chapter 7) specifically states it is not “a panacea” to Alberta’s fiscal ails. Ascah similarly suggests a range of other forms of revenue, a sales tax being only one arrow in the fiscal quiver.

The array of sales tax proponents, including myself, span the political spectrum. Such wide-ranging agreement is rare on any issue—so why the unanimity? The authors in this volume note several positive benefits of a sales tax. First, sales taxes offer both predictability and stability of revenue. Second, sales taxes are efficient and less prone to tax avoidance than other measures—an efficiency that is enhanced when harmonized with the federal GST. Third, sales taxes are fair as they require temporary workers and visitors to pay for services they use while in the province, and also capture inherited wealth. Fourth, as Smythe argues in chapter 7, a sales tax would be “a small step toward restoring democracy” by freeing Alberta from its dependence on, and thus its subservience to, the oil and gas industry. Finally, a sales tax would broaden the sources of provincial revenues. Ultimately, a sales tax would make Alberta more resilient to economic circumstances beyond its immediate control.

These are good, rational arguments. They provide fodder for the notion that a sales tax might offer at least a partial solution to Alberta’s fiscal dilemma. What, then, are the barriers—psychological, practical, and political—to bringing in a PST for Alberta?

The most immediate alleged barrier is what critics refer to as Alberta’s “political culture.” Although the term is imprecise, it broadly refers to the manner in which people come to define problems and identify solutions—including some, excluding others. Albertans, it is said, are too viscerally opposed to a sales tax or, as Graham Thomson (chapter 2) colourfully describes it, a “political suicide tax.”

However, like so many other things discussed here, the barrier of political culture is not inevitable. No culture is static, especially in the face of obdurate political realities. Both Smythe (chapter 7) and Kenneth McKenzie (chapter 9) suggest public attitudes towards a sales tax may be mellowing. People may not like paying taxes—who does?—but most also recognize there are positive, collective benefits that accrue from paying taxes, such as having the vast array of public services upon which Albertans have come to rely.

To get to “yes” on the issue of sales tax, then, at least two related issues must be addressed. The first issue, as Ian Glassford (chapter 8) argues, is one of trust. Many Albertans are ideologically conservative. As such, they support the notion of small government; a few are even antigovernment. They believe that governments are both incompetent and wasteful, and that only private markets are capable of instilling fiscal discipline—a curious argument given the record of market failures since the late 1990s, topped off by the great recession of 2008–10, but I digress. This lack of trust can only be resolved through a clear and reasoned laying out of Alberta’s fiscal dilemma, the options for dealing with the problem (and the consequences), and how a sales tax must be part of any solution.

The second issue is one of fairness. There is no escaping it: a sales tax is regressive. Those at the bottom of the income scale have less disposable income than those at the top, but would pay the same proportion of tax on each purchase. As Ascah (chapter 10) points out, though, a sales tax is potentially less regressive than many other taxes and charges that Albertans already pay, such as licensing and school fees. For reasons of both political acceptability and social fairness, refundable tax credits such as those suggested by Smythe (chapter 7) and McKenzie (chapter 9) would need to be included in any proposal of a PST in Alberta. Low-income earners would receive an additional indirect benefit from the stabilizing of government programs upon which many depend. A sales tax with built-in tax credits would also assist low-income groups.

In other words, getting a “yes” on sales tax requires convincing Albertans of the benefits of sales tax; the sales tax must be sold. Unfortunately, the primary purpose of sales tax—to correct the imbalance between the services Albertans need (and demand) and the revenues to pay for them—too often gets lost, as does the sales pitch’s appeal. For instance, a lack of focus can be seen in arguments that a sales tax should be revenue neutral; that is, that money obtained through a PST should be used to lower corporate taxes (as Ferede argues in chapter 6) or personal taxes (as McKenzie argues in chapter 9). Such arguments largely ignore the immediate and serious problems that Alberta’s fiscal hole implies. In the case of corporate taxes especially, there is another problem: further reducing CIT is politically unsaleable, as Alberta’s corporate tax rates are already the lowest in Canada. If Albertans are to be convinced to accept a sales tax, the idea of lowering corporate taxes is a political nonstarter. It comes down to fairness again. As Ascah further notes in chapter 10, these arguments are based on the hope that higher revenues will, in the long run, result in increased corporate investment and personal spending—the so-called Laffer curve. While many mainstream economists continue to voice this (neoliberal) argument, the evidence from nearly forty years of practice is not persuasive; instead, one is reminded of Keynes’s (1923, 94) quip that, in the long run, “we are all dead.”

Glassford (chapter 8) makes a different pitch, suggesting that a PST be used to build up a cash reserve, the money from which would go into general revenues only when the economy was weak. But this, too, is currently, in my opinion, a political nonstarter. Private businesses are expected—and need—to build up cash reserves. However, the public expects governments, unlike private businesses, to take in only as much money as they need to provide services; anything else would be viewed as a form of hoarding that results in lessening aggregate demand. The howls of private business and regular taxpayers would be deafening. Indeed, a major problem of the Heritage Fund has been that too many Albertans—unlike Norwegians—have ignored the value of making long-term investments, and viewed the fund as nothing but a piggy-bank for satiating immediate needs—a view that politicians have been only too happy to nurture.

How, then, to really get to a “yes” on a sales tax? The path, as Ascah (chapter 10) suggests, is surely through education. In this regard, the establishment of a broad-based commission to look at Alberta’s fiscal situation in its entirety—that is, from both an expenditure and a revenue point of view—would be a good starting point. While a sales tax offers only a partial solution, it is nonetheless an important one that must be part of the commission’s deliberations. In the end, however, the biggest hurdle to overcome in implementing a sales tax is political will—the will, that is, of the general public to make this change. Most politicians are not leaders, but followers of their constituents—a fact McKenzie alludes to in chapter 9. To get sales tax through the Legislature doors, the general public must show elected officials that Alberta’s political culture is changing—that, all things considered, a sales tax is an acceptable alternative to an endless rollercoaster ride of funding for important services.

Changing Alberta’s political will towards sales tax may feel to many like a pipe dream. As Sherlock Holmes famously says, however, “When you have eliminated the impossible whatever remains, HOWEVER IMPROBABLE, must be the truth” (Doyle [1890] 2009, 71). So it is in Alberta’s long-standing fiscal dilemma. Our fiscal experience and projections have identified certain expenditure-related solutions to be impossible. What remains are solutions based in revenue reform, including the introduction of a sales tax. Although this solution, politically speaking, has long been viewed as an improbable, if not untenable, choice in the province, it is among the only reasonable choices that remain. Indeed, as McMillan (chapter 5) states, a sales tax is not just reasonable; it is “inevitable.” This book can only serve to speed on the inevitable.

References