7 Oil, Democracy, and Social Solidarity The Case for an Alberta Sales Tax

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 non-renewable resources is equally unstable. For example, the crash in oil prices that occurred in the fall 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 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 Reagan-Thatcher decades, a form of “market fundamentalism.” Critics from George Soros to Joseph Stiglitz note proponents of neoliberalism have a quasi-religious 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 for-profit 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 Co-operation 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 high-income 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) 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 non-renewable 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 mid- to 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.

Non-renewable resource royalty rates have also proved difficult to increase. In addition, contributions of non-renewable 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” 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 price-production war between Russia and Saudi Arabia and the economic impact of the COVID-19 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.

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 Cayley-Daoust 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 non-renewable 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 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 behind-closed-doors “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 well-educated 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). Post-election, the promise to review the royalty regime was implemented in the form of a one-shot 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 that enhanced dependence on non-renewable 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 Four-Letter Word?

In their 2013 edited collection Tax Is Not a Four-Letter 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 four-letter 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 foregone revenue annually, which put a major constraint on federal government spending.

The problem for those wanting to drastically shrink the size of government is that Canadians value many of the services governments provide, especially provincial government services such as health and education. Building on and encouraging distrust of government, the antitax movement has promulgated the “free lunch” version of tax cuts, which claims that more efficient spending and cutting can make up for all the lost revenue with no change to services by reducing the supposedly massive amount of waste present in current programs and expenditures. While disingenuous or deceptive at best, this painless vision of tax cuts has little basis in reality. Prior to elections, those seeking to cut taxes will make exaggerated claims about how much savings can be found in increasing efficiencies. Voters often find, however, that after elections, there is a real price to be paid for tax cuts, and that price is cutbacks to services and programs they value. This price tag is particularly steep for vulnerable populations who are especially reliant on these programs. As Himmelfarb and Himmelfarb (2013, 4) put it, “tax cuts based on the promise of ending the gravy train almost never find enough gravy.”

Whether Alberta has a revenue problem or spending problem is a topic of sometimes heated debate (canvassed by Ascah in chapter 4 of this volume), and conclusions vary based on the measures and ratios one uses to determine debt loads and the provinces to which one compares Alberta (Graff-McRae and Hussey, 2016). The reality is that, because Alberta has relied on revenue from non-renewable resources to subsidize the cost of providing services, Albertans have been able to demand and receive services without having to cover their full costs through the taxes they pay. Without this resource revenue subsidy, citizens would be obliged to confront the true cost of these services, as well as the sizeable gap between the current costs of public services and the amount of alternative revenue sources available to fund them. It is unclear whether citizens would choose reducing services over raising taxes in these circumstances, but there is evidence to suggest that the prospect of major cuts to close the revenue gap might lead them to consider the possibility of finding other revenue sources. The impacts of the pandemic have made some of Alberta’s fiscal challenges more visible to the public, which may be opening space for an honest conversation with citizens about possible solutions. Indeed, although a majority still oppose a PST, public opinion polling in 2020 reflects some shrinkage in this opposition (Labby 2020).

Research on public attitudes toward taxation in Canada also challenges the claim that raising taxes is political suicide for any government. As Frank Graves (2013) of EKOS Research Associates noted, the claim of citizens’ across-the-board hostility to all taxes is a myth; in fact, the attitudes of Canadians toward taxation are much more complex. If taxes are linked to a positive public purpose—for instance, funding valued services or programs or reducing inequality especially by increasing taxes on the wealthy—they are viewed more positively (Fitzpatrick 2012).

There have been similar findings in Alberta. While polls in 2015 and 2017 reported that the majority of Albertans were opposed to a provincial carbon tax, Ian Hussey (2017) of the Parkland Institute found through public polling that if you link a tax to the idea of funding services that people value, you get a different result.3 When respondents were asked directly about whether they support or opposed a carbon tax, 41 percent of Albertans supported it. However, when asked, “To what extent would you favour or oppose the Alberta carbon tax if you knew the funds were used to . . . invest in public health care and education[?]” support for the tax increased to 63 percent. In other words, people responded more positively to the carbon tax when the questions were worded in ways that linked the tax to various policies and programs that people valued. High levels of support were also found when the tax was linked to investments in public transit and renewable energy and was accompanied by rebates for lower and middle-income households (Hussey 2017, table 3).

The visibility of a tax also affects attitudes. Citizens tend to be more resistant to a highly visible tax, such as a sales tax. That being said, rebate programs targeting low-income households can often shift public views, as was the case with the federal government’s carbon tax proposal. On 23 October 2018, Prime Minister Justin Trudeau announced that, to make sure the federal carbon tax is revenue neutral, 90 percent of the revenue collected in the four provinces without a provincial carbon tax would be returned to lower-income households within those provinces, while the remaining 10 percent would be divided between hospitals, schools, and other organizations.4 Figure 7.4 illustrates the results of an Angus Reid Institute poll conducted shortly after the announcement of this plan, showing a national shift from opposition to the tax to support of it. The most dramatic shift was in Saskatchewan, where the government was in the process of challenging the carbon tax plan in court.

The poll also revealed a large generation gap between the 69 percent of younger respondents (eighteen to thirty-four years of age) who supported the plan, and the only 52 percent of older respondents (fifty-five years and older) who did. This may reflect differing generational attitudes about climate change. A subsequent poll just prior to the 2019 federal election revealed a majority of Canadians continued to see climate change as a priority, and 52 percent still moderately or strongly supported a carbon tax (though there were continuing regional gender and age divisions). Over 60 percent of those who opposed the tax, however, claimed that it was a “tax grab”—that is, an attempt to generate revenue without tying it to any particular public purpose (Angus Reid Institute 2019).

The argument that voters will reject parties or candidates that challenge the dominant discourse of tax cuts, small government, and balanced budgets was refuted by the results of the 2015 federal election, which was won by the Liberals, the only party to advocate running deficits to fund infrastructure spending. In the 2019 national election, deficits were a minor issue compared to leadership, climate change, and affordability, particularly of housing. Despite this, the leaders of the two major parties went back to the discourse of promising tax cuts, especially for the middle class, while they moved their commitments to balanced budgets further into the future. Neither party won either a majority of the popular votes or a majority of seats in the House of Commons—a reflection, perhaps, of the fact that voters’ choices are not solely focussed on taxes and deficits, but are driven by a range of issues.

Regressive Sales Taxes and the Corporate Agenda

Even if a case could be made for the need to increase taxes to fund important public services in Alberta, many of those who would support that approach would oppose a PST. Many on the left have a negative view of the move to fund government activities by taxing consumption. They cite two major reasons for this opposition. The first reason is that such taxes are regressive, falling more heavily on those with lower incomes. This is in contrast to, for example, a progressive income tax, where tax rates increase along with income. The second reason is that the use of consumption-based taxes has often been accompanied by a push to lower both personal income and corporate taxes. Such tax cuts benefit the wealthy and contribute to increasing inequality. Thus, some on the political left see advocates of consumption taxes—specifically, those who favour a PST while otherwise pressing for corporate and income tax cuts (see, for example, Bazel and Mintz 2013)—as simply furthering the corporate agenda in the name of global competitiveness.

While my preference would be for most revenue to come from progressive income taxes, there may still be some good reasons to consider a sales tax in Alberta, especially given the province’s fiscal situation. First, Bird and Smart (2016) argue that the extent to which a sales tax is understood to be regressive depends largely on how the impact of the tax is measured, and that this impact has, by and large, been overstated. Second, such regressive impacts on lower-income taxpayers can be mitigated somewhat by creating refundable tax credits for lower-income taxpayers. Third, sales or value-added taxes like the federal GST provide very stable, predictable revenues that increase consistently over time, as the (pre-pandemic) data provided by the federal government indicate in table 7.1.

Moreover, a sales tax is less subject to avoidance since the tax is imposed on everyone at the retail level. It thus avoids some of the challenges of capturing tax revenues from wealthy individuals and corporations—challenges connected to globalization, capital mobility, and the enhanced influence of large corporations at all levels of government. The ability of the wealthy to avoid taxation by, for example, shifting profits and income to jurisdictions with low or no taxes increases the burden of funding services on less mobile taxpayers within a given jurisdiction. The OECD has led an effort to limit what it calls tax-based erosion and profit shifting through international agreements. However, the development of robust international rules and state cooperation to stop avoidance of these taxes is still limited. This has allowed tax havens to flourish, encouraged tax competition among jurisdictions to attract investment, and increased the challenge for states to capture these tax revenues. So, while those on the left rightly argue that fair taxation should include progressive taxation of income and higher levels of corporate taxation, a case can be made that, in the context of continuing income tax avoidance by the wealthy, a sales tax could broaden a government’s range of revenue sources, lessen dependence on royalties, and help ensure predictable funding for important programs such as education and health care.

Source: Government of Canada, Equality and Growth: A Strong Middle Class (budget 2018), https://budget.gc.ca/2018/docs/plan/budget-2018-en.pdf. See table A2.7, “The Revenue Outlook.”

Pipe Dreams, Pipelines, and Sunset Industries

In 2017, a Globe and Mail editorial asked: “How much longer can they [Albertans] afford to elect governments that fail to develop the kinds of stable revenue mechanisms—a sales tax or higher income taxes, notably—that can help smooth out the rough patches and keep the province moving forward in hard times?” (“Alberta Can’t Rely” 2017). Alberta in 2020 was indeed in hard times as a result of oil price drops and the economic crisis connected to the COVID-19 pandemic. Since the beginning of the 2000s, as production especially in the tar sands expanded, many Albertans and their governments have been living in what Barney (2017, 85) calls “this imaginary country where jobs spring from the ground in great numbers and go on forever and the public coffers are always full of revenues generated by taxes and royalties.” The volatility of oil prices and the industry’s influence have been reflected in government policies that, depending on oil prices and royalty revenues, went from increasing spending to cutting spending, providing tax- and royalty-based inducements to the industry to continue investing and to increase production, and hoping higher oil prices would help balance the books.

In recent years, building new pipelines has become the imagined saviour of the Alberta economy. Even if pipelines could be built without great costs, both social and environmental, they would not solve the problems of oil price volatility and fluctuating revenues. While they would afford Alberta oil more access to markets, which might reduce the discount on the price of Western Canadian Select oil relative to the benchmark West Texas Intermediate price, the overall downward trends and volatility of global oil prices would still be there. Indeed, the COVID-19 pandemic has seen further drops in non-renewable resource revenue, weak demand for oil, and a provincial deficit ballooning to over $24 billion. The pandemic has also had the effect of increasing income inequality. In response to the crisis, the provincial government has talked ominously of a fiscal reckoning and possible cuts to critical programs such as Assured Income for the Severely Handicapped—a cut proposed in the fall of 2020, though the government backed down from major funding reductions to the program in the 2021 budget. Without a revenue rebalance to support public programs—specifically, one that includes a sales tax—cuts will continue to increase inequality, target the most vulnerable, and undermine social solidarity. While a PST would not be a panacea for all of the province’s fiscal woes, it could help to address revenue shortfalls (as long as it is not accompanied by corporate and income tax cuts). It could also relieve pressures to cut spending on services that Albertans value and provide some space to open a public conversation about the future of Alberta in a post-carbon world. What Alberta needs is an honest conversation between political leaders and citizens about how we will fund our programs in the face of volatile oil prices. This conversation is now all the more urgent in the face of a looming climate crisis and pandemic-related deficits and debt which threaten the future of all Albertans.

Notes

References