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Red budgets lead Alberta to ponder new provincial sales tax

DH Vancouver Staff Jan 19, 2015 10:59 am

Alberta’s golden era sparked by the late Ralph Klein, the former premier of the province, and fuelled by the province’s natural resources industry is over, for now.

Worldwide oil prices have plummeted from about $100 per barrel in the summer to $50 per barrel and the ongoing price volatility could send the provincial government’s revenues deeper into the red. Every $1.00 drop in the price of a barrel of oil translates into a reduction of $215-million in revenue for Alberta’s government.

Approximately 20 per cent of the province’s revenues are dependent on oil royalties, but with the expected prolonged price drop in oil next year’s resource-based revenues could be short of between $6-billion to $7-billion. Alberta has about $40-billion in annual expenditures and is now slated to end the fiscal year with a $500-million deficit, down from the announced surplus of $1.5-billion in November. Officials with the government say a recovery into the black could take until 2018.

That leaves the provincial treasury with a conundrum of how to wade through the energy sector’s boom-and-bust cycle while also expanding public services and infrastructure to accommodate rapid population growth.

Last week, Premier Jim Prentice presented three options on the table to resolve the budgetary crisis: cuts in public spending, hikes in taxes or an interim reliance on the province’s $5-billion rainy-day contingency fund.

Spending cuts could help alleviate the issues at hand, but spending cuts alone without severely impeding on valued public services and critical infrastructure projects will not be sufficient.

For Alberta, difficult talks of tax hikes are no longer taboo: Alberta has had a conventional conservative mindset for decades and prides itself for resolving its issues without having to raise taxes, but a tax hike of some form now seems to be the only alternative to face the province’s worst financial crisis in generations.

The province applies a 10 per cent corporate tax rate, the lowest of all provinces tying with New Brunswick, that could potentially be raised and still keep the economy relatively competitive.

Another option revolves around Alberta’s provincial income tax: It is the only jurisdiction in Canada with a unique 10 per cent flat tax across all taxpayer income levels.

The province could adopt a progressive income tax structure or hike its flat rate income tax, but that would mean low and middle income earners will take the brunt of the burden of the budgetary issues. Both options are likely highly unpopular if proposed to taxpayers.

This leaves Alberta with implementing a provincial sales tax as it is the only province without a sales tax. A 5 per cent PST in Alberta would still keep the province competitive among all the provinces as only Saskatchewan has such a low sales tax. The PST enables the province to fully tackle its current fiscal issues and provide the government with a more stable revenue source. It would also be a cushion for the province during future boom-and-bust cycles.

However, legislation in Alberta mandates that any introduction of a sales tax requires public approval through a referendum.

Over the coming months, hard choices will need to be made by Albertans. While the province has made some strides in diversifying its economy over the last decade, its wealth is still largely energy sector dependent. It also produces more crude oil than it can export, which is why the province has been a staunch proponent of the pipeline projects through British Columbia and the United States.


Feature Image: Canadian currency via Shutterstock

DH Vancouver Staff
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