July 2001
Income Tax Freedom for Alberta is Desirable and Realistic
by John Carpay
[The following article summarizes a recent paper commissioned by the Canadian
Taxpayers Federation regarding the possibility of replacing the personal
income tax in Alberta with earnings from the Heritage Fund. The article
and the study upon which it is based are narrowly focused on this specific
issue and do not, therefore, consider alternative options for the revenues.
It is, nonetheless, an important primer for readers interested in understanding
the current debates under way in Alberta.—Jason Clemens]
Alberta could eliminate provincial personal income tax by 2015, according to a study written by University of Calgary economist Dr. Jean-Francois Wen and commissioned by the Canadian Taxpayers Federation (CTF) (available at www.taxpayer.com). The study shows how the Alberta government could use resource revenues to build up the Alberta Heritage Savings Trust Fund ("the Heritage Fund") to approximately $55 billion, at which point it would produce a steady and reliable source of income for future generations of Albertans, replacing government revenue from personal income tax.
Why eliminate personal income tax?
There are several benefits to eliminating personal income tax. First, doing so will allow Albertans to keep more of their own money. Taxpayers will have more money to spend, save, or invest, depending on their own preferences. However, the question of whose money it is remains political. Does the money belong to the taxpayers who earned it, less the portion that goes to fund government activities? Or does money belong to the government, less the portion that taxpayers are allowed to keep?
Second, income tax freedom would preserve and enhance Alberta's tax advantage in a global economy. Premier Klein's Progressive Conservative Party was recently re-elected on a platform that included keeping Alberta's taxes the lowest in Canada. But in a global economy, where both labour and capital are highly mobile, having the lowest provincial taxes is not good enough. Alberta must be able to compete against US states and other foreign jurisdictions where the overall tax burden is even lower.
Third, the absence of income tax will enable Alberta to continue attracting new businesses and investment, thereby sustaining a high-growth and high-employment economy. According to a 1994 study by Dr. Bev Dhalby, The Distortionary Effect of Rising Taxes, one dollar in tax cuts can generate as much as $1.40 of economic activity in the private sector. With such a tax advantage, Alberta's businesses will have an edge in attracting highly skilled and highly paid workers.
Fourth, income tax freedom can be a permanent and enduring legacy for future generations. As non-renewable resources, Alberta's oil and gas belong to both present and future generations. If the Alberta government uses its resource revenues to fund programs and services for the present generation, no legacy will be left for the future. But a large Heritage Fund, producing a reliable and steady stream of income, can be enjoyed indefinitely by future generations.
Finally, eliminating personal income tax corresponds to the preferences expressed by Albertans in extensive surveys conducted by the provincial government in 1998 and 2000. Albertans indicated that debt elimination and tax cuts were their top priorities, with increased government spending ranking a distant third.
Is it realistic? A lesson from Alaska's Permanent Fund
The CTF study holds up Alaska's Permanent Fund as a model. Created in 1976, its assets now total US$27 billion, or roughly Cdn$40 billion. The fund's specific mandate is to provide future generations with income after the state runs out of oil. By law, at least 50 percent of oil and gas revenues must be put into the Permanent Fund. By law, income from the fund is automatically reinvested back into the fund, and is not included in the government's general revenues.
In a state where citizens already pay neither sales tax nor income tax, Alaska's Permanent Fund provides an annual dividend to every man, woman, and child. In 2000, each Alaskan received a cheque for $1,963.68. The fund is protected from inflation by statute; the principal must be increased by an amount based on the growth in the consumer price index. The fund is managed as a separate trust, at arm's length from the government of the day. Changing these laws requires the approval of the majority of voters in a state-wide referendum.
Alberta's Heritage Fund
In contrast, Alberta's Heritage Fund now stands at $12.3 billion, even though it was created the same year as Alaska's Permanent Fund. Alberta law does not require the government to put a designated (or any) percentage of resource revenues into the Heritage Fund. In fact, only 14 percent of the roughly $82 billion collected in oil and gas revenues since 1976 has made its way into the fund. Unlike the situation in Alaska, the annual earnings of Alberta's Heritage Fund are included in the government's general revenues, which the government of the day spends as it sees fit. The fund is not protected from inflation, and it is managed by the government, not as a separate trust. The fund's mandate is vaguely worded, and the laws which govern it can be changed without voter approval.
The principal difference between Alaska's fund and Alberta's fund lies in the amount of political control over them. Alaska's fund is beyond the control and influence of the government of the day; Alaska's governor and legislators have no access to it. Therefore, they face no political consequences for saying "no" to spending demands from special interest groups. There is no need for them to exercise restraint, because political discretion over the fund has been fettered by law. Alaskan politicians may raise or lower corporate and other taxes at their full discretion, and cut or increase spending on different programs, but unless Alaskans approve of a change, the Permanent Fund and its annual dividends belong to the people.
Some critics decry the fettering of politicians' discretion. But it is precisely this fettering through legislation that, in Alberta's case, has required the province to run balanced budgets and devote 75 percent of any surplus to debt repayment. In turn, this legislation has helped to create the "Alberta Advantage" of lower taxes and progress towards debt freedom. If this legislation were absent, it is unlikely that Alberta politicians would have cut spending in the 1990s to the extent that they did, or would have repaid as much of the provincial debt as they did.
If partial fettering of political discretion was effective for these fiscal goals, why not do the same to grow the Heritage Fund and reach the goal of income tax freedom? There is no reason why Alberta cannot create legislative safeguards for its fund, as Alaska has done.
The 2015 target date for income tax elimination assumes a 1.5 percent annual population growth, a 2.5 percent annual economic growth, a significant drop in oil and gas prices, no growth in real per capita government spending, and an allocating of 50 percent of resource revenues to the Heritage Fund.
Unfortunately, Alberta's 2001-02 budget increased real per capita spending to the highest level in nine years, erasing virtually all of the cuts implemented in the mid-1990s. Real per capita spending is 34 percent higher than it was five years ago, and is back in the same range where it was 10 years ago. Had real per capita spending been kept at its 1998 level, Alberta's $6.9 billion remaining debt would be gone by the end of 2002. Nevertheless, the goal of eliminating income tax remains viable. Whether the goal is achieved or not depends on the political will to honour Albertans' preference for tax cuts over spending increases.
John Carpay is the Alberta Director for the Canadian Taxpayers Federation. He received a B.A. from Laval University as well as a law degree from the University of Calgary.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.