Carbon tax a blow to investment climate

Combined with other recent changes, it has eroded the Alberta Advantage, write Ben Eisen and Charles Lammam.

For many years, Alberta has maintained a strong investment climate vis-a-vis other provinces and other energyproducing jurisdictions. This helped set the foundation for robust economic performance and make Wild Rose Country the envy of many economies. A competitive, well-designed tax regime anchored an assortment of pro-growth economic policies, collectively known as the Alberta Advantage.

A series of policy changes over the past several months has buried that advantage, with the latest nail in the coffin coming from the provincial government’s new climate change strategy. Among other things, the strategy calls for a phased-in carbon tax starting January 2017 and reaching $30 per tonne in January 2018. This will impose an additional tax burden on businesses and families. The proposed carbon tax must be placed in the context of provincial policy choices that have eroded the Alberta Advantage. More broadly, the carbon tax is yet another blow to Alberta’s investment climate, making the province a less desirable place to work and invest. And this comes at the most inopportune time as the province struggles in the face of depressed commodity prices and weak economic performance.

Let’s recap some of the government’s recent economically damaging policies to demonstrate the extent to which Alberta’s once exemplary investment climate has been tarnished.

In the fall, the government increased the general corporate tax rate to 12 per cent from 10, a 20-per-cent jump. This tax hike sent a powerful, negative signal to both domestic and international investors about the direction of economic policy and weakened the incentives for firms to invest and create jobs. The economics literature is clear that higher corporate taxes are among the most damaging forms of taxation as they deter investment and dull growth.

The government also eliminated the province’s single personal income tax rate of 10 per cent, replacing it with five distinct tax brackets and increasing the top marginal rate by 50 per cent. The old single rate gave Alberta a unique advantage, helping the province attract and retain skilled workers, entrepreneurs and investment. Alberta now no longer has the lowest top combined federal and provincial (or state) income tax rate among Canadian provinces and U.S. states. In fact, its top marginal rate is higher than competing energy-producing jurisdictions in the U.S., including Texas, Alaska and Wyoming — all of which have no state income tax.

In addition to these tax increases, the government has introduced economically damaging regulations. For example, it set in motion a plan to significantly increase the minimum wage over the next several years, despite the overwhelming evidence that higher minimum wages increase unemployment, especially among young and low-skilled workers. Prior to Oct. 1, the minimum wage in Alberta was $10.20 an hour, but it is scheduled to rise steadily before reaching $15 in 2018. This represents a 47-per-cent increase.

In the energy sector, the government created further uncertainty this spring by announcing plans for a royalty review. It has since said there would be no rate increases until 2017, quelling concerns about immediate royalty hikes, but the prospect of a future increase remains a concern.

The newly announced carbon tax and accompanying environmental regulations will be layered on top of these policy changes. The combination of higher personal and corporate taxes with a new carbon tax is particularly troubling given that Alberta’s energy sector will be at a marked disadvantage relative to competing energy-producing jurisdictions such as Texas, North Dakota and Wyoming — none of which have or are actively considering a carbon tax. Taken together, the policy changes will undermine the province’s ability to compete effectively with these and other jurisdictions. The Alberta Advantage served the province well for many years. In just a few months, it has been virtually undone.