Pity Jason Kenney, finally king of the castle

You should feel sorry for Jason Kenney, the Premier of Alberta. In 2019, he finally got to be the head of the government of the province that had an impressive record of economic growth and economic prosperity. Then things went south. The price of oil fell like a stone as Russia and Saudi Arabia engaged in a price war. Then Americans, knowing the Alberta producers had no alternative way to sell their crude, particularly the bitumen coming out of the tar sands, discounted what they would pay per barrel.

Faced with a sluggish economy, Kenney put in a hefty corporate tax cut hoping that this would stimulate investment. But then the COVID-19 virus hit and the economy took a nose dive, which meant that corporate tax revenues shrank. Were that not bad enough, the longer-term shift to lower carbon energy will result in massive write-downs on the value of fossil fuel assets and even greater reduction in tax revenues. Corporate tax revenues in Alberta, which stood at almost $5 billion when Mr. Kenney was elected, will fall to $2.2 billion for fiscal 2020-21 and to

$1.7 billion in the following year. Corporate tax revenue will then form the smallest percentage of total revenue since 1982.

What this means for Alberta government is obvious. It has three choices. It can drastically cut expenditures; it can just run a substantial deficit; or it can institute a tax increase. None of these options would be very pleasant. If austerity is introduced in the coming budget it will kick in in the year leading up to an election. The latest polls show that the Conservatives are running neck and neck with the NDP in Alberta and implementing a stiff program of austerity might not make the Conservatives more popular.

Deciding to borrow to cover the shortfall in revenue also has a downside. The projected deficit for the current fiscal year ending in March is $24.2-billion, equivalent to roughly 8.1 per cent of the province’s GDP. It will be the largest budget shortfall in the province dating back to the 1980s. Another deficit of an equal or greater amount will likely be seen as poor management. Scarcely a positive for the lead-up to an election.

So that leaves a tax hike. The province certainly has tax room since it has the lowest taxes in Canada. But in deciding where to raise new revenue, it might wish to consider a tax that will, in all probability, lessen the volatility of revenues over time. Relying on royalties from oil and gas, as Alberta has done for decades, can lead to high volatility. It is also short-sighted because, if and when those royalties are reduced – either owing to a shift in sources for energy or exhaustion of reserves – the government is really over a barrel.

This volatility could be eliminated by the imposition of a provincial sales tax harmonized with the Federal Goods and Services Tax (GST). While such a tax would be regressive, such regressivity can be lessened, if not completely offset, by providing a deduction for taxpayers with low incomes.

Introduction of a sales tax has often been characterized in Alberta as a political “third rail” certain to send the government to defeat in the next election. I believe that an effective effort by the government to explain the pros and cons of each of the three alternatives and why the sales tax is the best option could be effective.

The important objective of such an effort is to convince the voters that doing nothing is an option that would be exceptionally costly to Albertans in the longer term and should be avoided. Indeed, doing nothing would mean running massive deficits as far as the eye can see. The choice is not an easy one but there really is no alternative to making it.