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There are two big problems with the Alberta NDP tax plan

Given the size of Alberta’s deficit, the Alberta NDP’s tax changes alone won’t be enough to balance the budget by their mandate’s end


 

Rachel Notley 20150512Remember when Alberta had one of the highest-spending provincial governments along with the lowest tax rates in the country? Those were good times—but those times are over. Alberta faces a projected deficit of around $5 billion for 2015-16, worse than any province except for Ontario, and larger compared to the size of the economy than any province except for Newfoundland and Labrador.

The March budget presented (but not implemented) by Jim Prentice and the Progressive Conservatives proposed to close the deficit through a number of tax increases, along with modest restraint in the growth of spending. The newly elected NDP government plans to change this mix by doubling down on the revenue increases and using the extra funds to increase spending. There’s a lot of room for doubt about the NDP’s fiscal plan for the 2015-16 year, as shown below. Moreover, if they’re going to make their goal of a balanced budget by 2018-19 the Alberta NDP will have to draw deeply on the vaunted “NDP Prairie Pragmatism” to find the necessary spending restraint.

I start with a description of the personal income tax changes, then move on to corporate taxes. I then assess the tax challenges facing the new NDP government in the last section. I’ve placed in this public document all my calculations for the charts presented below.

Personal income taxes

There are two elements of personal income tax to consider: changes to the standard rates and brackets of the personal tax system, and also the new health levy proposed by the Prentice government. For a great backgrounder on how tax brackets and tax rates work, see this post by Stephen Gordon.

The Alberta NDP proposes a substantial increase to the progressivity of personal taxes for those at the top of the income scale. The existing provincial income tax in Alberta is pretty simple—everyone pays 10 per cent once you exceed the $18,214 basic exemption. To introduce greater progressivity, you need to implement some combination of lower rates on low earners and higher rates on high earners. The NDP proposes new rates of 12 per cent starting at $125,000; 13 per cent at $150,000; 14 per cent at $200,000, and 15 per cent at $300,000. The chart below shows the tax rate on the next dollar earned for the 2015 status quo system, the 2016 Prentice plan presented in his March budget, and the proposed NDP plan. I’ve also included the 2015 British Columbia rates for comparison, since B.C. has one of the most progressive income tax systems in the country.

Marginal Tax Rates for NDP and PC plans in Alberta

Marginal tax rates for NDP and PC plans in Alberta

The NDP plan shows a clear increase in progressivity at top income ranges compared to the status quo, reaching a difference of 15 per cent versus 10 per cent by the time taxable income reaches $300,000. However, by keeping the lowest bracket rate at 10 per cent, those earning under $76,000 face a higher marginal rate in Alberta than in B.C. The reason is that B.C., like most other provinces, starts with a low rate in the first few tax brackets before hitting higher rates for those at the top. The Alberta NDP proposal does the second part (higher rates for those at the top) but not the first (low rates on low earners).

The Prentice government proposed a Health Care Contribution Levy, starting at an income level of $50,000. Earners around $50,000 would owe $200, and this increased progressively to a $1,000 maximum amount around $130,000. The Alberta NDP proposes to scrap this levy. This is a big tax shift—it gives a fairly large tax cut compared to the Prentice plan for those earning more than $50,000.

When you put all this together, you can see the overall impact on total income taxes (including the health levy) under the Prentice and the NDP plans. It turns out that those earning between $50,000 (where the health levy would have kicked in) and $180,000 (where the NDP tax rate increases overcome the Prentice health levy) are better off under the Alberta NDP plan. In other words, the Alberta NDP plan effectively raises taxes on those earning more than $180,000 and cuts taxes on those between $50,000 and $180,000.

PC vs NDP tax plans

Comparing PC and NDP personal tax plans

Federally, the Liberal proposal to shift some tax burden from the middle to the top brackets has generated pointed criticism that low earners are left behind by this kind of shift. The same criticism could be aimed at this Alberta NDP tax shift from the middle to the top. The analysis underlying those criticisms is correct, but misguided. Why? Because one third of tax filers in Canada don’t pay any income taxes—their income doesn’t exceed their basic amount and other credits, so these low earners don’t pay income taxes at all. This means it is simply not possible to propose any changes in brackets or rates that will help the bottom one-third of tax filers. If you want to increase the progressivity at the bottom of the income scales, other tools (like refundable tax credits) must be employed. As far as I can see, the NDP plan leaves lower-earning Albertans paying heavier taxes than their neighbours in B.C., and little difference in tax rates between those at the bottom and the middle.

Corporate income tax

Corporations pay tax on their profit (revenue less expenses). In Canada, the federal government charges a tax rate of 15 per cent on corporate profits, but provinces have the freedom to set their own rates. The chart shows the rates chosen by each province, with two entries for Alberta showing the proposed tax rates under a PC or NDP government. The NDP proposal to move from 10 per cent to 12 per cent puts Alberta squarely in the middle of the pack.

Corporate Income Tax Rates by Province

Corporate Income Tax Rates by Province

All taxes harm the economy in some way, so the job of raising taxes involves a choice among bad options. Most economists agree that corporate taxes are the most harmful among the choices, as documented in this link-filled post on Maclean’s from Stephen Gordon. So, I don’t think that raising corporate taxes is a step in the right direction.

However, we must also maintain a sense of proportion. When deciding on a big investment, firms will consider labour costs, output prices, and other factors along with corporate tax rates. Picture a corporate VP in Calgary constructing her financial planning spreadsheet. My suspicion is that any sweat observed on her brow comes more from the “future oil price” cell in her spreadsheet than the 10 per cent versus 12 per cent corporate tax rate. Economist Jack Mintz has estimated the long-run job impact of corporate tax increases in Alberta at about 8,900 per point of tax. That represents about 0.4 per cent of the 2.3 million jobs in Alberta—not a huge impact. Again, it is better to have more corporate investment and jobs than not, but in my view the “end of the world” political rhetoric employed around this corporate tax increase during the Alberta election has been exaggerated.

Challenges

The tax proposals of the new Alberta NDP government are not particularly radical compared to other provinces. However, given the size of the budget deficit hole facing Alberta, I don’t think these tax changes alone will be enough to reach the goal of a balanced budget at the end of the mandate. Two challenges in particular will be top of the mind for the new cabinet in Edmonton over the next few weeks: timing and revenue estimates.

The biggest short-term issue facing Alberta is the timing of the tax changes. The Alberta NDP election platform plan booked a substantial amount of revenue for the 2015-16 fiscal year. To do that, the NDP would have to increase tax rates retroactively on both the personal and corporate tax sides. On the personal side, our income tax system does not distinguish between income received in January versus December, so the only way to raise rates for 2015 is to raise them for the whole year—which is now close to half done. On the corporate side, if rates are increased immediately, any company with a year end arriving in the next few months will be paying 12 per cent on their year’s profits when they had been counting on 10 per cent. This kind of corporate surprise isn’t without precedent, though—when B.C. raised its tax rate from 10 per cent to 11 per cent in 2013, only six weeks notice was given.

Even if the Alberta NDP is philosophically fine with retroactively increasing personal tax rates for 2015, they face a seemingly difficult challenge in doing so. Alberta is party to a Tax Collection Agreement with the federal government, through which the Canada Revenue Agency collects personal income tax and remits the revenue to the Alberta government. Under section 2.10(a) of the agreement, however, any tax changes have to be given to the federal government by April 15. So, unless the new NDP government finds something in the Tax Collection Agreement that I’ve missed, or is able to call in a favour with Prime Minister Harper to facilitate tax increases, the NDP will not be able to make their desired personal tax changes in 2015. If so, this leaves a $1.1-billion dollar hole in their plan.

The second issue facing the Alberta NDP government is a clear-headed assessment of the realism of their budget numbers. They expect to raise $800 million in 2015-16 in new corporate tax revenue, along with the $1.1 billion in new personal taxes. They also plan to find $100 million in “delinquent corporate tax collection.” I think these tax revenue numbers are overstated.

The issue of tax leakage—companies and high earners adjusting their financial affairs and accounting entries to shift money out of higher-tax jurisdictions—must be considered. Moreover, at the provincial level this concern is heightened, as firms or individuals operating in several provinces have greater ease to shift taxable income across provincial borders than national borders. Alberta, being a low-tax jurisdiction within the federation, has been the recipient and beneficiary of much of these interprovincial tax shifts up to now. I don’t expect Albertans to start shifting their own money out of the province, but I do expect the inflow from other provinces to slow to a trickle since the tax differential will no longer be as large.

Tax leakage is not an all-or-nothing thing; not everyone has the ability to shift income and most firms have only a limited scope for shifting. But it doesn’t take much shifting for it to matter. A quick example shows why.

Imagine there is $6 of corporate income being taxed at 10 per cent, for a tax revenue haul of 60 cents. If the tax rate goes up to 12 per cent, it only takes $1 of those $6 being shifted out of Alberta for the tax change to yield no net increase in revenue. ($5 times 12 per cent leaves you with the same 60 cents of tax revenue you started with.) The reason? When a dollar is shifted away, you lose the whole 12 per cent, and it takes a lot of dollars to stick around to pay the incremental two per cent to make up the difference. The best evidence suggests that provincial corporate taxation in Canada is quite susceptible to income shifting and tax leakage.

The bottom line

Taking all the numbers together, what is the bottom-line impact for the new Alberta NDP government? For 2015-16, the analysis presented here suggests almost no chance the Alberta government will meet its revenue targets. It will simply be too hard to make changes quickly enough. In future years, the target of $800 million to $1 billion of new revenue is aggressive, but may be possible depending on how much high income and corporate tax shifting occurs.

Left out of the analysis here is the spending side of the NDP’s fiscal proposals. In short, the spending plan appears to address Alberta’s high-spending ways with the novel approach of committing to still-higher levels of spending. In my view, for the Alberta NDP to meet its target of eliminating the deficit by 2018-19, they will need to reach deep into the “pragmatic prairie NDP” tradition and keep a tougher line on spending than is evident in their platform plan. How tough? I think that to meet their goals they will need to exhibit “unprecedented discipline” of the kind shown by Stephen Harper—which will be interesting to watch.

Of course, every word of analysis in this post is dependent on oil prices. If energy prices surge, the budget will improve; if they drop, the fiscal problems will be many times worse. But I think all readers knew that already.

(My disclosure statement is here.)


 

There are two big problems with the Alberta NDP tax plan

  1. This is tired old ideological nonsense disguised as detached economic analysis. To present a statement like “All taxes harm the economy in some way, so the job of raising taxes involves a choice among bad options” while presented as fact is clearly opinion and one that is not particularly empirically supported at that.

    Categorical assumptions like this do more to expose the author’s ideology than to contribute to a discussion on the merits of a government budget.

    As most who pay attention realize there is increasing evidence that a more equitable society actually promotes economic growth (http://www.thefiscaltimes.com/Columns/2015/01/27/Taxing-Wealthy-Promotes-Economic-Growth). (and of course see Thomas Piketty as well).

    Additionally the very premise that a government’s goal is to balance the budget is faulty. The goal of a government is to govern effectively – to ensure the continued development of a just and productive society. When one operates from the perspective that a government budget is akin to one of a business there is no need to take that person’s analysis seriously.

    • Hi Mr. Hunter,

      The premise that the NDP government’s goal is to balance the budget came from their platform document. “With our plan we will balance the budget in 2018.” You are welcome to disagree with that goal, but that goal was set by the NDP, not by me. Thanks, Kevin

      • Dear Mr. Milligan,

        Nice sidestep! However, surely if the basic premise of balancing the budget is wrong, then that would influence your judgement on problems with NDP tax policies. If pro-cyclical tax policy is indeed damaging, then for heaven’s sake why are you not saying so?

        Here is what Keynes had to say in a 1933 radio debate:

        You will never balance the Budget through measures which reduce the national income…. The only chance of balancing the Budget in the long run is to bring things back to normal, and so avoid the enormous Budget charges arising out of unemployment…Even if you take the Budget as your test, the criterion of whether the economy would be useful or not is the state of employment…I do not believe that measures which truly enrich the country will injure the public credit…It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.

    • Bhunter wrote:
      “Additionally the very premise that a government’s goal is to balance the budget is faulty. The goal of a government is to govern effectively – to ensure the continued development of a just and productive society.”

      To which I would redirect him to his own words again…he wrote:

      “Categorical assumptions like this do more to expose the author’s ideology than to contribute to a discussion on the merits of a government budget.”

      I agree BHunter….statements like that show clearly your ideology.

      One other thing though…….if balanced budgets don’t matter, may we assume that your own household is in a perpetual state of being indebted?

      Greece once held the same beliefs as do you…however, at the end of the day you do have to pay your bills. It would seem you agree with that as well…..but you expect someone else to pay for your own.

  2. Talking about balancing Alberta’s books without spending cuts is all hat and no cattle. 55% of revenue goes to payroll, and Alberta public employees are some of the highest paid in the country. On top of that we have a rapidly growing unfunded pension liability problem that is not counted in the deficit and debt numbers.
    Every pensionable public employee in Alberta who has more than ten years seniority is a pension liability, over and above the employers already generous contribution to the public employees pension plan. At 20 years service, that liability amounts to roughly 20% of pay, and grows dramatically every year.
    Simply changing from a defined benefit plan to a defined contribution plan more in line with what is available in the private sector (5% matching contribution) would save $2.5 billion per year in payroll costs, and stop the unaccounted growth in public sector pension debt.
    For example, the City of Red Deer is currently sitting on an unaccounted debt of at least $40 million for it’s share of the Local Authorities Pension Plan. This amount is still growing at a substantial rate, as the number of long term, pensionable public employees is growing at a rate greater than the population in general.
    These unfunded liabilities are growing exponentially. They exist solely because governments saw them as a way of kicking the labor unrest can down the road, and entered into them without either knowing the actual repercussions that would inevitably come with them, or knowingly deceived the taxpayers as to the true costs.
    Increasingly, taxpayers are being told that they have to take reductions in their incomes and their ability to save for their own retirements, not to preserve public services but so that the pubic sector workers will not have to do exactly that.
    Notley can talk about extra taxes until the cows come home, but until she’s willing to take a paring knife to our massively bloated public sector, she’ll never gain a lick of traction with the part of the electorate that actually pays taxes.

  3. Considering this is a ng the only publications the Harper regime will allow to ask them questions in a debate format, its not tough to discern whose side this mag is on. As for balancing budgets…the Harper regime didn’t do it right, either, the federalLibs couldn’t do it right, provincial governments can’t do it right…is there a point to this article other than pointing out the obvious? And is the obvious really that big a deal when legitimately balancing a budget, especially in absence of substantially significant tax revenue, isn’t possible for anyone? I’ll take new blood, new ideas, and money that is returned to Albertans and Canadians over Saudi-based corporate entities any day of the week. Us Maclean’s worried for the Alberta executive class? Cuz that’s who hurts under progressive-minded governments, balanced budget or not. Forgive me for hardly giving a duck.

  4. Leave it to Trudeau’s consultant to neglect the provincial sales tax and carbon tax low income BC’ers pay that low income Albertans don’t pay.

    Since low income persons consume most of their income, these translate almost directly to the marginal tax rate.

    That is why the marginal rates on low income earners in BC are so low, because they are hammered with two regressive consumption taxes, the carbon tax and the PST.

  5. Lower income BC’ers pay lower margin personal tax rates than lower income Albertans because they are hit with two regressive consumption taxes, the carbon tax and the PST.

    That was part of the trade-off for the carbon tax on low income earners, lower personal income tax rates.

    Factor in that and lower income Albertans and the difference, if any disappears, if not reverses.

  6. To be fair and accurate this article should state, that Alberta has the lowest Debt / GDP ratio of all the provinces ( a minus ) and your own stats say that Alberta accumulated debt is about 9 billion dollars ney debt compared to about 70 billion dollars net accumulated debt for British Columbia and 230 billion for Ontario ! Maybe a little balance and research fro the writer should be called for eh ? Deficit is a current account yearly tally. Accumulated Debt is the long term debt in each province . You have misled your readers by failing to state that for example Ontario with 230 million net debt is a basket case whereas Alberta has the lowest debt at 9 billion of all the provinces !!!! Geez. Duh…. so Alberta can borrow a little, and still be the best debt free province!!! See Your own article !!!!http://www.macleans.ca/economy/business/interactive-provincial-deficits-and-debt/

  7. Deficit is a yearly accumulation and tally of budgetary shortfall for the year. It is added to the net deb, if not paid. Folks here are confusing Debt and Deficit. Alberta has a small debt of 9 billion and a deficit of 5 billion , primarily because of the collapse of oil price for 2015 to 2016. Yearly debt, if not payed off or refinanced will be added to the net accumaulated provincial debt and it will still be only, 14 billion in Alberta which is nothing compared to approx 230 billion net accumulated debt in Ontario. Am I missing something here , or is everyone that is confusing debt and deficit simply out to lunch ?

    • Thank you Gabriola for your comments. You have put it much better than I did, but the jist is the same. We in BC are in MAJOR trouble.

  8. I would suggest that the person that wrote this piece of tripe go to the following sites:
    Northern Insight and The Straight Goods and read both of these gentlemen. If your reporter thinks that British Columbia is in any kind of great shape, he is badly mistaken. The Liberals will tell anyone who will listen that they have a balanced budget. What they forget to mention is the cost of Contractual Agreements that are not figured in, the money owing to Big Oil and Gas that sits on the books waiting to be collected. Our accumulated deficiet sits at just under $74B and if you add in what they don’t mention you are looking at close to $1.74B. Christy Clark has broke this province, sold out to the Chinese and is now in the process of selling out what is left to PETRONAS, so she can keep her campaign promises; that were all lies anyhow. Alberta will be just fine with NDP, I only pray that people in the province of BC wake up (which they are starting to do) and vote NDP in 2017.

  9. Alberta can pass a surcharge on 2015 corporate taxes, and make it payable with 2016 remittances, and this will suit the Tax Collection agreement. Any record of taxes payable in 2015 will serve to calculate the levy, and Canada will have those records. Its collected in 2016 that’s all. On the question of tax shifting, not all corporations are in the position to do this, and Mr Milligan’s piece does not acknowledge this. Tax shifting only works because the Agreement contains provisions preventing a province from taxing income earned in another province. It can be combatted by the provinces entering into a revenue sharing agreement with respect to taxation of corporations able to tax shift. It shouldn’t be difficult to isolate paradigms commonly used to create the ability to tax shift. Taxing whole groups of related companies as if they were one company is the way to go. Alternately get rid of the distinction between income and capital gain in terms of tax liability: it is to preserve that distinction and to partially deal with its impact on fair taxation that corporate taxes were created in the first place.

  10. Interesting article Mr Milligan. I don’t mind paying my share of taxes – if they are going to pay down the debts we are leaving our children. But retroactive increases seem downright unethical. “Wealthy” of not, we all make financial plans based on our expected yearly income. I was happy to read your remark about the deadline in the Tax Collection Agreement. I wonder though how Ontario was able to enact a retroactive increase in 2014.

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