Enter the taxman

It’s becoming a familiar ritual for Alberta Finance Minister Ted Morton and Premier Ed Stelmach. Some press gadfly asks Morton about the possibility of introducing a provincial sales tax. Morton acknowledges the idea’s merit, but insists that it is not on the short-term agenda. And Stelmach thumps his chest and declares, more or less, that such a thing could only happen over his dead body. The playlet was reprised last week, as Morton announced that the anticipated deficit for 2010-11 had risen to a record $4.8 billion. He admitted, again, that “in the medium to long term, looking at all the options is a good idea.” The denouement followed the next day, when Stelmach said: “I can tell you as long as I’m premier, there won’t be a sales tax.”

Albertans are proud of not having had a PST since 1937. A 1995 statute requires a referendum to be held before one can be adopted. All three opposition parties are against it. So why does the issue keep coming up? Because a sales tax may be inevitable anyway.

As Canadians learned during the debate over the federal GST cut, the economics profession is virtually unanimous in preferring consumption-based taxes to income taxes. Sales taxes are, on the whole, more efficient and growth-friendly. They reward saving and investment, including investments in human capital. Their progressivity is relatively easy to adjust by means of rebates and exemptions. The industrialized world has, over time, shifted toward them, and Alberta economists have long urged that the province follow suit.

But today, they’re no longer just talking about a revenue-neutral PST—a mere efficiency adjustment to the tax mix. In late 2007, the Alberta financial investment and planning advisory commission, led by the University of Calgary’s Jack Mintz, pointed out that it will be harder for the province to capture economic rents from the oil sands, with their high production costs, than it has been to rake off conventional oil and natural gas profits. Bulging growth in oil-sands revenues bailed out Morton this year, shielding him from the full effect of slumping gas prices. But as Alberta’s population ages and health budgets explode, the balance between conventional and non-conventional oil will only get less favourable. And there’s no next generation of petro-revenue lying in wait beyond the oil sands.

Mintz argued that the Alberta government already faces a fiscal gap between long-term revenues and expenditures. That means spending cuts or tax hikes—and when it comes to shrinking government, much of the low-hanging fruit, like rural hospitals, has long since been devoured. At his press conference Morton noted that a blue-ribbon panel, led by retired federal minister David Emerson and featuring former Bank of Canada governor David Dodge, has begun three years of deliberations on economic strategy for Alberta. It is hard to imagine the panel not repeating Mintz’s PST advice. For all the premier’s bravado, he knows this, and his political machine is contemplating Alberta’s ultimate heresy more seriously than he lets on.