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Save Alberta From The High-Taxers

05/15/2013 05:40 EDT | Updated 07/13/2013 05:12 EDT

In a recent debate on the pages of the National Post many Albertans might have missed, two economists, Rhys Kesselman from Simon Fraser University and Jack Mintz from the University of Calgary sparred over the most desirable tax mix for Alberta. Kesselman wanted Alberta's single income tax rate replaced with cascading tax brackets, and structured to ensure higher overall taxes. Mintz advocated a sales tax but with the caveat that it be revenue neutral, i.e. some other tax should be lowered in exchange.

The tax tussle reminded me of a quip from the Minister of Finance under Louis XIV, Jean Baptiste Colbert: "The art of taxation consists in plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing."

On the question of an Alberta sales tax, such an impost is indeed preferable to other taxes. Properly designed, consumption taxes are more efficient and less damaging to the economy. Such advantages have been pointed out by my colleagues at the Fraser Institute since at least the 1970s.

Problem is, all this tax talk is cemented in the notion Alberta is short revenue, or at the least, must find a more "stable" tax source.

Fact is, Alberta's red-ink budgets have much more to do with real per-capita program spending being near historic highs. This also explains why so many Albertans "hiss" at the notion of a sales tax.

To understand why the spending side of the government ledger deserves more attention, consider some statistics about Alberta's program spending, ones that take into account Alberta's population growth and inflation rate.

Based on hard numbers from past government documents, here's what we know: Back in 2005/06, the height of Alberta's last energy boom (when resource revenues hit their peak), the Alberta government spent $9,465 per person. As of 2011/12, program spending was $10,377 per capita. (I will deliberately exclude the year just ended, 2012/13. Alberta's last provincial budget completely changed how it accounts for spending and revenues, making historical comparisons difficult.)

Neither year set a record. In 1985/86, per-person program spending peaked at $11,905 and then declined to $6,733 by 1996/97. In other words, by 2005, Alberta's government was already spending closer to the all-time high than to the all-time low.

Had the Alberta government increased program spending beginning in 2005 until 2012, based solely on inflation and population growth instead of zooming past those factors, the province would have spent a cumulative total of $18.2 billion less during that period. Albertans would have seen balanced budgets in every single year, including during the recession.

Granted, Alberta's own-source revenues are volatile and down from their highs in the past decade. Point is, even with that reality, had spending been better managed, Alberta's budgets would have been written in black ink, not red. Who except the financially reckless spends up to the limit of their income every year? Someone who is self-employed and earns $90,000 one year and $70,000 in another will not run into a problem if their annual spending is kept to $60,000.

The precise amount of revenues flowing into Alberta's coffers every year is less important than if the province spends more prudently.

There is precedent for such prudence. Right at the end of the 1990s, Alberta suffered a 37 per cent drop in resource revenues in just one year (between the 1997 and 1998 fiscal years). The province stayed in the black because it had better managed the growth in spending.

Since at least 2005, the province budgeted and spent as if exceptional years were the norm. So the Alberta government did a number of unwise things. Some examples: The province signed a contract with teachers between 2007 and 2012 that awarded raises double the inflation rate, indicative of its general approach to the public sector. The province also took over billions in unfunded liabilities for the Teachers' Pension Plan. In addition, as my colleagues have shown, public-sector compensation in Alberta is on average 10 per cent higher than in the private sector.

Add to this spending on corporate welfare (the province spent $1.3 billion in carbon capture over several years) and a clear picture of fiscal profligacy develops.

Over the years, polls repeatedly show Albertans opposed to a sales tax. I suspect that is because while many Albertans may not understand the economic intricacies of various taxes, they quite clearly and intuitively get this fact: Alberta has a serious spending problem and the politicians have barely begun to address it.

That is why, whenever talk of tax reform arises, even on justifiable grounds of efficiency and proposed as revenue neutral, much of the Alberta public reacts a la Colbert's plucked goose. They suspect that unless one tax ends in exchange for a sales tax, taxpayers will simply see more of their feathers plucked by a high-spending provincial government.

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Mark Milke is a Senior Fellow with the Fraser Institute.