Alberta urged to adopt tax reforms

Alberta’s debt-free status and massive surplus is the envy of the rest of Canada. The head of the C.D. Howe Institute says the energy-rich province should resist the urge to use all the excess cash to beef up social spending and instead consider tax reforms.

“Alberta, in the past few years, is starting to squander its good fortune by ramping up spending on public services at too fast a rate,” Jack Mintz said Friday in a speech to the Calgary Chamber of Commerce.

Mintz noted that health care spending alone has rise more than 11% per year over the past five years. Even if energy prices remain high, the province could be facing a deficit situation by 2010, Mintz warns.

Mintz concedes that Alberta is already considered a tax haven by some, since its personal and corporate tax rates are lower than most other provinces. But he believes that by international standards, the province’s marginal tax rates are still far too high, and “discourage work effort, investment and risk-taking.”

“The overall tax system in Alberta therefore causes economic loss, creates unfairness and, especially at the business level, is highly complex.”

For instance, he says the top marginal tax rate for high income earners is 39% and the combined federal-provincial corporate income tax rate in the province is 33.6%, above the OECD average of 30%.

In addition, high effective tax rates also apply to investment income outside sheltered investments, such as RRSPs, “making it tragically difficult for Albertans to accumulate resources for their sunset years.”

On the personal tax side, Mintz suggests that the province introduce a personal expenditure tax, based on the relationship that earnings net of savings is equal to consumption, similar to the current treatment of pensions and RRSPs. “Contributions would be fully deductible without limits, income within the plan is exempt and withdrawals of principal and interest would be fully taxed.”

An alternative would be to simply exempt investment income and capital gains from tax. “As tax has already been prepaid on earnings saved for future consumption, no further tax is required on investment income and capital gains.”

“Business tax reform can be equally bold,” Mintz says, such as introducing a business value tax. Such a tax would be applied to business revenues from the sale of goods and services and would provide for a deduction of business purchases. The proposed tax could also be applied to trusts, partnerships and non-profits, Mintz adds, although a special regime taxing net interest income could apply to financial institutions.

The business value tax has been successfully adopted in Italy and Hungary by their regional governments, Mintz points out.

“The business value tax and the personal expenditure tax would accelerate investment in Alberta, especially by non-resource businesses,” Mintz believes. “Businesses will wish to shift income into Alberta since the 11-point corporate income tax rate would be sharply reduced. Effective tax rates in capital would be quite low and there would be no need to introduce special incentives such as venture capital and research and development tax credits.”

Mintz says he has other ideas, but is really just hoping to advance the argument that Alberta should put taxation on the priority list. “Tax reform is a policy well worth considering. With tax reform, Alberta could keep up its winning ways.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com