It’s time for Alberta to work towards regaining its former tax advantage.
Until recently, the province was known for having the lowest personal and corporate income tax rates in Canada. In fact, in 2014 Alberta had the lowest combined federal/provincial top personal and corporate income taxes of any jurisdiction in Canada or the United States. This competitive edge was an important part of Alberta’s tax advantage.
Times, however, have changed.
The combination of provincial and federal tax increases, and the significant recent reduction in U.S. federal corporate and personal tax rates have shoved Alberta into the middle of the pack on these two important indicators of tax competitiveness.
For Albertans, the province’s old single 10 per cent personal income tax rate meant that high-skilled workers in Alberta faced lower marginal rates than workers in competitor states such as Texas. The move towards a five-bracket tax system with a top rate of 15 per cent, combined with a four-percentage point increase to the top federal rate, vaulted Alberta from the lowest top combined federal/provincial income tax rate in North America to 46th place as of 2016.
A similar though less dramatic shift occurred when the provincial government increased Alberta’s corporate income tax rate from 10 to 12 per cent. In 2014, Alberta had the lowest combined general corporate income tax rate of the 60 provinces and states. After the two percentage point increase, the province maintained its edge over U.S. states due to a lower federal rate, but fell to the middle of the pack among provinces. Crucially, it leapfrogged both Saskatchewan and British Columbia, which now have lower corporate tax rates.
Meanwhile, as Alberta increased tax rates in these key areas, tax rates in American jurisdictions, which compete with Alberta for investment, have gone down. Due to a two percentage-point reduction in the top U.S. federal rate, Alberta’s top personal income tax rate is now higher than nearly every U.S. state.
And because the new U.S. federal corporate income tax rate is now 21 per cent – down from 35 per cent – statutory corporate tax rates in several key competitor states such as Texas and Wyoming are lower than in Alberta, rather than significantly higher like in 2014.
It’s true that many U.S. corporations historically paid less than the 35 per cent rate due to complexities in the U.S. corporate tax system. But looking at the marginal effective tax rate (METR) on new capital investments gives us an apples-to-apples comparison. Philip Bazel and Jack Mintz at the University of Calgary estimate that the average METR for U.S. corporations has dropped from 34.6 per cent to 18.8 per cent, below their 19.3 per cent estimate for Alberta in 2016 (and 17 per cent in 2014). Clearly, the large tax advantage on new investment Alberta used to enjoy over the average American investment is gone.
Unfortunately, the government of Premier Rachel Notley is loath to part with the new revenue generated by its personal and corporate tax increases. Alberta Finance Minister Joe Ceci has warned that returning to a single-rate personal income tax system would reduce provincial revenue by $851 million. While that’s a meaningful amount, it pales in comparison to the multibillion-dollar deficits that have become routine in the province. It’s also far less than the projected $1.5 billion increase to operating expenses projected for 2017-18.
In fact, according to Ceci’s numbers, had the province simply froze operating expenses at 2016-17 levels, it could have returned to a single 10 per cent income tax rate, reversed his government’s corporate tax increase, and eliminated small business taxes entirely with virtually no impact on the deficit. It’s not that the province can’t afford its previous tax rate advantage – the government simply chose to increase spending instead.
Unfortunately, bolstering Alberta’s tax competitiveness will be challenging without meaningful action to repair the province’s once sterling finances. Hopefully as the province emerges from a painful recession, the government recognizes the urgency of tax competitiveness for Albertans and their families.
Steve Lafleur is a senior policy analyst at the Fraser Institute.
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