PST has potential to bring economic growth to Alberta: economist

Economics professor Trevor Tombe discusses the impact if Alberta introduced a provincial sales tax (PST) for Albertans.

Alberta Premier Danielle Smith says she would put PST on a referendum if citizens gathered enough signatures to support it through a petition. Economics professor Trevor Tombe discusses the development with Alberta Primetime host Michael Higgins.

This transcript has been edited for length and clarity.

Michael Higgins: On budget day, Finance Minister Nate Horner made a comment about kitchen table discussions around the question, “Is this the right tax structure for the province?”

How much room is there right now for a provincial conversation on tax structure?

Trevor Tombe: I think it’s a conversation that makes a lot of sense, even independent of the deficit that was projected in the province’s latest budget. With $9.4 billion in terms of the deficit projected for 2026, that does raise the question around whether or not we should be thinking about ways of raising revenue.

The government was quite clear in its budget that it felt it was unable to decrease spending. Indeed, they increased overall spending this year compared to last. They’re trying to keep it in line with population plus inflation. Though, in recent years they’ve had to increase spending even faster than that. I think it’s fair to say that the current government would describe itself as fiscally conservative.

If we’re not able to balance the books here on the spending side because of the immense pressures that Alberta faces, I think it is worthwhile having a conversation around whether or not some other sources of taxes might become part of the picture. Which would be a much more stable way to fund public services than non-renewable resource revenues.

MH: How do you see a provincial sales tax factoring into that new conversation?

TT: It is one type of tax revenue that is relatively efficient compared to others. When we levy income taxes, for example, there can be some drawbacks there in terms of the incentive to invest or the incentive to work because effectively, you’re shrinking the amount of after tax income that would come from higher investment or increased hours of work.

Whereas a consumption tax only levies that tax when you spend the dollars that you earn. So any income that you save and don’t consume out of, is effectively not subject to that taxation. So there’s potential for that being a little bit better for economic growth in the province. Added benefit is that a sales tax also raises considerable revenues about $100-million dollars per point off of non-Albertans, visitors to the province, for example.

It’s one important piece of having the right tax mix in the province. Even independent of the deficit because of sales taxes being a little more efficient than income taxes. You could imagine increasing sales taxes in the province and then decreasing income taxes to potentially increase growth and productivity.

MH: Where individual Albertans are concerned, how much of a drain would a PST take on our pocketbooks at a time of inflation, at a time when affordability is such a concern?

TT: That’s a fair counter argument to a sales tax. To be clear, the revenue to fund public services has to come from somewhere and if we’re going to be borrowing it through the deficit, then we’re going to be seeing an increase in the overall stock of public debt and the overall cost of interests that are associated with managing and carrying that debt. Those dollars do need to come from somewhere and at the end of the day, Albertans are responsible for funding Alberta provincial public services.

A sales tax doesn’t necessarily need to lower disposable income. It does depend on how it is introduced and how it’s structured. If a sales tax is brought in and income taxes or other fees are reduced, then it could be a revenue neutral change. It could even be revenue negative if we use the revenue that we’re raising from non-Albertans that a sales tax captures in order to lower the tax burden on Albertans. We could also think about increasing the basic exemption, the amount of income that you can earn before income taxes even kick in. There are lots of alternative proposals here. We shouldn’t just view it as introducing a sales tax in isolation of other potential changes to offset some of those costs.

MH: We’ve discussed dynamics around a PST for years. It’s never been something Albertans across the political spectrum have been willing to bite on. If there was something that would push it across the threshold of consideration, what do you think it would be?

TT: That’s a political question. I think sales taxes do have the challenge that they are visible and visible taxes tend to be less popular. Property taxes suffer from that same challenge. Many people know how much they pay in property taxes, for example, but have no clue how much they pay in income taxes, even though the latter is much larger in terms of the actual dollar impact on individuals and families.

To the extent that kind of unpopularity is difficult for governments to overcome, that’s fair enough. Alberta taxes do differ from other jurisdictions in many ways and only about half of the difference between where Alberta is in terms of its overall tax rates and the next lowest tax jurisdiction is accounted for by sales taxes. Other types of taxes like a health premium, for example, a health levy that B.C., Ontario, Quebec, has that former Premier Jim Prentice suggested we introduce in 2015, that should also be a part of the conversation too.

I don’t think we should view it as just a sales tax or nothing, but we could have a conversation more broadly about the structure of revenue in Alberta and whether or not that can help dampen the volatility from resource revenues.

MH: You brought up some of the dynamics around the budget earlier. How concerned should Albertans be that the government does not include a plan for recovery in this latest budget? How worrisome is that for the financial picture?

TT: It’s always difficult to budget in Alberta, precisely because so much of our revenue is required to come from non-renewable resource revenues, royalties largely on oil and gas. This year, we need about $23-billion dollars in royalties just to balance the books and because oil prices move around so dramatically, that means that that revenue source moves around so dramatically as well. So it’s tough for the government.

Their fiscal framework was kind of a rule they had on the books as of 2023 that was meant to force the government to have a plan to balance the budget. But they did abandon that framework in this latest budget, so I’m not sure I’d characterize it as worrisome for Albertans.

We’re going into this challenge in a really strong position. We can carry and manage and service the increase in public debt that we’re potentially likely to see over the coming years, but we can also keep in mind that oil prices are quite volatile. On Thursday of this week, reaching nearly $81-dollars per barrel as a result of conflict with Iran. If those high oil prices remain, then we could very well be looking at a surplus this year.