Personal Taxes

Visitor Opinion: Uniform Private Earnings Tax Crucial to Restoring Alberta Benefit

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Premier Jason Kenney provides an update on Alberta's response to COVID-19 on Tuesday, January 4, 2022 at the McDougall Center. Premier Jason Kenney provides an update on Alberta’s response to COVID-19 on Tuesday, January 4, 2022 at the McDougall Center. Photo by Azin Ghaffari/Postmedia

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Premier Jason Kenney recently said Alberta could return to a unified income tax, which would help repair the province’s lost tax advantage and attract entrepreneurs, businesses and investment.

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Despite appearances, a flat tax is more fiscally feasible than one might think.

Less than a decade ago, Alberta in North America enjoyed a powerful tax advantage based on the recognition that low taxes encourage entrepreneurs, business owners and workers.

At that time, Alberta had a flat 10% personal income tax rate, a 10% business tax rate, and the lowest statutory combined (federal and provincial/state) personal income tax rate and business tax rate of any Canadian province or state 2014

This made Alberta a very attractive place to work and invest.

In 2015, however, the new provincial government dealt Alberta’s tax advantage a devastating blow.

It increased the trade tax rate to 12% and replaced the flat income tax rate of 10% with five tiers with a top rate of 15% (top rate increase by 50%).

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Recognizing the importance of low tax rates for economic growth and job creation, the Kenney administration lowered the business tax rate to 8% despite a provincial deficit, thereby recovering some of Alberta’s lost advantage and reversing some of the damage done by the previous administration.

Returning to a flat income tax rate is the next logical step in restoring a pro-growth tax environment.

This, too, would improve people’s incentives to work, save, invest and engage in entrepreneurial activities – all of which contribute to economic growth.

And faster-growing economies mean higher tax revenues for the provincial government.

As a result, a return to Alberta’s unified income tax system would likely be a lot less costly than one might think.

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In fact, according to a recent study, gradually returning (over four years) to a 10% tax rate would result in a revenue loss of just $16 million in year one (2022-23), roughly a 0.1% decrease in projected income tax receipts this year.

The revenue loss would increase to $1.36 billion by 2025-26 if the tax rate returns fully to 10%, representing a roughly 9% reduction in projected income tax receipts this year.

Simply put, the revenue loss would likely be relatively modest given the positive economic benefits the tax cut could bring.

And the Kenney administration shouldn’t hesitate to press ahead with lowering personal income tax rates.

One study found that to truly restore Alberta’s tax advantage, given changes in federal, provincial and US tax policies, the province should implement a 6% personal and corporate income tax rate.

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Setting the personal income tax rate at a minimum of 8% to match the new corporate tax rate would allow for a more integrated system of personal and corporate taxes, reducing tax complexity, administrative and compliance costs for individuals and businesses.

Kenney’s government has made progress in restoring Alberta’s tax advantage by lowering the local business tax rate, but the work isn’t done yet.

Returning to a flat income tax rate is the logical – and feasible – next step to support strong economic growth in Alberta during the COVID recovery and beyond.

Tegan Hill and Niels Veldhuis are economists at the Fraser Institute.

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