Alberta government should pursue single 8 per cent income tax rate
Alberta Premier Danielle Smith has committed to creating a new 8 per cent tax bracket on personal income below $60,000. While this would be a positive change to reduce economically harmful tax increases, the Smith government should go one step further and return to a single-rate personal income tax system at 8 per cent, which is more fiscally feasible than one might think.
As recently as 2014, Alberta had a powerful tax advantage premised on the understanding that low taxes attract entrepreneurs, investors, businesses and workers that fuel economic growth. Specifically, Alberta had a single 10 per cent personal income tax rate and a 10 per cent business income tax rate. As a result, the province had the lowest top combined (federal and provincial/state) personal income tax and business income tax rate of any Canadian province or U.S. state. And one of the lowest capital gains taxes in North America. Paired with no provincial sales tax, this made Alberta an incredibly attractive place to build a business, work and invest.
However, in 2015 the provincial NDP replaced Alberta’s single personal income tax rate of 10 per cent with five tax rates including a top rate of 15 per cent. In 2016, the Trudeau government increased the top federal rate from 29 per cent to 33 per cent. Together, these changes dealt a crushing blow to Alberta’s tax advantage.
Understanding the importance of low tax rates for economic growth, the Kenney government reduced the business income tax rate to 8 per cent, regaining part of Alberta’s lost advantage. But Alberta’s higher personal income tax rates remain in place.
The next logical step is to return to a single personal income tax rate—but at the lower rate of 8 per cent. This would restore and indeed extend Alberta’s pro-growth tax environment, and it’s more fiscally feasible than one might think. According to a recent analysis, based on 2021 data, returning to a single-rate tax of 8 per cent would result in an estimated revenue loss for the provincial government of $4.2 billion. To cover the lost personal income tax revenue, one option is to replace the federal consumer carbon tax with a made-in-Alberta approach so the Alberta government receives the tax revenue, not Ottawa.
And again, reducing personal income tax rates would improve incentives for people to work, save, invest and engage in entrepreneurial activities—all of which contribute to economic growth and spur tax revenue. In addition, setting the personal income tax rate to 8 per cent would match the new business tax rate, allowing for a more integrated system of personal and business taxes, reducing tax complexity, administration and compliance costs for Albertans.
Premier Smith’s plan to reduce the personal income tax rate on income below $60,000 would be a positive step forward, but her government shouldn’t stop there. Returning to a single-rate personal income tax system would finally restore the province’s lost tax advantage and attract the entrepreneurs, businesses and investment that fuel a strong economy.