Alberta government should finally restore province’s tax advantage

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Appeared in the Western Standard, April 4, 2024
Alberta government should finally restore province’s tax advantage

As recently as 2014, Alberta enjoyed a “tax advantage” that helped make the province one of the most attractive jurisdictions for individuals and businesses in North America, and the provincial economy benefited as a result. But the Notley government eliminated this advantage in 2015. And today, after 18 months in office (and two provincial budgets), the Smith government has failed to restore it.

Specifically, prior to 2015, Alberta had North America’s lowest top combined (that is, federal and provincial) personal income tax rate, lowest business tax rate, and no provincial sales tax.

Simply put, lower personal income taxes allow workers to keep more of their money and help attract skilled workers, top researchers and entrepreneurs—the kinds of people who help build a more productive economy. And jurisdictions with competitive business taxes enjoy higher rates of investment, innovation and job creation, which all contribute to higher living standards.

However, in 2015 the Notley government replaced Alberta’s single personal income tax rate of 10 per cent with a five-bracket system that included a top marginal rate of 15 per cent, and raised the business tax rate from 10 per cent to 12 per cent. In other words, the Notley government, by knocking down two of its three pillars, effectively ended Alberta’s tax advantage.

In recent years, some progress has been made in restoring this advantage. Starting in 2019, the Kenney government reduced the business tax down to its current rate of 8 per cent—even lower than the pre-2015 rate. As a result, Alberta again has the lowest business tax rate in Canada, and a lower rate than 44 U.S. states.

Yet both the Kenney and Smith governments retained the Notley personal income tax rates, which remain decidedly uncompetitive relative to many jurisdictions in North America (due also in part to the Trudeau government’s 2016 increase to the federal top personal income tax rate).

Indeed, according to a new study published by the Fraser Institute, Alberta’s top combined (again, provincial and federal) income tax rate of 48 per cent ranked 10th highest last year among 61 North American jurisdictions—higher than Saskatchewan and every U.S. state (except California)—compared to 39 per cent in 2014 (prior to the provincial and federal tax increases), which ranked lowest among 60 North American jurisdictions. And Alberta’s rates are also now uncompetitive at other income levels.

Clearly, if the Smith government wants to regain Alberta’s tax advantage, it must reduce income taxes. In its 2024 budget tabled in February, the government included a plan to reduce the PIT tax rate to 8 per cent on income under $60,000 by 2027. But this alone won’t restore the province’s advantage. Instead, the government should re-establish a single-rate personal income tax system, this time at 8 per cent, which would give Alberta the lowest top provincial rate in Canada one of the lowest top combined rates (41 per cent) in North America.

In its recent budget, nearly a decade after Alberta lost its tax advantage, the Smith government missed an opportunity. But in the near future, it should re-establish the province’s tax advantage, which served Albertans so well.