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Carbon tax major blow to Alberta’s investment climate

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By Ben Eisen
and Charles Lammam
The Fraser Institute

Recent policy changes have buried the Alberta Advantage. The latest nail in the coffin comes from the provincial government’s new climate change strategy.

For many years, Alberta’s strong investment climate helped set the foundation for robust economic performance.

A competitive, well-designed tax regime anchored an assortment of pro-growth economic policies, collectively known as the Alberta Advantage. It made Wild Rose Country the economic envy of many other provinces and energy-producing jurisdictions.

Ben
Eisen

But a series of policy shifts over the past several months have put Alberta at a disadvantage. Case in point: the provincial government’s new climate change strategy. The strategy calls for a phased-in carbon tax starting in January 2017 and reaching $30 per tonne in January 2018.

It’s just one more tax burden on Albertan businesses and families, and makes the province a less desirable place to work and invest. And it comes at the most inopportune time, as the province struggles in the face of depressed commodity prices and weak economic performance.

The newly-elected NDP government’s recent policy moves demonstrate the extent to which Alberta’s once exemplary investment climate has been tarnished.

In early summer, the government increased the general corporate tax rate from 10 to 12 per cent. This sent a powerful, negative signal to domestic and international investors about the direction of Alberta economic policy. It also weakened the incentives for firms to invest and create jobs. Many economists believe that higher corporate taxes are among the most damaging forms of taxation, as they deter investment and dull growth.

The government also replaced the single personal income tax rate of 10 per cent with five tax brackets and increasing the top marginal rate to 15 per cent in 2016. The old single rate gave Alberta a unique advantage, helping the province attract and retain skilled workers, entrepreneurs and investment. But Alberta no longer has the lowest top income tax rate, when federal and provincial or state taxes are combined, among Canadian provinces and U.S. states. Its top marginal rate is higher than competing energy-producers Texas, Alaska and Wyoming – all of which have no state income tax.

Charles
Lammam

The government has introduced other economically damaging measures as well. It plans to significantly increase the minimum wage over the next several years, despite compelling evidence that higher minimum wages increase unemployment, especially among young and low-skilled workers. Prior to Oct. 1, the minimum wage in Alberta was $10.20 but it is scheduled to rise steadily before reaching $15 an hour in 2018. This represents a 47 per cent increase.

In the energy sector, the government created further uncertainty this spring by announcing plans for a royalty review. It has since said there would be no royalty rate increases until at least 2017, quelling concerns about immediate hikes. But the prospect of an increase in the future remains a concern.

The newly announced carbon tax and accompanying environmental regulations will be layered on top of these policy changes. The combination of higher personal and corporate taxes with a new carbon tax is particularly troubling given that Alberta’s energy sector will be at a marked disadvantage relative to competing energy-producing jurisdictions such as Texas, North Dakota, and Wyoming – none of which have or are actively considering a carbon tax.

The Alberta Advantage served the province well for many years. In just a few months, it has been virtually undone.

Ben Eisen and Charles Lammam are economists with the Fraser Institute.

Ben and Charles are Troy Media contributors. Why aren’t you?

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Ben Eisen

Ben Eisen is a Senior Fellow in Fiscal and Provincial Prosperity Studies and former Director of Provincial Prosperity Studies at the Fraser Institute. He holds a BA from the University of Toronto and an MPP from the University of Toronto’s School of Public Policy and Governance. Prior to joining the Fraser Institute Mr. Eisen was the Director of Research and Programmes at the Atlantic Institute for Market Studies in Halifax. He also worked for the Citizens Budget Commission in New York City, and in Winnipeg as the Assistant Research Director for the Frontier Centre for Public Policy. Mr. Eisen has published influential studies on several policy topics, including intergovernmental relations, public finance, and higher education policy.

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