Recently, the Trudeau government announced it would increase the federal backstop carbon levy to $170 per tonne between now and 2030. This backgrounder considers options for fiscal policy reform in Alberta that would be made possible by the provincial government repatriating the full amount of the carbon levy (most of which is now collected by Ottawa and distributed to Albertans in lump sum transfers) while also instituting a harmonized sales tax. These options include almost entirely closing the province’s “fiscal gap” and thus essentially solving its current fiscal problems or eliminating both personal and corporate income taxes, thus creating a more economically efficient and easily understood “tax advantage” than Alberta has ever enjoyed in the past.
Introduction
Recently, the Trudeau government announced a substantial increase to the backstop carbon levy for provinces unwilling to meet a federally mandated minimum per tonne price on carbon. The federal carbon levy had already been set to reach $50 per tonne in 2022 and will keep growing until it reaches $170 in 2030.
In September 2019, Finances of the Nation Co-Director Ken McKenzie published a study entitled “Altering the Tax Mix in Alberta.” Currently, the federal government (at Alberta’s choosing) collects the mandated fuel charge. It then distributes almost the entirety of the funds collected in Alberta to households in the province via lump sum transfers. McKenzie argued that by collecting carbon fuel charges itself, the provincial government could make its tax mix more growth-enhancing by reducing economically harmful personal income and corporate income taxes. He also proposed introducing a sales tax to make the province’s finances more sustainable and reduce reliance on volatile resource revenues.
The announcement of an increased backstop carbon levy has been greeted with scorn by the Kenney government, but it can also be viewed as a unique moment during which it is possible to consider transformative changes to the province’s fiscal policy.
This commentary uses a thought experiment to consider policy options for re-designing Alberta’s tax system and/or improving its fiscal position in light of the mandated carbon price, using McKenzie’s proposals as a jumping off point. The calculations presented here represent highly simplified models that do not account for behavioral changes (aside from the especially large and intentional ones that would be produced by a substantial carbon levy).
None of what follows is an endorsement of any specific option. The purpose is to present the type and scale of reforms that could be considered by introducing an 8 per cent HST and repatriating carbon levy revenue.
While the Alberta government may wish to continue fighting the federal mandate in court or hope that it will be overturned following a federal election, even ardent opponents of carbon pricing should encourage provincial governments to make the best policy decisions available given current federal law. There is nothing to stop Alberta’s provincial government from reversing policy changes if the mandate is eventually repealed.
Ballpark Estimating the Revenue Gains from an 8% HST and Repatriating Carbon levy Revenue
To begin, let’s produce a ballpark estimate of how much additional revenue would have been collected by Alberta’s provincial government in 2019 if an 8 per cent HST and entirely repatriated $170 per tonne carbon tax had been in effect.
The revenue raised through a sales tax depends on how broad the tax base is, and different provinces adopting HST so far have had different revenue performance levels, depending on details of the tax implementation and the mix of taxable and non-taxable goods in their consumption mix.
Using Finances of the Nation data on federal and provincial revenues, we can estimate that if Alberta were to tax the same share of consumption expenditure as the federal GST does nationally, then an 8% HST would raise about $9 billion in annual revenue.[1] Revenue could in fact be even higher. If an Alberta HST had the same revenue performance as Ontario, annual revenue would be around $10 billion. For the calculations below, we will use the more conservative of these estimates ($9 billion, based on revenue performance of the federal GST) for estimating Alberta’s potential revenue from an 8 per cent HST. This is a mechanical estimate of the revenue implications of a new HST that does not account for any behavioural changes—although in the long-run we should expect behavioural changes from a well-designed VAT to be small.
Making a reasonable estimate of carbon levy revenue at $170 per tonne is relatively straightforward. Specifically, a recent PBO report estimated that in 2021, the $40 per tonne fuel tax component of the carbon levy currently collected by Ottawa will produce $1.9 billion in revenue from Alberta.[2] Meanwhile, the federal government provides an estimate on the size of rebates to individuals up until 2030—and the percentage growth in these rebates tracks the growth in fuel levy revenues.
The federal forecast shows rebates for individuals will increase by a multiple of 3.3 between 2021 and 2030. Applying this 3.3 multiple to 2019 carbon fuel taxes tells us that if a $170 fuel levy carbon levy had been in place, revenues would have been approximately $6.4 billion.
This estimate of the behavioural effects tracks closely to expert predictions on the impact on emissions. Carbon policy and environmental economist Dave Sawyer estimates the shift from a $50 per tonne carbon levy to $170 will reduce emissions by 25 per cent.
The federal GST credit to protect low-income individuals and households reduces the revenue value of that tax by approximately 11 per cent.[3] A similar effect from a low-income tax credit in Alberta would reduce the revenue collected by approximately $1 billion.
This provincial tax credit could protect low-income households from a larger carbon levy, and additional protections may be needed for rural Albertans and those with large families. The BC low-income rebates reduce overall revenue of its carbon levy by 17 per cent, which provides a useful estimate of the cost of a similar credit in Alberta. If such a tax credit existed in Alberta, it would reduce our 2019 carbon levy revenue estimate by $1.1 billion.
Finally, carbon levies from large emitters would be much higher under a $170 carbon levy. Using the same 3.3 multiple from current levels that we used for the fuel levy produces an additional $1.4 billion in 2019. Because this exercise focuses on potential uses of additional revenues beyond what is already being collected, we will exclude revenue already being collected at the current level ($400 M). This brings the total additional revenue from an 8 per cent HST and a $170 carbon levy in 2019 to $14.3 billion. The table below shows the breakdown of estimated additional revenue from these changes.
Table 1 Estimated Additional Revenue from Policy Changes
Policy Change
Estimated Additional Revenue from change in 2019 ($B)
Introduction of 8 per cent HST w/ credit for low income households
$8.0
Repatriation of Federal Fuel Carbon Levy w/ credit for low income households.
$5.3
Additional Revenue from Levy on Large Emitters
$1.0
TOTAL ADDITIONAL REVENUE
$14.3 billion
Example 1: Eliminate the Deficit and Reduce Reliance on Resource Revenues
What could be done with all this additional revenue? The first thing that springs to mind given the dismal state of provincial finances is that it could be used to eliminate the deficit. Between 2015 and 2019. Alberta’s average deficit was $8.8 billion. Meanwhile, non-renewable natural resource revenue in 2019 was $5.9 billion.
As such, the revenue changes described above could be used to eliminate the pre-pandemic deficit while also improving Alberta’s fiscal balance minus natural resource revenues to just $400 million. This would mean almost entirely eliminating the province’s reliance on revenues from that volatile source in the short term. This would allow the province to run a balanced budget while placing the vast majority of natural resource revenue into a stabilization fund and/or resume contributions to the Heritage Trust Fund.
Although this policy mix would end Alberta’s long string of deficits, it may be insufficient to entirely end Alberta’s reliance on natural resource revenues to fund programs. Analysis by FoN Co-Director Trevor Tombe suggests Alberta may face a deficit of up to $10 billion by 2025 even if resource revenues recover to $8 billion.
Under this scenario, the revenue enhancements described above would be adequate to prevent deficits but may not entirely end reliance on resource revenues to fund current programming. Modest spending restraint could make up this difference.
Alberta’s finances are in shambles. The option described in this section would go a long way towards bringing Alberta’s finances to sustainability while also dramatically reducing or even eliminating the province’s reliance on natural resource royalties to fund current programming.
Example 2: Eliminate Income Taxes in Alberta
Many would object to the option of reducing Alberta’s deficit via increased revenue as described above, preferring to do so via spending reductions. This is the stated preference of the current government. Given Alberta’s per-person spending levels are approximately 20 per cent higher than the other large provinces (Ontario, BC, and Quebec), meaningful spending reductions seem plausible.
Instead of using the new revenue from the tax changes above for deficit reduction, this section considers a radical option for tax reform in Alberta that may be made possible by the introduction of an HST and repatriating the entirety of the federally mandated carbon levy. Specifically, it considers eliminating personal and corporate income taxes in Alberta.
Finances of the Nation’s REAL Dataset shows that Alberta collected $16.7 billion in combined personal and corporate income taxes. This means that introducing a combination of an HST and repatriating the entirety of a $170 carbon levy ($14.3 billion total) in 2019 would be adequate to replace approximately 86 per cent of all current personal and corporate income tax revenue.
Coupled with a 5 per cent reduction in program spending, the additional revenue from the tax changes described above would have been adequate to entirely replace income taxation in Alberta in 2019.
This approach would create a new, and easily understood version of the “Alberta Tax Advantage.” The table below breaks down the components of this scenario.
Table 2 Effect on Fiscal Balance from Policy Changes
Policy Change
$ Effect on Fiscal Balance ($ Billion)
Introduce 8 per cent HST and repatriate carbon levy (w/ supports for low income households)
$14.3
Eliminate PIT
($11.8)
Eliminate CIT
($4.8)
5 Per Cent Program Spending Reduction
$2.8
TOTAL
$0.5
This option would not address the Alberta’s large deficit or reliance on resource revenues, and the province would require further action to address those issues.
Of course, eliminating the PIT would bring especially large benefits to high income earners. To address concerns surrounding distributive consequences, there are numerous ways to make the option related to eliminating or nearly eliminating the PIT more progressive beyond the implementation of a low-income credit.
For example, instead of eliminating the PIT, the personal exemption could simply be raised to a high value – say $314, 429 (the current cutoff rate for the top tax bracket)- so that Albertans with the highest incomes continue to pay provincial income tax. The threshold earnings level for PIT taxation could be reduced further still to subject additional high-income Albertans to income tax. However, such changes would reduce the efficiency gains as well as the simplicity and marketability of a new “tax advantage.”
Conclusion
This commentary has sought to estimate the additional revenue that would flow to the government of Alberta as a result of implementing an 8 per cent HST and repatriating the whole of federally mandated carbon levy. It has also examined, in broad strokes, a non-exhaustive list of policy options that these actions would make possible.[4] The thought experiment is meant to provide a big-picture estimate of the type and scale of reforms that could be undertaken, and should not be read as a complete, dynamic policy analysis.
There are countless possible variants of the options presented here, such as policy bundles including components of each, and entirely other options available to the provincial government. For instance, the provincial government may wish to use some of the revenue for deficit reduction and the rest for CIT and PIT rate reductions but not the elimination of the entire tax categories. This option would allow the province to benefit from increased revenue resulting from the enlarged tax base of the CIT and PIT resulting from a rate reduction, which it obviously could not do if the rates were reduced to zero.
The government of Alberta frequently laments the intrusion of the federal government in provincial affairs. Alberta’s government can take greater charge of its fiscal and economic future by repatriating all carbon levy revenues. It can then use the money for any number of its own priorities rather than allowing the decisions about how it is used to the federal government.
[4] One immediate objection to all of these options is that the purpose of a carbon levy is decarbonization, and so carbon levy revenues should decline over time. Given the indeterminate time horizon of decarbonization, I am willing to file this concern in John Maynard Keynes’ “in the long run we’re all dead” file. If and when carbon revenues decline significantly in the future Alberta’s government will have to either increase other taxes or reduce spending commensurately.
Making the Best of It: Options for Carbon levy Revenue in Alberta
By Ben EisenBen Eisen
Recently, the Trudeau government announced it would increase the federal backstop carbon levy to $170 per tonne between now and 2030. This backgrounder considers options for fiscal policy reform in Alberta that would be made possible by the provincial government repatriating the full amount of the carbon levy (most of which is now collected by Ottawa and distributed to Albertans in lump sum transfers) while also instituting a harmonized sales tax. These options include almost entirely closing the province’s “fiscal gap” and thus essentially solving its current fiscal problems or eliminating both personal and corporate income taxes, thus creating a more economically efficient and easily understood “tax advantage” than Alberta has ever enjoyed in the past.
Introduction
Recently, the Trudeau government announced a substantial increase to the backstop carbon levy for provinces unwilling to meet a federally mandated minimum per tonne price on carbon. The federal carbon levy had already been set to reach $50 per tonne in 2022 and will keep growing until it reaches $170 in 2030.
In September 2019, Finances of the Nation Co-Director Ken McKenzie published a study entitled “Altering the Tax Mix in Alberta.” Currently, the federal government (at Alberta’s choosing) collects the mandated fuel charge. It then distributes almost the entirety of the funds collected in Alberta to households in the province via lump sum transfers. McKenzie argued that by collecting carbon fuel charges itself, the provincial government could make its tax mix more growth-enhancing by reducing economically harmful personal income and corporate income taxes. He also proposed introducing a sales tax to make the province’s finances more sustainable and reduce reliance on volatile resource revenues.
The announcement of an increased backstop carbon levy has been greeted with scorn by the Kenney government, but it can also be viewed as a unique moment during which it is possible to consider transformative changes to the province’s fiscal policy.
This commentary uses a thought experiment to consider policy options for re-designing Alberta’s tax system and/or improving its fiscal position in light of the mandated carbon price, using McKenzie’s proposals as a jumping off point. The calculations presented here represent highly simplified models that do not account for behavioral changes (aside from the especially large and intentional ones that would be produced by a substantial carbon levy).
None of what follows is an endorsement of any specific option. The purpose is to present the type and scale of reforms that could be considered by introducing an 8 per cent HST and repatriating carbon levy revenue.
While the Alberta government may wish to continue fighting the federal mandate in court or hope that it will be overturned following a federal election, even ardent opponents of carbon pricing should encourage provincial governments to make the best policy decisions available given current federal law. There is nothing to stop Alberta’s provincial government from reversing policy changes if the mandate is eventually repealed.
Ballpark Estimating the Revenue Gains from an 8% HST and Repatriating Carbon levy Revenue
To begin, let’s produce a ballpark estimate of how much additional revenue would have been collected by Alberta’s provincial government in 2019 if an 8 per cent HST and entirely repatriated $170 per tonne carbon tax had been in effect.
The revenue raised through a sales tax depends on how broad the tax base is, and different provinces adopting HST so far have had different revenue performance levels, depending on details of the tax implementation and the mix of taxable and non-taxable goods in their consumption mix.
Using Finances of the Nation data on federal and provincial revenues, we can estimate that if Alberta were to tax the same share of consumption expenditure as the federal GST does nationally, then an 8% HST would raise about $9 billion in annual revenue.[1] Revenue could in fact be even higher. If an Alberta HST had the same revenue performance as Ontario, annual revenue would be around $10 billion. For the calculations below, we will use the more conservative of these estimates ($9 billion, based on revenue performance of the federal GST) for estimating Alberta’s potential revenue from an 8 per cent HST. This is a mechanical estimate of the revenue implications of a new HST that does not account for any behavioural changes—although in the long-run we should expect behavioural changes from a well-designed VAT to be small.
Making a reasonable estimate of carbon levy revenue at $170 per tonne is relatively straightforward. Specifically, a recent PBO report estimated that in 2021, the $40 per tonne fuel tax component of the carbon levy currently collected by Ottawa will produce $1.9 billion in revenue from Alberta.[2] Meanwhile, the federal government provides an estimate on the size of rebates to individuals up until 2030—and the percentage growth in these rebates tracks the growth in fuel levy revenues.
The federal forecast shows rebates for individuals will increase by a multiple of 3.3 between 2021 and 2030. Applying this 3.3 multiple to 2019 carbon fuel taxes tells us that if a $170 fuel levy carbon levy had been in place, revenues would have been approximately $6.4 billion.
This estimate of the behavioural effects tracks closely to expert predictions on the impact on emissions. Carbon policy and environmental economist Dave Sawyer estimates the shift from a $50 per tonne carbon levy to $170 will reduce emissions by 25 per cent.
The federal GST credit to protect low-income individuals and households reduces the revenue value of that tax by approximately 11 per cent.[3] A similar effect from a low-income tax credit in Alberta would reduce the revenue collected by approximately $1 billion.
This provincial tax credit could protect low-income households from a larger carbon levy, and additional protections may be needed for rural Albertans and those with large families. The BC low-income rebates reduce overall revenue of its carbon levy by 17 per cent, which provides a useful estimate of the cost of a similar credit in Alberta. If such a tax credit existed in Alberta, it would reduce our 2019 carbon levy revenue estimate by $1.1 billion.
Finally, carbon levies from large emitters would be much higher under a $170 carbon levy. Using the same 3.3 multiple from current levels that we used for the fuel levy produces an additional $1.4 billion in 2019. Because this exercise focuses on potential uses of additional revenues beyond what is already being collected, we will exclude revenue already being collected at the current level ($400 M). This brings the total additional revenue from an 8 per cent HST and a $170 carbon levy in 2019 to $14.3 billion. The table below shows the breakdown of estimated additional revenue from these changes.
Table 1 Estimated Additional Revenue from Policy Changes
Example 1: Eliminate the Deficit and Reduce Reliance on Resource Revenues
What could be done with all this additional revenue? The first thing that springs to mind given the dismal state of provincial finances is that it could be used to eliminate the deficit. Between 2015 and 2019. Alberta’s average deficit was $8.8 billion. Meanwhile, non-renewable natural resource revenue in 2019 was $5.9 billion.
As such, the revenue changes described above could be used to eliminate the pre-pandemic deficit while also improving Alberta’s fiscal balance minus natural resource revenues to just $400 million. This would mean almost entirely eliminating the province’s reliance on revenues from that volatile source in the short term. This would allow the province to run a balanced budget while placing the vast majority of natural resource revenue into a stabilization fund and/or resume contributions to the Heritage Trust Fund.
Although this policy mix would end Alberta’s long string of deficits, it may be insufficient to entirely end Alberta’s reliance on natural resource revenues to fund programs. Analysis by FoN Co-Director Trevor Tombe suggests Alberta may face a deficit of up to $10 billion by 2025 even if resource revenues recover to $8 billion.
Under this scenario, the revenue enhancements described above would be adequate to prevent deficits but may not entirely end reliance on resource revenues to fund current programming. Modest spending restraint could make up this difference.
Alberta’s finances are in shambles. The option described in this section would go a long way towards bringing Alberta’s finances to sustainability while also dramatically reducing or even eliminating the province’s reliance on natural resource royalties to fund current programming.
Example 2: Eliminate Income Taxes in Alberta
Many would object to the option of reducing Alberta’s deficit via increased revenue as described above, preferring to do so via spending reductions. This is the stated preference of the current government. Given Alberta’s per-person spending levels are approximately 20 per cent higher than the other large provinces (Ontario, BC, and Quebec), meaningful spending reductions seem plausible.
Instead of using the new revenue from the tax changes above for deficit reduction, this section considers a radical option for tax reform in Alberta that may be made possible by the introduction of an HST and repatriating the entirety of the federally mandated carbon levy. Specifically, it considers eliminating personal and corporate income taxes in Alberta.
Finances of the Nation’s REAL Dataset shows that Alberta collected $16.7 billion in combined personal and corporate income taxes. This means that introducing a combination of an HST and repatriating the entirety of a $170 carbon levy ($14.3 billion total) in 2019 would be adequate to replace approximately 86 per cent of all current personal and corporate income tax revenue.
Coupled with a 5 per cent reduction in program spending, the additional revenue from the tax changes described above would have been adequate to entirely replace income taxation in Alberta in 2019.
This approach would create a new, and easily understood version of the “Alberta Tax Advantage.” The table below breaks down the components of this scenario.
Table 2 Effect on Fiscal Balance from Policy Changes
This option would not address the Alberta’s large deficit or reliance on resource revenues, and the province would require further action to address those issues.
Of course, eliminating the PIT would bring especially large benefits to high income earners. To address concerns surrounding distributive consequences, there are numerous ways to make the option related to eliminating or nearly eliminating the PIT more progressive beyond the implementation of a low-income credit.
For example, instead of eliminating the PIT, the personal exemption could simply be raised to a high value – say $314, 429 (the current cutoff rate for the top tax bracket)- so that Albertans with the highest incomes continue to pay provincial income tax. The threshold earnings level for PIT taxation could be reduced further still to subject additional high-income Albertans to income tax. However, such changes would reduce the efficiency gains as well as the simplicity and marketability of a new “tax advantage.”
Conclusion
This commentary has sought to estimate the additional revenue that would flow to the government of Alberta as a result of implementing an 8 per cent HST and repatriating the whole of federally mandated carbon levy. It has also examined, in broad strokes, a non-exhaustive list of policy options that these actions would make possible.[4] The thought experiment is meant to provide a big-picture estimate of the type and scale of reforms that could be undertaken, and should not be read as a complete, dynamic policy analysis.
There are countless possible variants of the options presented here, such as policy bundles including components of each, and entirely other options available to the provincial government. For instance, the provincial government may wish to use some of the revenue for deficit reduction and the rest for CIT and PIT rate reductions but not the elimination of the entire tax categories. This option would allow the province to benefit from increased revenue resulting from the enlarged tax base of the CIT and PIT resulting from a rate reduction, which it obviously could not do if the rates were reduced to zero.
The government of Alberta frequently laments the intrusion of the federal government in provincial affairs. Alberta’s government can take greater charge of its fiscal and economic future by repatriating all carbon levy revenues. It can then use the money for any number of its own priorities rather than allowing the decisions about how it is used to the federal government.
[1] To arrive at this estimate, I multiplied Final Consumption Expenditure (FCE) in Alberta by the ratio of federal GST revenue to national FCE, and times 8/5 to reflect the difference in tax rates. For details on the tax base for GST and measuring the revenue performance of sales taxes, see Michael Smart, 2012, Departures from neutrality in Canada’s Goods and Services Tax, SPP Research Paper 5(5).
[2] This is a slight simplification as the current $10 increases occur on April 1, not January 1 of each year.
[3] Calculation by author. Value of GST value drawn from Finances of the Nation REAL data set, value of GST credit drawn from https://www.canada.ca/en/department-finance/services/publications/federal-tax-expenditures/2020/part-2.html
[4] One immediate objection to all of these options is that the purpose of a carbon levy is decarbonization, and so carbon levy revenues should decline over time. Given the indeterminate time horizon of decarbonization, I am willing to file this concern in John Maynard Keynes’ “in the long run we’re all dead” file. If and when carbon revenues decline significantly in the future Alberta’s government will have to either increase other taxes or reduce spending commensurately.