An HST for Alberta? It depends what the money is used for

In Wednesday’s Financial Post, University of Calgary economist Trevor Tombe made the case for a provincial harmonized sales tax (HST) in Alberta.

Tombe argued that a harmonized sales tax in Alberta would cause less economic damage for every dollar raised than is the case for either personal income taxes or business taxes. And he’s right. Personal income taxes reduce the incentive for people to work, save and invest, while business taxes place substantial hidden costs on all Albertans and are among the most economically harmful components of our tax mix. Well-designed consumption taxes, of which sales taxes are one type, are much less damaging.

For this reason, if revenue from a new HST was indeed used to reduce, dollar-for-dollar, corporate and/or personal income taxes with no increase in the overall tax burden, this would represent a significant pro-growth reform.

However, it’s crucially important to distinguish between Prof. Tombe’s arguments for revenue-neutral tax reform and recent calls for a new sales tax to be added on top of existing taxes in an effort to reduce the provincial deficit. These proposals, which would deliver almost none of the economic benefits of a revenue-neutral tax swap, should be rejected.

For example, consider an open letter from a coalition of 19 academics published in February calling for a harmonized provincial sales tax of five per cent, with no offsetting tax cuts. The letter writers’ argument for a provincial sales tax was that the revenue could “significantly address the province’s current fiscal problems.” In other words, the new HST would simply be used to increase provincial revenues.

The problem with this sort of proposal is that it fundamentally misdiagnoses the cause of Alberta’s current budget woes. Yes, Alberta faces real fiscal problems—but not because the government doesn’t generate enough revenue. The problem is that successive governments in the province have increased spending unsustainably for more than a decade.

In fact, our research shows that if successive provincial governments had simply increased spending at a more moderate pace, matching the combined rate of inflation plus population since 2004/05  (keeping real per person spending constant), the province would have an approximately balanced budget today—not a $10 billion deficit.

In this light, it’s clear that proposals to try to solve Alberta’s fiscal challenges by creating an HST are focused on the wrong side of the ledger. Our deficit-reduction strategy should focus on reforming and reducing provincial spending, not on raising taxes.

Discussions about tax policy often get boiled down to sound bites, as lines get drawn and people declare themselves to be simply “for” or “against” an HST. But the wisdom of a new HST in Alberta depends crucially on what the money is used for.

If all of the new revenue is used to reduce other, more economically harmful taxes, a new HST could represent a substantial pro-growth improvement to Alberta’s tax system.

If, however, the money is simply used to continue financing unsustainable spending and put off needed spending reform then the introduction of a sales tax would amount to an unnecessary revenue grab and an unwarranted burden on Albertans who have already seen a number of their taxes raised over the past year.

Almost nobody likes taxes, but some taxes are more economically harmful than others. Governments should always seek the least economically harmful way to raise the money needed to fund public services. A dollar-for-dollar tax swap with a new HST being offset by reductions in personal and business taxes would be a significant step in that direction.