The royalty review and climate change panels currently underway in Alberta have the potential to radically alter the role that the oil sands play in Alberta’s economy. The royalty review is designed to assess what my constitute a “fair share” of the oil wealth. Albertans collectively own these resources and it is fair to inquire whether we are collectively getting the best return, much the same way individuals will continually evaluate their investment portfolios. Alternatively, the climate change panel is designed to find the best ways to address the costs of the extraction and use of these resources so that we don’t place those increasingly costly burdens on future generations. However, there has, up to this point, been minimal discussion about significantly altering Alberta’s sources of revenues.
Over the past decade, Alberta has relied on resource revenue for 20-40% of its total revenue. This is problematic, but not just for the reasons that have typically been put forth. When discussing the problem of over reliance on resource revenue, the central argument has been that such revenue streams are not reliable due to the volatility of the price of oil. This volatility makes it extremely difficult for governments and government departments to be fiscally responsible from year to year as they typically increase spending or implement tax cuts during the prosperous times, while slashing spending in the lean years. This exacerbates the already volatile budgets, creates inefficiencies within the public service, and does a disservice to tax payers. Jim Prentice was right that we needed to get government off the “oil revenue rollercoaster”.
All of this is well and good, but there is another compelling reason why Premier Notley should transition the Alberta government away from dependence on resource revenue: democratic accountability. The basic logic of democratic governance is that elected officials make governance decisions, implement policies to enact those decisions, and are held accountable by the citizens that elect and pay for those decisions through elections. This process establishes accountability linkages between elected officials and the electorate. However, if oil revenue supplants tax revenues collected from citizens the result is that the accountability linkages are no longer between citizens and elected officials, but between the oil industry and elected officials. Elected officials implement policies that keep the industry happy and thus their revenue stream secure, rather than implement policies for the good of its citizens. When Jim Prentice presented his budget earlier this year that proposed various tax increase across the board except for corporate taxes, and when you see that the Progressive Conservatives donor list is largely composed of corporations rather than citizens, you understand to whom the PCs were accountable. Such a situation is undoubtedly an erosion of our democratic institutions.
It is not that we should not use any resource revenue, but it must not be of such a quantity that the maintenance of that revenue stream can supplant other competing interests. We need to find sources of revenue that are reliable and maintain proper accountability linkages between our government and its citizens. Assuming Albertan’s don’t want our social services cut by one third (yes there are some spending cuts that could be made, but not enough to close the gap entirely), we would need to find a source of revenue to fill this gap such as increases to various existing taxes, the introduction of new taxes such as the currently anathema sales tax or a carbon tax. All of these have various trade-offs associated with them. For the sake of argument, and because it is one possible outcome of the climate change panel, let’s explore what a carbon tax might look like. When British Columbia introduced its carbon tax they made it revenue neutral meaning there were correlated cuts to income taxes. This is good economic policy: tax the things you don’t want (carbon emissions) more and tax the things you do want (income) less. In fact, the BC government cut income taxes more than the carbon tax brought in. In comparison, Alberta has subsidized its low income tax levels with resource revenues. By implementing a carbon tax it could use that revenue to maintain Alberta’s already low income taxes while filling the volatile resource revenue gap. The resource revenue could then be saved in the Alberta Heritage Savings Trust Fund for future generations while other revenue could be placed in another savings fund from which the government could draw a steady stream to spend on infrastructure and other capital spending projects to help diversify the economy away from oil and gas. This would have the added benefit, democratically speaking, of re-establishing the accountability linkages with all Albertans and not just a select group.
In discussions after posting this, Andrew Leach rightly pointed out that a carbon tax, especially in Alberta, would still result in a significant amount of money coming from the oil and gas sector and thus keep the Alberta government dependent on that revenue stream. Additionally, a carbon tax would negatively impact the amount of royalty revenue the government would take in.
An alternative to a carbon tax, which would be a clearer example for my argument from a democratic perspective, would be a sales tax. This would completely severe the dependence by the government on money from the oil and gas sector for the purposes of everyday budgetary program spending. To be clear, this post was originally about shifting revenue sources and looking at various options including both carbon and sales taxes. I chose to focus on the carbon tax for two reasons. The first is that the carbon tax is already in the news as a possible outcome of the climate change panel and has received support from the oil industry. The sales tax remains anathema to Albertans and has already been struck down as a possibility by the Notley administration. The second is that, while not as ideal as a sales tax for the democratic argument, the carbon tax has additional benefits (such as reducing GHG emissions) which are socially beneficial. Thus I was taking other benefits into consideration. This weakens the argument about about democratic accountability, but alternatively provides an additional argument for a policy proposal that is a real possibility for Alberta.