Regressive Resource Revenue Distribution

 

It’s soon going to be budget day in Alberta. There will undoubtedly be weeping and gnashing of teeth regarding the size of the deficit from the opposition parties with accompanying calls for spending cuts a la Klein 1993 and there will undoubtedly be various rejoinders of both a nuanced and not-so-nuanced type. To be sure, borrowing for program spending is problematic. Yet drastic cuts can also exacerbate an economic downturn and so I believe Notley is right to try to hold the line on spending. There are numerous aspects of Alberta’s budget which make governing more expensive than other provincial counterparts. For example, public sector wages are higher than other jurisdictions in Canada. But these higher wages are the legacy of high wage inflation that comes with an overheated economy that Alberta experienced from 2001-2008 or so. In order to recruit competent employees, the public sector must offer competitive compensation to the private sector. Such wages are “stickier” than private sector in part because stability of wages and job security are a trade-off for wages lower than in the private sector where a premium is paid because of the lower job security. 

The more substantial challenge for Alberta’s fiscal policy is on the revenue side. Alberta has, for too long, been overly dependent upon resource revenue to fill the budgetary gap between revenues and expenditures. This phenomenon is also common to all administrations since the Leduc discovery in 1947 to varying degrees. For this blog post I will focus my attention on three administrations in particular: Lougheed, Getty & Klein. I want to make the argument that this budget gap is a serious problem, not because it is fiscally irresponsible, although I am sure that case will be made in the coming days, but because it is a highly regressive mechanism by which to distribute resource revenue to its owners – the citizens of Alberta. To make this argument, I will make three points. First, I will demonstrate how the revenue/expenditure gap serves as a mechanism by which resource revenue is distributed to Albertans. This emerges from my dissertation research where I am analyzing a number of pathways by which governments can and have distributed wealth to their citizens – from public wealth funds such as the Alberta Heritage Savings Trust Fund to dividend systems employed by Alaska. Second, I will illustrate how it is regressive. Finally, I will highlight the fact that its regressive nature is exacerbated by progressive taxation rates. The final point is meant to demonstrate the importance of this issue for addressing other policy issues – such as inequality in the Province – rather than simply as an issue about fiscal prudence.

For this post, a number of assumptions must be stated and set aside. The first assumption is that natural resources belong to the citizens of Alberta collectively and are managed, for that collective public interest, by the government on their behalf. This would also include future generations of Albertans – an issue with which my dissertation is concerned – but we will set that aside for the moment. With this in mind, we can argue that one of the decisions government’s must make is how best to distribute the wealth or rent that it receives from those resources to the owners of those resources – Albertans. Different mechanisms can distribute that money through different transfer pathways. For example, the Alberta Heritage Savings Trust fund is one such mechanism. Revenue is collected and set aside to be distributed to citizens at a later date. The most extreme version of this kind of savings fund is operates according to what is known as the permanent income theory whereby resources are treated as capital and so 100% of the rent collected by the government is retained as financial capital in order to provide a continuous stream of interest income for the government in perpetuity. Lougheed, in setting up the AHSTF, only went with 30% of resource revenue. An alternative distribution mechanism is a dividend system such as that employed by Alaska. This transfer mechanism distributes resource revenue directly to citizens on an annual basis. The prosperity bonus cheques distributed by the Klein government in 2006 are a poor form of this distribution mechanism primarily because it was a single one-off payment rather than a consistent policy regime established to operate over time. From an intergenerational perspective, both policy choices are valid as a means of distributing money to future generations. What is key is that they conceptualize future generations differently. A government fund policy choice conceptualizes future generations as future residents of Alberta. Regardless of their origins, whoever lives in Alberta 50 years from now is entitled to the benefits of Alberta’s resource wealth. The dividend policy conceptualizes future generations as future descendants of the present generation of Albertans. Regardless of where they reside 50 years from now, whoever is a descendant of THIS generation of Albertans is entitled to Alberta’s resource wealth. While I don’t want to focus on the intergenerational distribution of resource wealth, this point remains important because it differentiates between public and private mechanisms of wealth distribution. The dividend system is a private mechanism for wealth distribution and requires the families themselves to save and distribute that wealth to their descendants. The government fund is obviously the public option. One could compare government run vs private pension savings regimes as analogous.

Highlighting the private wealth distribution mechanism allows us to see another means by which the government distributes money to its citizens, namely by using resource wealth to fill the spending/expenditure gap in the government’s overall budget. This allows the government to provide high quality and a high quantity of government services while maintaining an artificially low taxation system. If we remove the non-renewable resource revenue from the government budget, we see the gap that emerges on a per capita basis in the chart below. Note that this accounts for the Alberta Heritage Fund by reducing the gap when money was saved and adding that to later years when that money was taken from the fund to pay for expenditures. This is why the deficit from 1976-1983 is significantly lower than any other period.

 

 

Tax Gap

What we see is a pretty consistent use of resource revenue to fill a budget gap. To be clear, this illustrates what the government’s deficit would be without non-renewable resource revenue. Some years the government was running surpluses, some years deficits, but without non-renewable resource revenue the government doesn’t run a single surplus from 1970-2006.

Averaging over each premier’s administration we get the following tax gap in 2002 dollars.

Average Lougheed  $(1636.67)
Average Getty  $(2,788.76)
Average Klein  $(1,450.02)

 

For comparison, the current 2015-2016 Alberta budget numbers had a tax gap of approximately $2934.22 in 2002 dollars putting us just slightly above the Don Getty average. Like the Getty era, Notley has inherited a budget based on oil at $80/barrel when oil is nowhere near that number.
The purpose of all this is to make one simple point: this tax gap serves as a de facto transfer of resource revenue to Albertans via foregone taxes that would otherwise be paid. My purpose is to not argue for what the cause of this tax gap is – i.e. whether it’s a spending problem or a revenue problem – but simply to argue that spending more than you take in and using resource revenue to fill all or a significant portion of that gap transfers money to the citizens of that jurisdiction. In other words, Albertans are currently receiving approximately $3000 per citizen in foregone taxes as though Alberta had a dividend system like Alaska’s set up.

However, when compared to both the public government fund transfer mechanism or the Alaskan dividend system, this method of distributing resource wealth to Albertans is highly regressive and, as a result, highly problematic. In Alaska’s dividend system, resource revenue is distributed to each citizen based with adjustments made for residency duration (so someone living in Alaska more than 10 years receives a greater amount that someone who just move there, thus mitigating the population influx that could occur from such a system). With Alberta’s system, the money does not go towards citizens but only taxpayers. So, anyone who does not make enough income to pay taxes in the first place, receives absolutely no benefit whatsoever. Granted they may receive government services which are primarily focused on low income individuals and households, but that is a separate issue. Moreover, the more you pay in taxes the greater your benefit of foregone taxes through this mechanism. Thus, higher incomes which pay a greater tax amount and, now with the reintroduction of a progressive taxation brackets, a greater tax rate receive a greater discount. If we assume that 1/3 of Albertans don’t make enough to pay taxes then the per capita tax gap increases to $3300 per tax payer. And that amount would be prorated for overall tax burden so an individual making $50k a year will receive a much lower portion of foregone taxes than an individual making $200k a year. (I will try to update this with actual numbers once the StatsCan website is back up).

There are numerous reasons why an over reliance on volatile resource revenue is highly problematic for fiscal stability and prudence. Imagine trying to buy a car or a house if your income fluctuated that much. What I have tried to illustrate here, however, is that this is also fundamentally problematic from an equity perspective as the wealth benefit from this low tax, high spending regime – aka the Alberta Advantage – much more than lower income individuals. The progressive tax rates introduced by the Notley government to address the inequality in the province actually exacerbate the regressive nature of this system and undermine the policy priorities of this NDP government. Whether it is through spending cuts, or an open and honest discussion about alternative revenue sources, or both, what is clear is that Alberta needs to stop relying on resource revenue as quickly as possible.

 

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