What Happened to 8 Percent?

Worth A Look, Taxation, Frontier Centre

In 2001, former Minister of Finance, Patricia Nelson committed the Province of Alberta to reduce its corporate income tax rate to 8.0 percent over a four-year period as part of a broader pro-growth business tax reduction plan. Today, the provinces corporate income tax rate is 11.5 percent: below where it was in 2001 (15.5 percent) but significantly above the goal of 8.0 percent. Given the detrimental impact high corporate taxes have on business investment, entrepreneurial activity, and risk-taking, Alberta would do well to immediately prioritize the reduction of corporate income tax rates.

The 2001 Alberta budget was a watershed event in fiscal policy. That budget not only ushered in the provinces single rate tax of 10.0 percent on personal income, but, equally as important, accepted most of the Business Tax Review Committees recommendations, including reducing corporate income tax rates, completely eliminating corporate capital taxes, reducing capital gains taxes, and maintaining a low rate, broad base tax system. The 2001 budget, more so than any other single budget, established a solid and well-grounded foundation for prosperity.

Unfortunately, one of the main pillars of the 2001 reform, reducing corporate income tax rates to 8.0 percent has been allowed to fall dormant. One year after Minister Nelson committed Alberta to achieving an 8.0 percent corporate income tax rate, she rescinded the commitment and replaced it with a less specific goal of achieving the reductions when it was more fiscally prudent.

Given the often conflicting objectives of governments, the determination of a more fiscally prudent time is rather arbitrary. Also, it seems clear that the province has been in a position to meet its commitment of reducing corporate income tax rates given the rise in revenues and spending and debt reduction since 2001.

In 2001, the province recorded revenues of $21.9 billion against program spending of $20.1 billion and debt charges of $0.8 billion, resulting in a surplus of $1.1 billion.

The current 2005 budget estimates revenues at $27.3 billion against program spending of $25.5 billion and interest charges of $0.3 billion. Put differently, the province continues to record large surpluses that are soundly being used to establish long-term financing funds. However, the presence of on-going surpluses coupled with increased revenues and spending indicates a clear opportunity for tax relief.

Reducing corporate income tax rates to the previously established goal of 8.0 percent makes a great deal of economic sense when one realizes the costs such taxes impose on an economy. Economic research dating back to the early 1970s has consistently found that business taxes impose much higher costs on the economy compared to other more efficient taxes, such as sales and payroll taxes. The federal Department of Finance has calculated the cost of raising one additional dollar of revenue from corporate income taxes at $1.55. This compares with costs of $0.17 for sales taxes and $0.27 for payroll taxes.

Reducing the use of onerous, costly taxes such as corporate income taxes improves the efficiency of an economy and substantially improves the incentives for savings and investment, and entrepreneurial activity. In addition, reducing corporate income taxes will close the gap between Alberta and numerous US states that do not impose corporate income taxes.

Albertans have achieved some significant fiscal goals over the last few years: balanced budgets, surpluses to eliminate the debt, single rate tax on personal income, and generally reduced taxes. Despite some setbacks, including large increases in program spending, the fiscal situation in the province remains strong with surpluses forecast for the foreseeable future.

Alberta must honour its commitment to reduce corporate income tax rates to 8.0 percent immediately with an eye towards even greater tax relief aimed at improving the incentives for work, savings, and investment. Such reforms and tax relief will build on the foundation established in the 2001 budget and enhance the provinces prosperity and economic growth.

Jason Clemens (jasonc@fraserinstitute.ca) is the director of fiscal studies and Niels Veldhuis (nielsv@fraserinstitute.ca) is the senior research economist with The Fraser Institute.