Tax cuts or tax credits? Economic diversification questions loom for next Alberta government

For decades, Alberta politicians, regardless of their ideological leanings, have touted economic diversification as the key to getting the province off its heavy reliance on oil and gas royalties.

The theory is that spreading the province's tax base across a wider range of businesses will make the treasury less vulnerable to problems in a particular sector. 

Although economic diversification hasn't been a key issue on the campaign trail, the next government will have the reality of Alberta revenue staring it right in the face. 

The February 2023 budget projected revenue of $70.7 billion for the 2023-2024 fiscal year.

Resource revenue makes up $18.4 billion, or 26 per cent of that amount. Corporate income tax is projected to account for $5.9 billion.

Alberta Finance assumed a price of $79 U.S. a barrel of the benchmark West Texas Intermediate when creating the budget. Prices have hovered in the low 70s for most of May. 

If that trend continues, the new government could be dealing with a significant drop in resource royalties, which could reignite the diversification discussion.

One Calgary economist argues economic diversification helps resolve volatility with corporate incomes taxes, but does little to solve what he sees as the key problem with Alberta finances: too much dependence on oil and gas revenues, which are vulnerable to factors out of the province's control. 

"Conversations about the budget really should never involve the word diversification unless we're talking about diversifying our revenue sources," said University of Calgary economics professor Trevor Tombe.

Tombe argues the province should shift the conversation toward finding different sources of revenue, such as a provincial sales tax. 

Tax credits

The NDP was in government from 2015 to 2019, followed by the UCP taking power in 2019. 

Both governments faced serious financial challenges over which they had little control. The NDP faced the effects of the sharp drop in oil prices in late 2014 for most of their mandate. The UCP had been in power for just a year when the COVID-19 pandemic took hold in Canada. 

Deron Bilous was economic development minister in the NDP government. After deciding not to run for re-election this year, he is now senior vice president for Western Canada at Counsel Public Affairs.

During his time in office, Bilous focused on growing international markets for Alberta products, particularly in Asia, where he led trade missions. 

The NDP introduced five tax-credit programs, including the Alberta Investor Tax Credit, Capital Investment Tax Credit and the Interactive Digital Media Tax Credit. The latter aimed to build capacity in game development. 

The government also introduced a program to bring petrochemical production to Alberta — one of the few NDP initiatives the UCP continued under former premier Jason Kenney. 

"We tried to take an approach of of building on our strengths … building on technology, artificial intelligence, enhancing our agriculture and agri-food processing capacities," Bilous said.

The UCP government cut the NDP's tax-credit programs in its first provincial budget in October 2019. Finance Minister Travis Toews said these "boutique" programs helped only a small number of businesses and created an environment of picking winners and losers.

Instead, Toews focused on cutting the income tax that large companies pay on their profit as a way to bring employers to Alberta. The corporate tax rate dropped from 12 to eight per cent in the first 14 months of the UCP mandate.

But the UCP wasn't entirely hostile to the idea of tax credits over the last four years. 

The UCP replaced the NDP's film and television grant with a a new tax-credit program. The government has touted high-profile Alberta productions like HBO's The Last of Us as evidence of the program's success. 

If re-elected, the UCP is also promising to expand the existing Agri-processing Investment Tax Credit, and proposing a new tax credit for students in high-demand professions who work in Alberta after they graduate. 

If the NDP wins the election Monday, the party has promised to introduce the Alberta's Future Tax Credit. That program would provide a 20 per cent refundable tax credit on new capital investment that creates high-skilled jobs, new technological capacity or new sector skills. 

The party says it would expand the Alberta Petrochemicals Incentive program to expedite the approval of projects by businesses with a good record. 

NDP Leader Rachel Notley also promises, if elected, to repeal the Alberta Sovereignty Act this summer, which the party feels creates an uncertain legislative environment for business. 

The act was signature piece of legislation for UCP Leader Danielle Smith, and it helped her win the leadership race in October. But it isn't part of the party's campaign.

Business signals and government help

Doug Horner held many cabinet portfolios during his nearly 14 years in government, culminating with a stint as finance minister under former Progressive Conservative premier Alison Redford. 

Like Bilous, Horner said he believes Alberta should diversify by adding value to commodities the province already produces, like agri-food, tourism and petrochemicals. 

In an interview with CBC, Horner said a provincial government should be very selective about what industries it chooses to support. 

"If the industry won't survive if you remove that incentive, how good of an incentive was it?" 

Horner said he prefers governments to set the conditions that allow businesses to thrive — that includes cutting corporate taxes.

The NDP is proposing increasing the corporate tax rate to 11 per cent, arguing it will still leave Alberta with the lowest corporate tax rate in Canada. The party wants to drop the small business tax rate to zero.

The UCP has seized on this promise, saying an NDP government would drive investment away from Alberta, killing tens of thousands of jobs.

Horner said even if Alberta still has the lowest corporate tax rate in Canada, a tax increase still raises troubling questions for businesses.  

"What's the trend line here? Where is this government's policy going?" Horner asked. 

"It''s one thing to say you're business friendly, but your actions speak louder than words."

Bilous said government has a role to play in helping some sectors get off the ground with financial support or even taking some risk away. 

He said even the oil sands needed help from federal and provincial governments to become viable in the early days. 

If all levels of government work together with the private sector and post-secondary schools, Bilous said, "Alberta could have an economy that would be rolling regardless of the commodity prices."

Tombe said both parties are focusing on the same industries for economic diversification: film and television, food production, and hydrogen and petrochemicals. 

He added changes in corporate taxes generally don't have the effect claimed by political parties — they neither drive away investment nor bring in companies in droves. 

"It's a marginal effect," he said.

"The UCP is right to note that [a corporate tax hike] will be a negative effect on the economy, but not at the scale that they would like voters to believe."