Experiments in Raising taxes: Alberta and BC Offer Two Different Approaches to Tax Increases

Raising taxes is one of the more difficult things for governments to do. Tax increases impose clear costs often on significant portions of the population, and can lead voters to punish governments when they seek re-election. The links between the costs that individuals pay in increased taxes and the social programs that those taxes pay for is often obscure. It is clear that governments need to levy some taxes in order to pay for government services, but making the case in the abstract that taxes are necessary is very different than making the case for a particular increase. Democratic governments often have to try to find ways to raise taxes while minimizing the political backlash they suffer for doing so. Proposed increases in Alberta and British Columbia offer two strategies that governments might use. In Alberta, the NDP’s throne speech included a promise to end Alberta’s flat tax rate by increasing the rate on income earned over $125 000 as well as raising the corporate tax rate from 10% to 12%. In British Columbia, there was a referendum on a 0.5% sales tax increase that would go towards transit and transportation infrastructure expansion this May. It is worth noting that the ballots from the BC referendum are still being counted, and there was significant (though it remains to be seen how significant) opposition to the BC tax increases. Both approaches offer some ability to governments to limit the political costs of tax hikes, but each also has significant limitations.

One of the major problems that governments face when developing fiscal policy is that there is downward pressure from public opinion on taxes, and upward pressure on social service spending. Tax cuts are popular because they provide clear and immediate benefits to large portions of the population. The result is that governments, especially when strong economies provide surpluses, face pressure to decrease taxes. At the same time, cuts to government programs tend to be unpopular. Reductions in spending on healthcare, education, and other major government programs impose costs on significant portions of the population and can also hurt a government’s popularity. As a result, tax cuts are often not accompanied by cuts in government spending. When the economy weakens, governments have difficulty making up for lost revenue because it is difficult to raise taxes or cut social services. Downward pressure on tax rates without corresponding downward pressures on public spending increase the difficulty that governments have balancing budgets during difficult economic periods (and at times, even during good economic times). The last two decades of Alberta fiscal policy provide an example of this. The PC governments in Alberta took advantage of good economic times to keep taxes low, at one point even cutting checks to Albertans rather than saving money for poor economic conditions. As a result the government has been left unprepared for a crash in oil prices that left the Alberta government with a large deficit. Governments that cannot find politically safe ways to raise taxes can end up in difficult fiscal situations.

Central to the NDP’s successful 2015 election campaign were promises to increase funding for social programs such as education and healthcare. To raise funds for this, the government’s throne speech included a commitment to end Alberta’s flat tax rate by increasing taxes on revenue over $125 000 and to increase the corporate tax rate. The NDP’s approach to raising taxes employs two strategic advantages. The first is that it is occurring at the beginning of the government’s term. This offers two benefits. From a cynical perspective, it gives time for other issues over-shadow the tax increases in importance, limiting their impact on future election results. From a less cynical perspective, tax increases at the beginning of a government’s time in office allow time for those increases to have a positive and visible effect on policy. The benefits of any tax increase are not realized over night. A government that increases taxes right before an election (as the Prentice government did) is left defending imposing costs on the public without having much concrete to show for such costs. If the NDP is able effectively use increases in taxes to balance the Alberta budget and increase funding to social services than the NDP can use those benefits to justify tax increases in four years time. Increasing taxes immediately after an election allows a government as much time as possible to realize the benefits of tax increases and use those benefits to defend the increases.

The NDP is also concentrating the costs of tax increases. The creation of an additional tax bracket at the upper end of the income scale and the increase in corporate taxes means that the individuals who end up paying the increased taxes are limited. Costs are not being imposed on the entire population but rather on those that are most able to afford tax increases. This limits potential backlash. Tax increases that are experienced by the entire population, such as increases in sales tax, impose costs on a larger number of people and therefore have the potential to cost a party a larger number of votes. In this case the NDP has been able to bring in a policy that looks both politically smart and socially beneficial. They can limit the imposition of costs that come with tax increases while ensuring that tax increases affect those who are most able to pay for them.

There are limits to the degree to which the approach the NDP has taken in Alberta can be used in other jurisdictions. The NDP came into government in a province with low taxes and a clear need for increases in government revenue. There is room at the upper-end of the Alberta income spectrum (and in corporate tax rates) to increase taxes without imposing exorbitant costs on the wealthy. Because taxes in Alberta have been low under previous governments, particularly with respect to the rates paid by high income individuals, the NDP has more space to increase taxes. A government that already has a progressive tax system and reasonably high corporate tax rates does not have this option. When a progressive tax system is already in place, governments that are raising taxes have to impose increases on a larger portion of the population and are likely to face a broader electoral backlash. Further, unlike the preceding Prentice government, the NDP has a full four years to wait for tax increases to have their expected benefits. If they are able to point to a balanced budget and increased government service provision, they will be in a stronger position to defend their tax increases that the Progressive Conservatives were in the most recent election. Neither the advantage of low existing tax rates or time before an election are present for all governments that are short revenue. As a result, both strategies are limited in their applicability to different governments.

In the greater Vancouver area, a different approach to raising taxes is being tried. There, rather than raising the sales tax by 0.5% through legislation, the provincial government is submitting the tax increase to a referendum. This deflects the blame for tax increases away from the elected government and on to the general public. Voters cannot blame the BC government (or the governments of any of the municipalities in greater Vancouver) for raising taxes when voters themselves chose to vote for the tax increases. The government in this case is able to insulate itself from the political costs of raising taxes by deferring to voters on the decision. This has the added benefit of allowing government to bolster its democratic credentials. Allowing citizens to vote on tax increases gives voters a stronger impression that they are in control of the policies that governments pursue.

There are a couple of limitations to this approach to raising tax increases. The first is that referendums on taxes are most likely to be successful when they are attached to increases in a particular program. Voters are unlikely to support a tax increase in a referendum if it is unclear what that tax increase is to be used for. Indeed the Vancouver sales tax increase has been carefully directed at transit and transportation infrastructure. The problem with this is that there are only a limited number of cases in which taxes are being increased to pay for specific programs. Often governments need to increase taxes in order to provide funding for a broad array of social programs, or to compensate for declining tax revenues that occur when an economy goes into recession. In these cases the link between the tax that a government is levying and the programs it is spending the tax money on is less clear. Trying to increase general government revenue so that a government can increase, or even just maintain, general spending does not provide the clear linkages that are often needed to make a strong appeal to the public during a referendum.

The second limitation is that referendums take control over tax increases away from the government, leaving them in a bind if citizens vote against the referendum. The use of referendums to approve tax increases does nothing to change the pressure on governments to maintain, and often increase, spending on social programs. When voters vote against a tax increase, it is unclear what governments should do to compensate for lost revenue. It is unclear if “no” voters want to see a decrease in spending on social programs, money to be taken from one program to fund another, increased government borrowing, or the use of different tax (an income tax instead of a sales tax for example) to make up for the gap between revenue and spending that tax put to a referendum was meant to address.

Alberta and British Columbia are providing useful examples of how governments might increase taxes. These cases should not be taken as interchangeable or mutually exclusive. The revenues that Alberta is trying to raise, and the scope of the tax increases, are far different than the tax increased being considered by the BC government for Vancouver. Each, however provides an example of how governments might find ways to raise taxes in order to pay for important public services. Both should be watched carefully by other governments for the lessons that their success or failure can teach about how governments might go about raising taxes.


Mother Knows Best: Two Parliamentary Practices that Canada Should Adopt from Britain

The British parliament at Westminster is often referred to as the “Mother of all Parliaments.” A number of countries around the world, including Australia, Canada, and New Zealand, have based their parliamentary systems on the British model. Each country, however, has developed some of its own unique rules and conventions that guide its parliament. Question period in Canada is conducted differently than it is in Britain. In Britain time is set aside for questions directed to a particular minister while in Canada questions must be directed towards the cabinet as a whole. Additionally parliamentary committees in Britain are more independent of party leadership in Canada, and have much greater practical leeway to scrutinize and modify the legislation that they review. Question period and parliamentary committees play an important role in allowing parliament to hold the executive (the cabinet and Prime Minister) to account for the policies and the legislation they pursue. Canada would benefit from the adoption of the British approach to question period and from the creation of parliamentary committees with a greater degree of independence than they have now.

Question period is probably the most viewed and talked about session in parliament, and also the most maligned. It exists as a mechanism through which the opposition and backbenchers can hold the executive to account for government policies, but has largely degenerated into a venue for partisan attacks from both government and opposition. Partisanship in question period in and of itself is not a bad thing. Indeed, partisanship can lead to an opposition that is vigorous in its scrutiny of the government, seeking to exposure scandals and policy failures. This exposure benefits not only the opposition party, but the Canadian public as a whole. The same can be said of the partisanship and the government if the desire to avoid being embarrassed by a scandal hungry opposition pushes ministers to be more careful in the way they run their departments. Problems arise in question period, however, when partisanship leads ministers to refuse to answer questions or when parliamentary tactics lead parties to deflect questions away from the minister responsible for the department on which a scandal or policy failure occurred. When parliamentary secretary Paul Calandra (instead of the foreign minister or defence minister) is answering questions about the deployment of Canadian forces to Iraq, and when he is doing so by talking about what an opposition staff member thinks about Israel, question period is no longer serving its purpose.

In the United Kingdom a question period session is dedicated to the questioning of a particular minister. Most famous (and common) is Prime Minister’s question time, where all questions are directed towards the Prime Minister and must be responded to by the Prime Minister. Other ministers have their dedicated question time as well though. David Cameron cannot defer to a parliamentary secretary if he does not want to be seen talking about a particular issue or giving a particular answer. If he gets a question during Prime Minister’s question time, he has to provide the government response. If Stephen Harper does not want to be seen addressing a particular subject he can have any other minister or parliamentary secretary provide a response to the question. This led to the absurd scenario in which the response to a question over a discussion Stephen Harper had with Mike Duffy over Duffy’s expense account, not by Stephen Harper, but by then Foreign Minister John Baird.

The British approach to question period has several benefits over the Canadian one. The first is that it ensures that each department is effectively scrutinized and that the appropriate ministers are answering the appropriate questions. An issue such as the deployment of Canadian forces to Iraq is the responsibility of both the foreign minister and the defence minister, and both should be able to provide a full account to Canadians of the details of any policies relating to such a deployment. If they cannot, Canadians have reason to be concerned about the way the Minister is running that department. Further, because a department’s Minister has (or at least should have) the most information of any cabinet minister in government, the Minister should be in best position to give and full and complete answer to the opposition’s question. As the individual responsible for a department, it is reasonable for an opposition party to expect that that Minister will be the one who responds to questions designed to hold the government to account for the way that department is run. The ability of a minister to provide effective answers in question period can then be used as a way to judge that minister’s ability to run her department. A minister that spends most of their question time deflecting or ignoring questions can have their competence questioned by both opposition parties and by the public as a whole. The more important the minister, the more damaging the appearance of incompetence is to the government as a whole. It is one thing for a parliamentary secretary to respond to questions about Iraq by talking about Israel, it looks far worse when the Minister of Defence does so.

Requiring Ministers or the Prime Minister to answer questions further reduces the ability of governments to play partisan games with the way that questions are responded to. The degree of public scrutiny that a minister receives plays a role in the degree to which they can give non-responsive and partisan answers to questions. The more prominent a minister is, the less they can afford to look ridiculous by giving non-responsive and non-sensical answers. There is a reason that Stephen Harper defers to a parliamentary secretary, or even another Minister, when his party wants to make its most partisan of attacks or wants to completely ignore a question. A parliamentary secretary can be shamed into giving a tearful apology to the House of Commons, as Paul Calandra was after refusing to discuss the deployment of Canadian forces to Iraq, without that apology doing too much damage to the way people perceive the government. A Prime Minister or senior minister that has to apologize for ignoring questions is a much bigger deal. This is not to say that Stephen Harper never makes partisan attacks or always responds to question, no Prime Minister is ever as direct or as responsive as the opposition, or often the public, would like. But the Prime Minister and senior ministers are far more constrained in the types of replies that they can provide to questions because there is a greater likelihood that their replies could end up on the 6:00 news. That is a good thing for question period and for parliament.

In contrast to question period, parliamentary committees probably receive some of the least public scrutiny of any of parliament’s activity. They exist to allow MPs to debate and discuss the details of legislation, gathering informations (committees are allowed to call witnesses) and discussing details in a way that could not be done in a 300 person meeting of parliament. The committees provide a valuable venue in which parliament can scrutinize government and private member’s legislation. Individual MPs rarely have the time to go through every detail in a piece of legislation. There are simply too many pieces of legislation for a single MP to become an expert in each one. Committees allow for a division of labour in parliament when it comes to the scrutiny of legislation. The quality of this scrutiny hinges on the committees being independent of leadership, particular of government control. Committee members who are assigned committee positions by their party leadership are going to be less likely to go against the wishes of their party and provide proper scrutiny of legislation.

The independence of committees is affected by the way that members are selected to them. In Britain many committee chairs are elected by all MPs and by secret ballot, limiting the control that party leadership can exert over their selection. If a substantial number of government backbench MPs want to work together to get an MP selected chair of a committee the government can not only do little to stop them, but also has no ability to figure out who was part of the group that organized in favour of the backbencher elected. In Canada committee chairs are elected only by the MPs who sit on the committee. The small number of voters coupled with the control that parties have over who is assigned to committees makes it easy for party leadership to wrangle votes and ensure that the chairs that they prefer are appointed heads of particular committees.

One could go further than Britain in designing a committee selection process that maximizes the independence of parliamentary committees. All committee members could be elected by members of their parties, ensuring that the MPs chosen to represent their parties on a committee are accountable to their colleagues in parliament and not to party leadership. Committee positions are assigned to parties based on their overall representation in parliament, so elections would have to occur within the parties. NDP MPs would vote on which of their members would serve on a committee, say the finance committee, and Conservative MPs would vote on which of their members would serve on such a committee. MPs would thus have to demonstrate to their colleagues that they can best serve MPs’ interests rather than just demonstrating that they will do what party leadership wants them to. Groups of backbench MPs hostile to their party’s leadership would be able to organize and seek to gain control of the committee that deals with that issue. Government legislation in this area would then be subject to greater levels of scrutiny. The election of committee chairs and members would reduce the ability of party leadership to control committee activity and make leadership much more accountable to parliament as a whole.

Canadian parliament would be well served by changes to its procedures that allow more space for parliament to scrutinize the activity of the government. This is not to argue that party discipline and partisanship does not have its place in Canadian politics. Both do play important roles in ensuring that parliament can function effectively, but both can also serve as impediments to government accountability. Changes to the procedures that govern question period and the selection of committee members could help to improve the ability of parliament to hold the Prime Minister and cabinet to account.