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.

Advertisements
Standard

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s