No restraint? No tax cuts
The
Calgary Herald
Tue 06 Mar 2007
Page: A10
Section: The Editorial Page

Byline: Danielle Smith
Column: Danielle Smith
Source: For The
Calgary Herald

When the provincial budget comes down on April 19, the
question entrepreneurs will be asking is whether Alberta will strive to be the
best tax jurisdiction in North America or whether it will settle for mediocrity.
Experience suggests it may be the latter.

Recent survey data by the Canadian Federation for Independent Business show
the No. 1 priority for small- and medium-sized businesses is greater discipline
in managing budgets and surpluses.

No wonder. A recent C.D. Howe Institute report paints a picture of fiscal
profligacy. Of all the provinces, Alberta is the most unable to stick to a
budget, having overspent a cumulative total of nearly $14 billion over the past
10 years.

Is there reason for optimism? Perhaps. The most recent fiscal update showed
no increase in unbudgeted spending between the second and third quarters. This
is a vast improvement over the first half of the year, which saw spending jacked
up by $1.4 billion more than was planned. But with the third quarter ending Dec.
31, just two weeks after Premier Ed Stelmach took office, it was more by
accident than by design.

Besides, unbudgeted spending is only part of the problem -- excessive overall
spending is the real dragon to slay.

After all, it would be easy for the province to end unbudgeted spending
without actually reining in total spending. For instance, the Finance minister
could budget for increases of 12 per cent. If spending increased by only 10 per
cent, the government would be under budget, but it would be no fiscal victory.

Real discipline requires a limit on overall spending. A measure some
economists suggest is to restrict annual spending increases to inflation plus
population growth. To see how powerful this restraint tool can be, consider
recent history in Alberta. In the last 10 years, population growth was 30 per
cent and inflation was 23 per cent. Had the government restrained spending to
account for just inflation and population, spending would have only increased 60
per cent in the last decade. Instead, it increased 113 per cent.

Put another way, if the province had adopted a restriction like this in 1996,
it would be spending nearly $7 billion less than it is right now -- enough to
eliminate the personal income tax.

Instead, Alberta leads the country in program spending: In the 2005/06 fiscal
year, combined provincial and municipal spending was $11,215 per person --
nearly $2,000 more per person than in Ontario and B.C.

The consequence of refusing to control spending is to threaten the economic
environment that makes Alberta such a great place to work, live and invest.
Unless total spending is restrained, there will be no more tax cuts, for
business or individuals.

And there should be tax cuts. The province promised the business community in
the 2001 budget that the general corporate rate would be reduced to eight per
cent by 2004. The rate has been reduced, but the general rate is stuck at 10 per
cent, with no timeline to reach the eight-per-cent target. In the advertising
world, this is called a bait-and-switch. Business investors made decisions on
the basis of this tax cut promise, and the province is clearly reaping the
benefits.

The third quarter fiscal update showed that revenues from corporate income
taxes will be $1.1 billion higher than budgeted. Reducing the general corporate
tax rate to eight per cent, as promised, would cost the treasury about $386
million -- just a third of the amount of this year's corporate tax revenue
windfall.

Also, as of July 1, the small business tax rate in New Brunswick (which
applies to income under $500,000) will be one per cent, compared to three per
cent in Alberta. Reducing this tax to match New Brunswick would cost the Alberta
provincial treasury about $198 million.

In other words, the province could reduce both the general and small business
tax rates in the next budget and still have plenty of revenue left over to fund
reasonable increases in program spending.

CFIB members say they would use tax savings to invest in more equipment and
machinery, expand their businesses, increase employee wages and hire more
workers. All of which will help to diversify the economy, increase productivity,
create jobs and increase future tax revenues.

Forgoing tax cuts and continuing to dump more revenue into the maw of
unsustainable program spending is a recipe for stagnation. Small- and
medium-sized businesses could make far better use of the money. The province
should give some of it back.

Danielle Smith is the Alberta Director of the Canadian Federation of
Independent Business. She can be reached at [email-masked]

Edition: Final
Story Type: Business; Column

Length: 769 words