Thanks to tax hikes at both the provincial and federal levels, Alberta’s tax advantage has been demolished. Alberta went from having the lowest top marginal income tax rate in Canada and the U.S. to the tenth-highest (48%).
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What a difference a decade makes.
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Back in 2014, Alberta had a single personal income tax rate of 10% and the province’s top combined (federal and provincial) tax rate of 39% was the lowest in Canada and the U.S., giving Alberta a competitive advantage in attracting skilled workers and allowing Albertans to keep more of their hard-earned money.
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Alberta advantage eroded
But today, thanks to tax hikes at both the provincial and federal levels, Alberta’s tax advantage has been demolished. Alberta went from having the lowest top marginal income tax rate in Canada and the U.S. to the tenth-highest (48%).
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Of course, there are consequences. Extensive research shows high personal income tax rates reduce economic growth by disincentivizing hard work, savings, investment and entrepreneurship. And subsequently make it harder for Alberta to attract doctors, engineers, technology workers and other high-income earners who often have lots of choices about where to live and work.
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At the same time, governments that levy high personal income tax rates often get less revenue from the tax hikes than they expect.
Why?
Because the negative effects on economic growth reduce the size of the underlying tax base to which the higher rates apply. This effect partially offsets the extra revenue from higher rates.
For all these reasons, the Smith government should substantially reduce personal income tax rates. And a recent study shows the government can afford to do it without blowing a hole in the budget.
Indeed, if the Smith government brought back a single-rate income tax system — this time at 8% — revenue in 2025-26 would fall by $6.1 billion or 8.2%. For context, total provincial government spending this year is forecasted to grow by $4.4 billion. In other words, if the government simply held nominal spending flat for just one year, that would be sufficient to offset more than 70% of the revenue loss associated with this transformative tax policy change.
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Tax reform is doable
The same study considered another tax reform strategy, which reduced all Alberta’s current income tax rates by 20%. This “across the board” tax cut would cost the government an estimated $5.1 billion in 2025-26. Here, if the government simply froze spending for one year (nominally, from 2024 levels), it would generate enough savings to offset 84% of the revenue loss from this substantial tax reform.
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Alberta’s personal income tax advantage that prevailed from 2001 to 2014 served the province well. Provincial and federal tax hikes have eliminated this advantage and made Alberta less attractive for people and investment, which are key for strong economic growth. The Smith government should restore Alberta’s erstwhile income tax advantage, for the benefit of the province’s economy and all Albertans.
Ben Eisen is a senior fellow in Provincial Prosperity Studies with the Fraser Institute.
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