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In Alberta’s budget released on Thursday, Premier Danielle Smith finally delivered on her long-promised tax cut. Effective Jan. 1, 2025, Alberta’s bottom personal income tax rate will drop from 10% to 8%, which is expected to save some Albertans up to $750 annually. Amid a budget deficit and the threat of U.S. tariffs, the government believes strong fundamentals, including low taxes, will help Alberta’s economy weather the upcoming storm.
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And Smith’s tax relief is welcomed. But if the goal is economic growth, there’s more work to be done.
As recently as 2014, Alberta had the lowest top combined (federal/provincial) personal income tax rate in North America. This was a key component of Alberta’s famous “tax advantage,” which drew talent and investment to the province.
But in 2015, the provincial NDP government replaced Alberta’s single personal income tax rate of 10% with a five-bracket system including a bottom rate of 10% and a top rate of 15%.
This change, combined with the Trudeau government’s increase to the top federal income tax rate from 29% to 33%, significantly increased personal income tax rates in Alberta.
Albertans now face some of the highest personal income tax rates in North America across various income levels, and tax rates are significantly higher than in states such as Texas, which compete with Alberta for talent and investment. That’s a big problem because Alberta must attract high-skilled workers and investment to fuel innovation, job creation and strong economic growth. High tax rates also discourage economic growth by reducing after-tax income from work, savings, investment and entrepreneurship.
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So again, Smith’s tax cut of the bottom personal income tax rate is welcomed. But research suggests cutting upper-income tax rates does far more to improve economic incentives and drive growth than tax cuts at lower income levels.
And Alberta’s upper-income tax rates are some of the highest in North America. In fact, Alberta has the 10th-highest top combined (federal/provincial) personal income tax rate in North America at 48% — that’s 11 percentage points higher than Texas’ top combined (federal/state) rate of 37% (Texas has no state personal income tax rate).
To make matters worse, Alberta’s top tax rate applies at a much lower level of income (C$355,845) compared to Texas (C$834,688).
Of course, the government must weigh any tax change against fiscal considerations and potential lost government revenue. But clearly there remains an opportunity to target tax cuts that will deliver a bigger boost to Alberta’s economy.
In Thursday’s budget, the Smith government finally cut income taxes for some Albertans. But to restore Alberta’s tax competitiveness and support strong economic growth, there’s still a long way to go.
Tegan Hill is associate director of Alberta policy at the Fraser Institute.
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