Newsrelease

October 28, 1998
Edmonton, Alberta

Tax Review Committee calls for sweeping changes to Alberta’s personal income tax system

Following consultations with Albertans and a thorough review of a number of issues concerning Alberta’s personal income tax system, the Alberta Tax Review Committee released its final report – a report that calls for major changes to Alberta’s personal income tax system.

In releasing the report, Co-Chair Jack Donald said, "A number of important issues were brought to the Committee’s attention – problems with competitiveness, bracket creep, high marginal tax rates, and differences in taxes paid by single and double-income families. We looked at each of those problems and decided that a major change to a new tax-on-income system was the best way to address them."

Co-Chair Gary Campbell stressed the positive impact the Committee’s recommendations could have on Alberta and Albertans. "If government chooses to go ahead with our recommendations, 78,000 low-income Albertans will come off the provincial tax rolls and pay no provincial income tax whatsoever. We’ll improve Alberta’s competitive position and our ability to keep highly skilled people in Alberta. And we’ll have a simpler and fairer income tax system. Alberta will be a leader in Canada."

Highlights of the Committee’s ten recommendations are as follows:

• The province should reduce personal income taxes and urge the federal government to lower taxes to improve Canada’s competitive position.
• The province should move to a new system of tax on income.
• The province should introduce a single rate of provincial income tax. The recommended rate is 11%.
• The basic provincial personal exemption and the spousal exemption should be set at the same rate. The Committee recommends an increase to $11,620. Currently, the basic personal exemption is $6,456 and the spousal exemption is $5,380.
• New tax credits should not be added.
• The province should urge the federal government to return to full indexing of basic exemptions and tax brackets.
• The temporary deficit elimination taxes introduced in Alberta in the late 1980s should be eliminated.
• The province should continue to review future challenges to the tax system, such as the impact of electronic commerce, and assess their unique impact on Alberta.

Taken together, the benefits of this tax reform package are as follows:

• Albertans would pay less in provincial income taxes and would continue to pay the lowest overall taxes in Canada.
• An additional 78,000 low-income working Albertans would be taken off the provincial tax rolls and pay no provincial income taxes.
• Differences in provincial income taxes paid by double and single-income families would be reduced.
• Marginal tax rates would be reduced in Alberta. Combined with the federal rates, the highest marginal rate in Alberta would be 42.3%, down from the current rate of 45.6%. If the federal government also eliminated its surtaxes, the maximum rate in Alberta would be 40%.
• The tax system would be more progressive. Fewer low-income Albertans would pay taxes, and every family type in Alberta would benefit – one and two-income families, lone parents, singles and seniors.
• The basic personal exemption would increase by more than inflation for the first time since 1988.
• A single rate system would be simpler for Albertans to understand.
• Alberta’s temporary deficit elimination taxes would be eliminated.

Examples of the impact of the proposed changes on individuals and families are attached. Questions and answers about the Committee’s recommendations also are attached.

For further information, please contact:

Gary Campbell, Co-Chair
(780) 429-9794

Jack Donald, Co-Chair
(403) 357-6400

Copies of the Committee’s report are available through a link to the Alberta Tax Review Committee HomePage at the bottom of this newsrelease or by contacting:

Alberta Treasury
Communications
(780) 427-4414

Attachment

Note: After viewing any table, press your "back" button to return to the document.

Click here for graphic - "Examples of proposed tax savings for Albertans"

Alberta Tax Review Committee’s Report and Recommendations

Backgrounder: Questions and Answers

1. Why did the Committee recommend a single-rate tax for Alberta?

   As we outlined in the report, we considered a number of alternatives and options for addressing a number of issues brought to our attention. In our view, moving to a tax-on-income system, combined with a single-rate tax and a higher personal exemption level provides the most benefits for Albertans. We wanted to give low-income Albertans a tax break. This achieves that objective. We wanted to reduce high marginal tax rates to keep highly skilled people in Alberta, reduce differences between taxes paid by single and double-income families, and keep the tax system simple. A single-rate tax combined with a generous personal exemption achieves all of those objectives.

2. Isn’t a single-rate tax system unfair to lower-income people? Don’t most of the benefits go to the wealthy?

   Not with the combination of recommendations in our report. A key component is to increase the basic personal exemption rate and the spousal exemption rate. By doing this, and introducing a single-rate tax, there are benefits for all income levels. As we’ve shown in the report, people with taxable incomes under $30,000 pay about 16% of the total personal income taxes collected in the province, and they would receive 34% of the proposed overall tax reduction. At the top end, for people with taxable incomes over $100,000, they pay 21% of the total provincial personal income taxes and they receive 29% of the proposed tax reduction. People with taxable incomes in the $30,000 - $100,000 range pay the greatest percentage of Alberta’s total personal income tax (63%) and will get 37% of the tax savings.

   If you look at it another way – considering how much of people’s income they would pay in taxes under this new system – consider these two examples. An individual who earns $30,000 would pay 11% of $18,380 ($30,000 minus the basic exemption of $11,620). This amounts to $2,022 in taxes paid or 6.7% of their income. A person who earns $60,000 would pay 11% of $48,380 ($60,000 minus the basic exemption of $11,620). That amounts to $5,322 in taxes or 8.9% of their income. Clearly, under a single-rate system, those who earn more pay more in taxes.

   As we noted in the report, the benefits of this approach go to all Albertans. Albertans would pay less in personal income taxes, fewer low-income Albertans would pay income taxes, and every family type in Alberta would benefit – one and two-income families, single parents, single people and seniors.

3. Isn’t a single-rate tax system less progressive than the current system?

   Because we’ve proposed a significant increase in the basic personal exemption and spousal exemption, the system we have proposed would be more progressive than the current personal income tax system. That’s demonstrated by the fact that an additional 78,000 low-income Albertans would be taken off the provincial tax rolls and also by the fact that higher income Albertans would continue to pay more in taxes as a percentage of their income than lower-income Albertans. In making our recommendations, the Committee considered a number of specific scenarios and their impact on Albertans at different income levels. The single rate we recommend, combined with the increase in the basic exemption level, will provide a more progressive system. This isn’t a "flat tax" like some American, regressive flat-tax proposals. It responds to the needs of low-income Albertans and it reflects the views of many of the people who made submissions to the Committee.

4. If the province implements the Committee’s recommendations, what would the impact be on the province’s revenues?

   We estimate that if the recommendations were implemented, provincial income tax revenues would be reduced by about $500 million. About $350 million of that total is due to elimination of the temporary deficit elimination taxes – the flat-rate tax and the surtax – introduced in the late 1980s.

5. What is the impact of moving to a new tax-on-income system?

   The Committee looked at a number of issues brought to our attention through the review. We concluded that a new tax-on-income system would provide the easiest and simplest way of addressing those problems. It allows the province to adjust personal exemption levels without introducing complicated rebate problems. The same is true for addressing high marginal tax rates or differences between taxes paid by single and double-income families. Another advantage is that it gives the province more flexibility in making its own tax policy decisions and it means the province’s revenues are not automatically tied to increases or decreases in federal income taxes.

6. What is the impact on Alberta if the province has a different way of calculating personal income taxes than other provinces?

   We believe that Alberta would take a leadership role in tax reform in Canada. While there may be some impact on inter-provincial comparisons of tax rates, the bottom line is how much people pay. With these recommendations, Albertans would continue to pay less in overall taxes than people in other provinces. Additionally, the importance of comparing taxes with other provinces is losing its significance in today’s global economy. We need to be in a position to compare how much Albertans pay in personal income taxes with other countries, particularly the United States, not just other provinces.

7. Can the province afford to forego $500 million in revenues?

   There are two things to consider when looking at revenue:

   While it might appear that the government would simply forego $500 million in revenue, studies and experience have shown that reducing taxes leads to a more vibrant economy. Therefore, the net result would be more revenue, across the board, flowing to the government.

   Our Committee was not asked to develop recommendations that were revenue neutral. At the same time, we have acknowledged that taxes are the price people pay for essential programs and services. It is important to ensure that sufficient revenues are available to support those programs and that tax reductions are sustainable. Between 1995-96 and 1997-98, the province’s revenues from personal income taxes increased by $700 million. Estimates for the current year (from Alberta Treasury’s First Quarter Report) are that personal income taxes will grow by a further $287 million. With those increases, there should be room for a tax decrease. We’ve also suggested that the government may want to reconsider a variety of tax exemptions, royalty rebates and special programs that have been in place for a number of years. Phasing out some of these programs or reducing the benefits would provide revenues to help pay for implementing the Committee’s recommendations. This is consistent with the Committee’s view that low-rate, broad-based taxes are the best way of achieving solid economic growth for the province.

8. Could the province achieve as much by just eliminating the temporary deficit elimination taxes?

   No. The Committee heard from many people who suggested that these taxes should be eliminated now that the deficit is gone. We agree. But we believe that a more comprehensive approach – moving to tax on income with a single rate and higher basic exemptions – provides more benefits to more Albertans and to the province as a whole. It allows the government to remove about 78,000 low-income people from the provincial income tax rolls, it addresses differences between single and double-income families, it simplifies the system and allows the province to eliminate the selective tax reduction, and it makes the tax system more transparent.

Go to: Alberta Tax Review Committee