Until recently, Alberta maintained one of the most competitive tax regimes in North America. In 2014, for instance, the province had the lowest corporate income tax rate and lowest top personal income tax rate in Canada and the United States. The “Alberta Advantage,” as it was known, has quickly been undone by both provincial and federal tax increases. To help restore that advantage, the Alberta government should consider capital gains tax reform.

Over the past few years, both the provincial and federal governments have introduced significant tax increases. At the same time, the United States—Canada’s principal competition for investment, entrepreneurs, business owners and professionals—introduced sweeping personal and business tax reductions.

The economic implications of the demise of the Alberta Advantage, and the province’s declining competitiveness more broadly, are evident throughout the province. Investment has collapsed, skilled labour and other workers are leaving the province. And there’s a general sense of economic malaise where vibrancy and entrepreneurship previously existed. On the most recent global survey of energy investors, Alberta ranked 43rd for its attractiveness with many respondents citing the province’s high taxes as a deterrent to investment.

Poor fiscal management in Edmonton has produced continued large deficits and mounting debt despite some modest economic growth. So again, while a broad-based approach to restoring tax competitiveness is needed, including both personal and business tax rate reductions, the capital gains tax reform option, which investors and entrepreneurs are particularly sensitive to, is worth considering.

Capital gains taxes refer to the additional tax applied to an asset when it’s sold for more than it was purchased—including the effects of inflation. (Yes, Canada’s capital gains tax regime includes inflationary gains.)

Critically, investors, entrepreneurs and business owners only incur capital gains taxes when they decide to sell their business, investment or asset. This leads to something called the “lock in” effect whereby asset owners choose to hold assets—even if they could purchase higher-performing assets—simply to avoid incurring the capital gains tax. This effect locks in capital in lower-performing assets and impedes investment in emerging and newer firms, which is vital in a dynamic and growing economy.

This is one of the many reasons why research continues to show that taxes on capital including capital gains taxes impose fairly large costs on the economy. Indeed, one recent study by the federal Department of Finance showed that each $1 decrease in personal income taxes on capital increased society’s well-being by $1.30.

There’s also a competitiveness angle to capital gains taxes. Currently, nine U.S. states do not impose a state-level capital gains tax including energy-producing states Alaska, South Dakota, Texas and Wyoming.

In Canada, while the capital gains tax is a federal tax, there’s a fairly simple mechanism to exclude capital gains from provincial income taxes. Currently, Alberta’s personal income tax return relies on federally-determined income to calculate provincial income. The Alberta government could remove capital gains income from total income to arrive at taxable income for Albertans. The effect of this small alteration in calculating total income for Albertans would be to exempt capital gains from provincial income taxes. Such a reform would send an immediate and potentially powerful signal to investors, entrepreneurs and business owners—both in and outside Canada.

While other reforms are also needed (more prudent spending, balanced budgets, lower regulations, broad tax measures to increase competitiveness), eliminating the province’s capital gains tax could lay the foundation for restoring the Alberta Advantage and returning competitiveness to the province.