The COVID-19 recession has severely damaged Alberta’s already struggling economy; a recent RBC forecast estimates the provincial economy will contract by 11.2 per cent this year. To help foster a strong recovery, the Kenney government should target the province’s personal income tax rates, which were uncompetitive even before the recession hit.

In 2015, the Alberta government replaced its single personal income tax (PIT) rate of 10 per cent with five tax rates including a top rate of 15 per cent. In 2016, the Trudeau government added a new top personal federal income tax rate, increasing the top rate from 29 per cent to 33 per cent.

Because of these two changes, Alberta’s top combined rate (federal/provincial) increased from 39 per cent to 48 per cent. At the same time, federal tax reform in the United States lowered the top federal personal income tax rate by 2.6 percentage points, from 39.6 per cent to 37 per cent. As noted in a new study by the Fraser Institute, Alberta went from having the lowest combined top tax rate (federal and provincial/state) out of all 61 jurisdictions in Canada and the U.S. in 2014 (including the provinces, states and Washington, D.C.) to having the 10th highest top combined rate in 2019.

The province is particularly uncompetitive compared to U.S. jurisdictions with large energy sectors that compete for talent and investment. Indeed, Alberta has a markedly higher top combined income tax rate than all seven energy-producing states—Alaska, Colorado, Louisiana, North Dakota, Oklahoma, Texas and Wyoming.

Three of these states—Alaska, Texas and Wyoming—have no state level personal income taxes, meaning that only the 37 per cent top federal tax rate applies. As a result, Alberta’s top combined rate is eleven percentage points higher than the top rate in these states.

Of course, tax policy in Alberta must be made in the broader context of the province’s financial situation including the province’s large budget deficit. However, trying to fight the deficit by maintaining high PIT rates is not wise. High PIT rates discourage work, savings and investment. Reforming and reducing government spending is a better—more pro-growth—strategy for reducing the deficit.

Moreover, high PIT rates can influence people’s decision on where to work or start new businesses. All else equal, jurisdictions with higher PIT rates are less likely to attract mobile professionals and entrepreneurs than jurisdictions with lower rates.

Consider a skilled professional with a high income, or a promising entrepreneur with a strong business plan, who’s deciding where she wants to live. She can either live in Alberta and face a top combined rate of 48 per cent or live in Texas with its top combined rate of 37 per cent. Of course, people consider a wide range of factors when deciding where to live, invest and create jobs. But PIT rates are a factor.

As Alberta’s economy emerges from COVID-19, we must look for ways to support recovery and prosperity. Creating pro-growth tax policy will give Albertans and the economy a better chance of recovering. By addressing Alberta’s personal income tax problem, the Kenney government can help bring prosperity back to Alberta.