Alberta’s inequitable resource wealth distribution system benefits current taxpayers. Dividends with future generations in mind would be a vast improvement.
The Alberta government has long been criticized for relying too heavily on resource revenue to meet its fiscal objectives and for saving an insufficient amount of the natural capital it has had the good fortune of possessing. These critiques, often made with an envious eye toward the fund Norway created to stash wealth from its oil industry (the Government Pension Fund Global), often focus on Alberta’s Heritage Fund (formally, the Alberta Heritage Savings Trust Fund). Alberta’s fund contains a paltry amount in comparison with Norway’s, even though it was established 15 years earlier. This, it is argued, constitutes a failure of the Alberta government to save for future generations.
Despite these critiques, the Heritage Fund is not the only means of addressing intergenerational equity: that is, equitably distributing resource wealth to future generations. Moreover, Alberta’s open borders mean that saving in the Heritage Fund is a trade-off not between present and future generations, but between different populations of future generations. The larger failure of the Alberta government on the issue of intergenerational equity from Premier Peter Lougheed (in office 1971 to 1985) onward has been the intentional decision to use resource wealth to create the cornerstone of Alberta fiscal policy: the high spending and low taxes that became known later as the Alberta Advantage.
Future generations can be thought of in two distinct ways: future residents and future descendants. Future residents are the residents of a given jurisdiction at a given point in time (say, 50 years from now), regardless of where they originate. In contrast, future descendants are the progeny of a given generation living in Alberta now, regardless of where they live in the future. For a jurisdiction like Norway, these two types of future generations more fully overlap. But in a jurisdiction like Alberta, with open borders and significant population migration in and out, they are much more distinct.
What these conceptions highlight (although the distinction isn’t clean cut, as we will see) is the difference between a public approach and a private approach to resource wealth distribution. Distributing money via state-run (public) systems or investing in public projects like infrastructure largely benefits future residents. By contrast, distributing money to (private) citizens through a dividend system, such as that established by Alaska, will largely benefit future descendants (assuming the wealth trickles down through inheritance from generation to generation). But because regardless of the policy choices some intergenerational wealth transfer does occur, it is more a question of which population benefits rather than whether future generations benefit. We can be agnostic about the question of who counts as Alberta’s future generations, while still being critical of Alberta’s history of intergenerational resource wealth distribution.
The primary mechanism of Alberta’s resource wealth distribution has been through the tax system. Under Lougheed, when windfall revenues were coming in, thanks in part to the oil price shock of 1973, this distribution was accelerated. The government increased spending and decreased taxes, while plugging the budgetary hole with resource revenue. This fiscal framework uses resource revenue to fund tax breaks for Albertans.
Viewed in this way, the Heritage Fund was a mechanism that altered the flow of resource revenue from future descendants (of Albertans living in the late 1970s) to future residents. Moreover, the Heritage Fund was created in 1976 less as a means of achieving intergenerational equity, although that was one rationale given, and more to serve as a stabilization fund with dual objectives. First, it would cushion the province against an expected decline in oil revenues within a decade or so.” Another purpose, which I uncovered through archival research, was to guard against inflation: the government was worried that more increases in spending would worsen the already high inflation rate (approximately 11 percent at the time). The first $1.5 billion the government set aside in the Heritage Fund was the money the government could not find a legitimate reason to spend. As the treasurer at the time put it, “After allowing for the substantial tax reductions and new expenditure programs contained in this Budget, I estimate that $1.5 billion will be available by December 31, 1975 for transfer to an Alberta heritage trust fund for present and future Albertans.”
When adjusted for inflation, the average per capita tax break funded by Alberta’s resource revenue was roughly equal under Premiers Lougheed ($3,445), Don Getty ($2,474 for 1985 to 1992) and Klein ($3,298 for 1992 to 2006), in 2015 dollars (see figure). This de facto dividend system distributes resource wealth primarily to future descendants, although future residents would also benefit so long as this system remains in place.
There are several problems with this method of distributing resource wealth. First, the wealth is distributed to a much narrower population base than the one used by the Alaska dividend program. Since Alberta’s resource wealth is distributed through the tax system, it benefits taxpayers rather than citizens. As figure 1 shows, the per taxpayer benefit is much larger than a per capita distribution would be, because children and low-income earners do not pay taxes. The average benefit from 1982 to 2009 (the last year for which these data are available) was $1,500 higher when distributed only among taxpayers than it would have been if the same amounts were distributed among all citizens.
Moreover, the distribution of wealth from nonrenewable resources is not equitable. Because taxes are based on income, the higher-income earners are receiving a greater tax break than those who are barely making enough to pay taxes in the first place. Granted, Alberta does have a much higher income cut-off level than other provinces, and low-income earners receive the greatest share of the social services funded by government revenue sources. However, the difference between the tax break for the top 10 percent and the social services received by low-income earners is significant. Many are critical about the short-sightedness of the one-time payment of $400 to every Albertan in 2006, the infamous “Ralph Bucks.” Yet those funds were distributed much more equitably than resource revenue is today.
The practice of turning resource revenue into tax breaks has also played havoc with government budgeting as Alberta intentionally became reliant on this revenue. The “resource revenue roller coaster” — the rapid fluctuations in revenue resulting from volatility in commodity prices — is a problem that has been central to Alberta political debates from Getty onward. The only solution is to remove resource revenue from the operating budget.
A true dividend system like Alaska’s, where some money is set aside to be distributed to citizens over time, would be a vast improvement over what Alberta has now. Such a system would distribute the money more equitably to Albertans; it could be designed to balance transfers to both future residents and future descendants; and it would force the Alberta government to balance its budget through a responsible amount of taxation and spending control.
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