December 29, 2006
Where Alberta leads...
Lessons From Our Neighbor
By: NIELS VELDHUIS and MILAGROS PALACIOS
December 13, 2006
Governor-elect Spitzer has tagged Paul Francis, former chief financial officer of Priceline.com as his budget director. With New York's budget due on February 1, Mr. Francis will have to hit the ground running. Most importantly, the first Francis budget should send a strong message that New York's interventionist approach to economic development - tax, spend, and subsidize - is over.
To that end, he may want to examine how provinces in Western Canada have turned around their economies. That is, Western Canadian provinces have focused on creating an environment within which economic activity can flourish by implementing pro-growth economic policies such as smaller government and tax relief. The results have been stunning, as Alberta and British Columbia have become economic beacons in North America. If New Yorkers wish to achieve similar results, they should follow Western Canada's lead and implement proven policies that achieve lasting prosperity.
Perhaps the most telling sign of New York's interventionist ways is the size of government. In 2003-04, the latest year for which data are available, state and local government spending in New York accounted for 25.9% of the economy, the fourth largest government sector among the 50 states. Put differently, over one quarter of all economic activity in New York State is directed by state and local governments.
High taxes are the unavoidable consequence of large government. According to a recent report by the U.S. Tax Foundation, New York ranks among the worst tax climates in America, 47th among the 50 states.
On personal income taxes, New York ranks 38th among the states as a result of its relatively high top marginal rate and highly progressive rate structure. These high and progressive personal income taxes have repeatedly been shown to discourage work effort, entrepreneurship, and savings and investment, all of which comprise the foundation of a successful and dynamic economy.
If New Yorkers want a stronger and more robust economy, one in which there are opportunities for all those who seek them, they should closely examine recent policies implemented in Western Canada. There, among other things, the size of governments and the accordant tax bills are being reduced.
Over the past five years for which comparable data are available, Alberta and British Columbia have reduced the size of government - provincial and local spending as a share of the economy - by 8.2% and 6.3%, respectively. Comparatively, New York has increased the size of its government - state and local spending as a share of the economy - by 9.9% over the same period.
Reducing the size of government has also enabled the Western Canadian provinces to reduce taxes. Fortunately, both provinces chose tax relief that improved incentives for work, savings, investment, and entrepreneurship.
Alberta led the way in 2000 by creating Canada's only single-rate personal income tax. It now resides among the ranks of jurisdictions with competitive personal income tax regimes like those in Tennessee, New Hampshire, and Pennsylvania that also do not punish success and diligence through increasing marginal personal income tax rates.
British Columbia soon followed Alberta's lead by substantially reducing its personal income tax rates. In fact, Alberta and British Columbia now have the lowest top marginal rates in Canada.
The changes to personal income taxes were matched, perhaps more importantly, by critical reductions in business taxes. Both governments pursued two broad measures: reductions in corporate income tax rates and the elimination of corporate capital taxes, a uniquely Canadian tax that punishes investment and risk-taking.
Again, Alberta was the leader. It eliminated corporate capital taxes and reduced corporate income tax rates by 35% between 2000 and 2006. British Columbia eliminated its general corporate capital tax and reduced corporate income tax rates by nearly 30% between 2001 and 2006. In comparison, the tax climates in New York have become less competitive in recent years. In tax climate rankings, New York has fallen to 47th from 44th in 2002.
The economic results of these pro-growth policies have been stunning. From 2000 to 2005, annual average economic growth in Alberta and British Columbia has been 8.5% and 5.1%, respectively, outperforming America's national average of 4.9% economic growth and New York's, which was 4.4%.
Even more pronounced results are evident in the labor market. From 2000 to 2005, annual average employment growth in Alberta, which was 2.4%, and in British Columbia, which was 2%, has been significantly greater than America's national average of 0.7% and New York's 0.4%.
While part of the explanation for the strong performance in Western Canada stems from a rise in commodity prices, one cannot underestimate the influence of public policy. If economic growth is just about resources, then many of the world's poorest jurisdictions should be the wealthiest.
Our hope is that the success of Western Canada will entice New York and others to adopt policies that support economic prosperity, such as reducing the size of governments and implementing incentive-based tax relief.
Mr. Veldhuis and Ms. Palacios are economists at the Fraser Institute, an international research and educational organization based in Vancouver.
Copyright 2006 - The New York Sun