Albert budget lowers corporate tax but undermines innovation and higher ed

Released on October 24th, the first budget by Alberta’s United Conservative Party relies on a corporate tax cut and increasing oil sands bitumen production to reduce costs and stimulate Alberta’s stagnant economy.

At the same time, the four-year budget eliminates tax credit programs aimed at helping startup companies, especially in the technology sector, achieve scale. It also significantly cuts advanced education funding and jobs, and reduces overall funding for innovation and climate change programs.

When it comes to supporting the transition to a digital economy and attracting innovative companies to Alberta, “This budget absolutely doesn’t help,” entrepreneur Jim Gibson told RE$EARCH MONEY. Gibson is a partner at Thin Air Labs, a Calgary-based venture capital firm, and co-founder of Rainforest Alberta, a grassroots organization working to improve Alberta’s innovation ecosystem.

Gibson says he understands that government must tackle the deficit. However, the budget focused only on reducing spending, instead of also recognizing the global transition to a new economy and working with technology leaders to capitalize on the opportunities, he says. “That just sets us up to not be successful. I think the whole province is way smarter than this.”

But University of Calgary economics professor Bev Dahlby, who was a member of the Blue Ribbon Panel on Alberta’s Finances whose report informed much of the budget, has a different perspective. “I think in general the direction of the budget is consistent with our recommendations,” Dhalby, research director at the School of Public Policy, said in an interview.

The budget lowered the provincial corporate income tax to 8% by 2022 from the current 11%. Alberta’s combined federal and provincial rate of 23% would be among the lowest rates in North America, and lower than in British Columbia (27%), Oregon (27%) and California (28%).

“Certainly the reduction in the corporate income tax over four years will help to improve the competitiveness of the companies operating in Alberta,” Dahlby says. He cites research, including a School of Public Policy paper he co-authored. The authors’ econometric model indicates the tax cut will boost Alberta’s real per capita GDP by 2.5% in 2022 and add about 58,000 jobs.

Critics, however, point out that reducing the corporate tax rate doesn’t provide any financial advantage before companies become profitable, which is the case for most new ventures in initial years.

The five business tax credit programs eliminated by the budget included the Investor Tax Credit introduced by the previous NDP government. It provided a 30% tax credit to investors who put money into targeted growth industries such as clean technology and digital animation.

“Cancelling the Investor Tax Credit without developing an alternative means of attracting innovators and investment creates a gap and puts Alberta at risk of losing out on meaningful and long-term economic growth,” Adam Legge, president of the Business Council of Alberta, said in a statement.

The budget also cancelled the Capital Investment Tax Credit, the Community Economic Development Corporation Tax Credit, the Interactive Digital Media Tax Credit, and the provincial Scientific Research and Experimental Development (SR&ED) Credit. The government says the move will save $400 million by 2022-23.

Gibson says the digital media tax credit was cancelled only a week before an international conference in Banff of leaders of the gaming industry, forecast to be worth $152 billion globally by year’s end. The cuts also came about a week after Calgary Economic Development launched a $4-million international marketing campaign, called “Live Tech. Love Life,” promoting Calgary as “Canada’s most adventurous tech city.”

In terms of perception of Alberta being a tech-friendly jurisdiction, “the timing is brutal,” Gibson says.

As for the SR&ED tax credit, Dahlby says a cost-benefit analysis by John Lester at the School of Public Policy shows this credit when provided to large corporations has a net positive benefit for Canada, but it isn’t effective for SMEs. “When you take into account all the costs of providing these tax credits relative to the benefits . . . they’re probably not worthwhile.”

“Step back” for advanced education

The budget cut the Advanced Education ministry’s operating expenses from $5.4 billion last year to $4.8 billion by 2022-23. Funding cuts average 5.1% across 26 post-secondary institutions and total $117.6 million this year alone.

Provincial grants to both the University of Alberta and the University of Calgary will be cut by 6.9% this fiscal year. That amounts to a $44-million reduction for UAlberta, as well as a one-time suspension of $35 million for infrastructure and maintenance, David Turpin, UAlberta’s president, said in a blog post.

Gibson notes that every technology ecosystem in Canada and the rest of the world has a highly integrated, well-supported post-secondary institution as its cornerstone. “By taking a step back, it will be many, many years before we can advance the cause of the degree programs that are necessary,” he says.

Dahlby, however, says Alberta spends more on the administration of advanced education than any other province, except Quebec: “Cuts or changes to the way post-secondary institutions work to reduce the amount of overhead spending would seem to be appropriate.”

The budget ended the former NDP government’s freeze on university and college tuition fees, and allowed institutions to increase tuition by 7% per year for three years. The education and tuition income tax credits also will be eliminated beginning with the 2020 tax year. And the interest on student loans will be increased to prime plus 1%.

Sadiya Nazir, chair of the Council of Alberta University Students (CAUS), says a 21% tuition fee hike over three years would cost an undergraduate student at the University of Calgary another $2,664 in total, on top of the current average tuition of $5,300 per year. “It really comes down to a question about accessibility and affordability for students.”

The budget also eliminated the Summer Temporary Employment Program (STEP) that provided funding to small businesses and organizations including non-profits to hire high school or post-secondary students in summer jobs.

Instead, the government increased funding for trades and apprenticeship training. Over four years, this will include $11 million for CAREERS, $10 million for Supporting Women Building Futures, and $2 million for Skills Canada.

Nazir says many students depend on STEP to help pay for their education and get degree-relevant work experience. And while support for trades students is welcome, she adds, CAUS questions why university students didn’t receive similar support. “In order to grow Alberta’s economy, we also need innovation and research and entrepreneurship incentives for young people,” Nazir says.

Kevin Carmichael, national business columnist at the Financial Post and a senior fellow at the Centre for International Governance Innovation, said in an op-ed piece that the “orthodox” budget represents short-term thinking. Alberta should be in the league of places with booming technology industries, including Quebec, B.C., California and Oregon, he wrote. “But it’s not, mostly because it’s waiting for a catalyst to bring all of its intellectual property, entrepreneurs and capital together.”

Gibson says government ideally should provide positive and impactful policy to grow the innovation ecosystem. “Is this budget going to kill it? It may just put some sand in the gears. As entrepreneurs and innovators, we’re going to stop spending a lot of time worrying about what’s next and get on with doing the work.”

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