Continued downtrends in the oil and gas industry paired with costly expenditures will plunge Alberta further into deficit to the tune of $40 billion by 2040, according to a new paper released by the University of Calgary.

The paper, which was authored by economics professor Kenneth McKenzie, attributes that potential deficit to factors such as global decarbonization policies and declining market demand.

"We have to face the reality that we can't rely on oil and gas royalties to finance our lavish lifestyle anymore," McKenzie said. "This sort of false dichotomy between spending versus revenue problem is a problematic way to talk about this.

"We need a sustainable fiscal policy writ large, which involves spending and it involves taxes."

McKenzie's paper was released one day after a new government report called for a $600-million cut to Alberta's operating budget.

Former Saskatchewan finance minister Janice MacKinnon chaired the panel that made those recommendations, stating that the province had "a spending problem, not a revenue problem."

McKenzie said MacKinnon's report was an interesting perspective on provincial spending, agreeing with Alberta Finance Minister Travis Toews's assessment that Alberta had to stop spending "like the rich kids on the block."

However, he said the report didn't provide enough perspective on the taxation system currently in place in Alberta.

"I'd argue we also have to stop taxing like we're the rich kids on the block," he said. "If you leave oil and gas royalties out of it, per capita tax revenue in Alberta is much lower than other provinces.

"We've been able to spend at high levels and tax at low levels historically because of our natural resources."

Provincial sales tax

Alberta has long resisted a provincial sales tax, but the report argues the introduction of such a levy would provide an "efficient, stable and non-volatile revenue source."

"Some structural changes are required on the revenue side in Alberta to get us off that royalty roller-coaster," McKenzie said.

"A sales tax is the most efficient, and, I would argue, most equitable way of doing it. And a lot of economic research backs that up."

Carbon Tax

McKenzie said the province should reintroduce the carbon tax brought in by the former NDP government. That tax was repealed by the United Conservatives on June 4 after winning the April election.

Though the government retained the portion of the legislation that levies high emitters, the lack of a full carbon tax means a federal backstop will kick in.

"So we haven't actually eliminated carbon taxes in Alberta at all. All we've done is replace the provincial tax with the central tax," McKenzie said. "But now, all the revenues go to the federal government rather than going to the provincial government.

"Now the federal government is returning it to Albertans in a lump sum way; however, it might be that those revenues could be put to better use in an Alberta context."

With a provincial carbon tax levied, McKenzie suggests the province could utilize revenues to lower personal and corporate income tax.

Further suggestions

The paper also suggests cutting corporate taxes from 12 to eight per cent, an initiative currently being phased in as part of the UCP Job Creation Tax Cut, otherwise known as Bill 3.

Under Bill 3, which received royal assent on July 18, the corporate tax rate will reach eight per cent on Jan. 1, 2022.

The tax cut will have a positive impact on the economy, the paper suggests.

"A great deal of economic research backs up the fact that, in fact, workers do bear a substantial portion of the burden of corporate taxes, whether we like it or not," McKenzie said. "If we recognize that, then we can put in place policy on the tax side that take economic realities into consideration."

McKenzie also suggested maintaining progressive rate structures in personal income taxes while considering a middle class personal income tax cut.

To read the entire report, visit the University of Calgary website.