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Alberta's provincial government investment and capital stocks have followed a rather varied and unusual path since 1961, a path characterized by large swings in both. This paper seeks to understand those developments better and suggest directions for improvement. Relative to other provinces, Alberta has a low level of provincial net capital stock relative to GDP but a high level of capital stock and investment per person. Investigation here shows that the reason for this seeming anomaly is that the Alberta economy is different in notable and generally unappreciated ways from the economies in other provinces. The results indicate that interprovincial comparisons to GDP can often be misleading. Also, household income, not GDP, appears to be the major determinant of public infrastructure. Since 2008, the Alberta government has relied increasingly on debt finance. There is a need for caution because what appear to be (inter-provincially) moderate levels of debt relative to GDP are large relative to provincial government revenue (which is argued to be a more meaningful comparator). Utilizing public investment to help stabilize the economy has been mixed in Alberta over the long term. However, the overall surplus/deficit pattern has been much more counter-cyclic. More emphasis has been placed on stabilization since 2000 and especially so during the 2009 and 2015 downturns. While both those downturns are linked to long-term resource revenue setbacks (the lasting drop in natural gas prices and the drop in oil prices that is expected to diminish the provincial government's resource revenues for some time), they have been treated as if caused by cyclic rather than structural changes. The result is that reserve funds have been drained and the province has dramatically increased debt (largely it is argued to support capital investment) and continues to do so even as the economy gradually improves. Provincial finances need adjustment to the longer-term realities. More stable capital funding would be a component. Possibilities are noted and suggestions are offered.

The fiscal adjustment that Alberta will have to undertake to put its budget on a sustainable path was a topic of discussion at the September 20th School of Public Policy event on Learning from the Past: Moving towards Alberta's Fiscal Future. This leads to the question – Should the fiscal adjustment be on the spending side of the budget or on the revenue side? In other words – Does Alberta have a spending problem or a revenue problem? This brief provides some insights into this question by comparing the level of provincial government expenditure relative to provincial household income. That is, what percentage of household incomes do provincial expenditures represent? And, how has that changed over time?

Somehow, in recent years, advocates for increased spending on services and particularly infrastructure in Canadian cities have succeeded in promulgating the idea within public policy circles that municipal governments are unreasonably constrained in their revenue-generating abilities. The general crux of their case argues that property taxes, the most substantial source of municipalities' own-source revenue, are a poor solution, and that cities should be given the power to levy sales taxes, or income taxes. In fact, closer analysis shows that property taxes are the best available solution for municipalities to raise funds for services and infrastructure, presuming governments can make the necessary case to citizens to justify greater spending. However, in the interests of improving government accountability, there is logic in the provincial government vacating the property tax space, funding education from general revenues and instead reducing municipal transfers, while leaving the extra tax room for municipalities to use. One powerful charge against property taxes has been that they are unresponsive to fast-growing demands on a city's obligations: that in a place like Alberta, where frequent economic and population booms can be robust and rapid, the expansion of the property tax base lags sorely behind the strains of a growing city, where a sales or income tax would not. But this is simply untrue: in Calgary, arguably the most boom-prone city in the country, the property tax base has grown 70 per cent faster than personal income in the last 19 years; between 1994 and 2012, while nominal personal income per capita doubled in the city, the per capita total equalized property assessment grew 3.5 times. And, property tax revenues have kept pace with Alberta's economic growth. Between 1994 and 2011, personal income per person in Alberta increased 2.17 times, but per capita property tax increased 2.73 times in the province overall. It is also untrue that cities in Alberta are today shouldering a larger burden — for social services, for instance — than they have historically, another argument used by those advocating for a wider array of municipal taxing powers. Relative to income, municipal expenditures are, in today's era, as low as they were in the 1950s. The portion of revenues that Alberta's cities have been spending on social welfare, health and non-school education is actually markedly less than it was in the 1950s and 1960s. One typical criticism of municipalities' reliance on property taxes that does hold up to some scrutiny is that they can be regressive — that is, property taxes can rise even for homeowners who may not be seeing commensurate increases in their incomes. But this is less of an argument against property tax than it is an argument in favour of making special accommodations to ease the tax burden on low-income homeowners, something Alberta has already taken steps toward doing, and can continue to improve upon. A likely reason that some consider property taxes to be insufficient for raising municipal revenue is that the rate-setting process is highly transparent and political: homeowners see and feel annual hikes quite keenly, and governments are publicly held to account for their taxing decisions. Yet local sales taxes have the potential to create more economic distortions — cross-border shopping and migration — while administrating income and sales taxes at the municipal level could be unwieldy and costly. There is considerable room, given the continual and relatively low rates of Alberta's property taxes, for municipalities to raise more funds by simply raising property tax rates. Local governments will, of course, have to make a persuasive case to taxpayers that any tax hikes are justified, but that — rather than utilizing revenue tools that are less transparent — is precisely how responsible governments should function.

Local governments in Alberta have faced considerable and variable challenges over the past 60 years. For example, the rapid population and economic growth during the 1950s, '60s and '70s created exceptional demands for schools, schooling and municipal infrastructure; demands exceeding those of the last 30 years. Local and especially municipal financing has relied heavily on the property tax throughout. Questions are being asked today about whether the property tax is sufficient for municipal government. Our historical analysis provides insights into the fiscal situation of Alberta's municipalities that can assist in addressing those questions. The main findings are highlighted here. We conclude that current demands, though considerable, are not creating stress on the property tax as a source of municipal revenue. • The property tax burden in Alberta during the past decade is the lowest that it has been over the past 60 years. Presently, property taxes are about 3.5 per cent of personal income. They were as high as seven per cent during much of the 1960s and averaged in the four to five per cent range from 1950 to 2000. Local and provincial school taxes were responsible for most of the fluctuations in the property tax burden. Municipal property taxes ranged from two to three per cent of personal incomes and recently amounted to about 2.5 per cent, a level typical of that over the past 20 years. • Investment in local infrastructure has over the past 30 years been at half the rate of that of the previous 30 years. Only since 2006, with the assistance of provincial capital grants, has infrastructure spending shown upward movement. Capital spending lagged population growth for many years and probably contributed to a deterioration of infrastructure. • Municipal current or operating expenditures (about three-quarters of the total) have been a declining share of personal incomes since the late 1980s and, since 2000, are a smaller share than observed since the early 1950s. • Since the mid-1990s, municipal total expenditures (current plus capital) have represented a smaller percentage of personal incomes than in any years since 1953.• The cost of financing municipal debt has decreased from 20 per cent of municipal expenditures in the mid1980s to about four per cent today. Other categories have remained comparatively stable. • Government grants to municipalities were greatly reduced from 1993 to 2004 but have since increased and now amount to about 19 per cent of total revenues. • Over 90 per cent of municipal own-source revenues come from property taxes, investment income, and the sales of goods and services. Over the past 30 years, sales generated about one-third of the total. The property tax share has increased from 47 per cent to 55 per cent; essentially absorbing the declining contributions from investment income. • Since the 1960s, municipal long-term debt has declined from 20 per cent of personal income to four per cent. Financial assets of municipalities amount to eight per cent of personal income. Since 2000, Alberta's municipalities have held net financial assets; that is, they have been net lenders. Overall, Alberta municipalities are in a solid, even favourable financial position. Debt and debt-servicing costs are low, the burden of municipal property taxes has remained stable at a moderate level for many years, and the total property tax burden in Alberta is (and has been over the past decade) lower than at any period in the past 60 years.The Finances of the Cities of Edmonton and Calgary Much of the interest in municipal finances has to do with the situations of "big cities." An overview of the finances of Calgary and Edmonton provides insights into the Alberta "big city" circumstances. Comparisons between 1996 and 2011 give some historical perspective. Major observations are: • Property taxes account for about 40 per cent of city revenues. • Approximately one-half of property taxes are funded by non-residential property. That is, residential property taxes fund about 20 per cent of city services. • Calgary and Edmonton had, at $3,435, equal per capita revenues in 2011. Those amounted to 7.1 and 8.6 per cent of the personal incomes in the two cities. These percentages show that municipal governments in the big cities are (relative to income) larger than the typical Alberta municipal government (5.9 per cent). • Transportation, protection (police, fire, EMS), environmental services (e.g., water, sewage, waste), recreation, and general government (legislative and administrative) account for 80 per cent of city expenditures. Spending by cities on social programs (e.g., health, social welfare, social housing) is less than five per cent of the total. • Outlays for capital assets represented 40 per cent of total outlays in 2011. This is up from 20 per cent in 1996. • City property taxes represent a greater percentage of personal incomes in 2011 than they did in 1996 but, because of the declining importance of school property taxes, the total property tax bill in Calgary has increased modestly (from 3.7 to 3.95 per cent of personal income) and has decreased slightly in Edmonton (from 4.2 to 4.06 per cent). • The per capita city debt is $3,065 per person in Calgary and $2,430 in Edmonton. Those amounts are equivalent to 6.4 and 6.1 per cent of personal incomes. Compared to 1996, that percentage is almost unchanged in Calgary but is up from 4.6 per cent in Edmonton.Since 1996, Calgary and Edmonton have experienced the challenges of coping with growing populations and of catching up after low rates of infrastructure investment in the 1990s. Despite those demands, city property taxes (at 2.8 per cent of personal income in Calgary and 3.0 per cent in Edmonton) have increased somewhat between 1996 and 2011, but have done so in an environment where the total (city and school) property tax burden has hardly changed. Debt has risen relatively in Edmonton since 1996, but the city debt is the equivalent of just over six per cent of personal incomes in both cities and is essentially unchanged in Calgary. Both cities appear to be on solid financial footings and coping well with the recent challenges.

1. Local Public Finance and Economics – Theory and the Practice: An Introductory Overview -- 2. Expenditures and Revenue Assignment: Principles -- 3. Expenditure and Revenue Assignment: Practices -- 4. Structural Design -- 5. Expenditure and Service Delivery: Core Services and Regulation -- 6. Expenditures and Service Delivery: Social Services -- 7. Provision and Finance of Infrastructure -- 8. Local Taxation -- 9. Property Taxation: Principles -- 10. Local Income, Sales and Environmental Taxes -- 11. Charges and User Fees -- 12. Intergovernmental Fiscal Transfers: Principles -- 13. Higher Order Fiscal Transfers to Local Governments: An Overview of Worldwide Practices -- 14. Higher Order Government Financing of Metropolitan Areas