Taxes, Volatility, and Resources in Canadian Provinces

Abstract

Tax policy often breeds controversy, especially when rate changes are motivated by volatile resource sectors. This article examines how provincial tax policies respond to changes in resource revenues. Specifically, it (a) estimates the tax–resource elasticity of Canadian provinces and (b) measures the resource sector's contribution to the volatility of provincial gross domestic product (GDP). Empirical results suggest that a $1,000 decrease in per capita resource revenue leads to a 150 basis point increase in a province's marginal personal income tax rate and a 3 percent increase in excise taxes on gasoline. A variance decomposition demonstrates that resource-induced volatility accounts for 76.2, 50.8, and 42.1 percent of the variance of the first-differenced GDP of, respectively, Newfoundland and Labrador, Alberta, and Saskatchewan.