Taxes, Volatility and Resources in Canadian Provinces

Abstract

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

Keywords: tax-resource elasticity, provincial income taxes, resource-induced volatility

JEL Classification: H71, Q38, Q48