Another Hit to the Alberta Advantage

The Alberta Advantage stands to take yet another blow, this time from Our Fair Share, the report on Alberta’s oil and gas royalty regime. The royalty report comes after the Stelmach government’s unwillingness to re-assert a clear focus on the Alberta Advantage - the combination of Canada’s lowest tax rates, smallest government and most attractive investment climate.

If Premier Stelmach decides to move forward with the report’s proposed massive increases in energy related taxes, he will undoubtedly cause further damage to Alberta’s Advantage and its unprecedented period of economic prosperity.

Our Fair Share contains a number of proposals aimed squarely at increasing the provincial government’s take from the energy sector. The report calls for significant increases in the province’s share in oil sands (47 per cent to 64 per cent) and natural gas (58 per cent to 63 per cent ) and a smaller increase in conventional oil revenues (44 per cent to 49 per cent). These increases are comprised of changes to rental agreements, the elimination of accelerated depreciation schedules, and increases in royalty fees (taxes). All told, the reports recommendations would increase the government’s tax take from the energy sector by $2 billion per year, an increase of 20 per cent over current revenues.

This significant increase in royalties will increase the costs of developing and maintaining oil sands operations. As a result, companies and investors will increasingly consider other resource-rich jurisdictions around the world as destinations for their investment capital. Reduced investment will have a significant impact on productivity growth and future living standards in Alberta.

The changes in royalties would follow a number of additional policy set backs for the oil and gas sector in Alberta including: federal tax changes to income trusts, the elimination of accelerated depreciation for oil sands investment by the federal government, and the implementation of federal and provincial environmental regulations, all of which have increased the costs of oil sands operations.

What’s more, the recommendations in Our Fair Share come after an erosion of the provincial government’s focus on constrained spending and tax relief. Consider that government program spending increased by an astounding average of 9.5 per cent per year between 1999/00, the year in which Alberta eliminated its net debt, and 2006/07. This rate of spending substantially exceeded that required to compensate for inflation and population growth (4.9 per cent).

One of the main results of the unabated increases in spending has been a dearth of meaningful tax relief. The absence of tax relief in Alberta has allowed other provinces, particularly resource rich provinces like Saskatchewan and British Columbia, to substantially close the tax gap.

For instance, British Columbia has been aggressively reducing its personal income taxes to close the gap with Alberta. Specifically, BC reduced its top personal income tax rate by 25 per cent since 2001 while Alberta has maintained its status quo. British Columbia now has the lowest personal income tax for individuals earning up to $108,000 of any Canadian province, including Alberta.

Both British Columbia and Saskatchewan have reduced the business tax gap. Specifically, BC has eliminated and Saskatchewan is phasing-out the general corporate capital tax. In 2001, Alberta had a significant advantage, being the only Canadian province without a corporate capital tax.

Unfortunately, the Stelmach government has chosen to continue the spending spree rather than seize the opportunity to strengthen Alberta’s diminishing tax advantage. In its first budget delivered earlier this year, total government spending was increased by almost 12 per cent, nearly double the rate of Alberta’s expected economic growth and well beyond the rate of population growth and inflation. Of course, the profligate spending came at the expense of tax relief.

Albertans are currently enjoying a booming economy and might previously have expected the boom to continue. The future now looks increasingly uncertain. What the province and its citizens require is a return to the fundamental principles embodied in the Alberta Advantage – small government, low taxes, and a positive investment climate. To that end, Premier Stelmach should immediately reject the recommendations put forth in Our Fair Share and send a strong signal in its next budget that the government takes the Alberta Advantage and the future of the province seriously.