In a very short amount of time the Alberta Royalty Review is going to be made public and there will be lots, I am sure, to talk about. Alberta, Royalties, and natural resources are not really my bag (then what are you doing in Alberta? many ppl will wonder, but that is another tale of a sabbatical and a desire for winter), but taxation is and there is a lot of overlap between this review and taxation. If you want to read a good summary piece of these issues, read this great CD Howe piece coauthored by the esteemed Robin Boadway and Ben Dachis.
Let’s start with first principles. Under the Canadian Constitution (with some tumultuous history for the Prairie provinces), provinces own the natural resources within their boundaries. This means that natural resources are what we call “commonly owned public property.” So the idea of resource royalties is that we the people own these resources and we the people should therefore be paid for these resources should someone want to access them. And we can use resource royalties equally to discourage access if and when and for what we want to keep in the ground.
How do we do this? Well that is the hard part. We really only want to tax rents. What? Rents are just a short form way to refer to the benefits from that resource extraction that are in excess of costs to extract the resource. So in general we want to ‘tax’ “all revenues from resource sales less all current and capital costs accrued in the year.” (Boadway and Dachis p. 435). So resource sales minus things like wages and capital cost allowances.
Trevor Tombe had a great diagram representing this (though apparently a few people bitched about the use of a pie, but it looks fairly helpful to me.)
— Trevor Tombe (@trevortombe) January 29, 2016
The hard part is that it is really hard to observe all these thing, there are many features of resource taxation (see for example Chen and Mintz) that interfere with the application of this concept, you have the never ending battle between the provincial and federal tax systems, and different resources face different tax treatments (e.g. mining vs oil and gas vs. clean energy). Of course, Alberta is most dependent on resource taxation so it is very important for it to design the right scheme to achieve the right objectives.
There are generally a number of ways to potentially tax ‘rent’:
- Auctions where resource firms bid to the right to explore, develop, and extract (Norway does not use Auctions)
- public participation where government shares ownership when they grant a license (Norway relies on this with rent taxes). The extreme end of this is that the resource firm is owned by the government.
- rent taxes where the corporate resource tax is designed to be revenues minus costs on a cash, not accrual basis. One of the benefits of such a system is that it treats negative cash flows (common during exploration) equal to positive ones (common during extraction)
Most economists would, I think, lean towards a rent tax system. Now let’s see what Alberta does.
*UPDATE: Here is the report. In a nutshell, Alberta is sticking with rent tax system for its royalty system, but it will be to better account for costs and better extract benefits so that both industry and the public ‘wins’. And it has defined objectives for the system and it will monitor how the system meets these objectives. This is public policy design 101: define the problem, establish the objectives, see if the policy achieves those objectives, rinse and repeat.
*Of course, an important angle to this is what the province does with resource revenues. Let’s hope this time, it does not piss them all away!