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Why the Alberta Advantage was flawed from the beginning

Economic strategy needs to focus on helping all Albertans over the long term.


Conservative media pundits are raining fire on Alberta’s New Democrat government for surrendering the Alberta Advantage.

According to Sun Media columnist Lorne Gunter, “When the NDP took power in May 2015, Alberta had the lowest top combined federal/provincial/sales tax rate of all 60 provinces and states in Canada and the US.”

And where are we now, he asks? “Alberta had fallen from the 14th-best place on the planet in which to invest in oil and gas to 43rd.”

According to a recent study by the Fraser Institute, http://www.plant.ca/vQu8O tax rates are the key factor drivings investment decision-making. The study concluded that Alberta’s former prosperity was driven by its low (conservative) tax regime and its new (socialist) tax rates will discourage business investment in Alberta.

But was Alberta tax advantage really the reason for the province’s success?

Business leaders make major investment decisions after an exhaustive analytical process. This includes complex cost-benefit analysis, with organizational resource requirements and finance factored for expected inflation and the cost of money. There’s a detailed analysis of a host of market, political and social risks. Then financial models are generated to predict the monetary returns, expressed in an accounting figure called EBITDA (earnings before income tax, depreciation and amortization).

Although investment decisions are multi-faceted, the deciding factor is usually EBITDA. And the returns that matter are calculated before income taxes are paid.
For most major investment decisions, tax rates are a secondary consideration. Stock market multiples are also calculated using EBITDA and so returns to investors are also largely independent of tax considerations.

If tax rates really mattered, investment dollars should be flooding into low-tax regimes like Switzerland. Considering the massive investment being made in high-tax United Kingdom, or into states like New York and California that have considerably higher tax regimes than Alberta, a case could be made that tax rates don’t influence major investment decisions at all.

A critical variable for investments in mega oil and gas projects is (obviously) the price of oil, which is roughly half of what it was a few years ago. More importantly, the volatility of the price is shattering the analytics behind mega projects.

The price of oil may stabilize at a decent price but future projects must factor in the potential for the price to fall to $20 a barrel, since oil pricing is now considered very volatile. This makes the worst-case scenario for any mega project uneconomic. And when you factor in the growing political and social opposition to oil and gas development, the numbers and the risk factors just don’t add up.

What drove oil and gas investments in the past was not low tax rates. It was high oil prices and low price volatility. Just the opposite factors are inhibiting investment today: low prices and high price volatility.

But this obsession with taxes in some quarters of Alberta is much more. Many conservatives consider raising taxes morally reprehensible. They view taxation as a kind of theft. For them, it’s not a means to redistribute wealth, it’s a crime against the whole notion of personal success.

Former premier Ralph Klein first introduced the idea of the Alberta Advantage in the late 1990s. It was part of his strategy to kick-start another oil and gas boom. At the end of the day, his Alberta Advantage was a corporate windfall that didn’t really help normal wage-earning citizens.

Contrast that with the vision of former Progressive Conservative premier Peter Lougheed, who in the 1970s established the Alberta Heritage Savings Trust Fund and jacked up oil and gas royalties to ensure a reasonable return for Alberta’s oil and gas assets. Lougheed’s plan, if it had survived, would have built a contingency fund of many hundreds of billions of dollars. These resources could today be used to support vulnerable Albertans through some pretty tough times.

Perhaps it’s time we thought more carefully about what kind of advantage we really want to construct in Alberta and ensure that it’s driving a broader range of investments in the province, while serving the needs of all Albertans, not just mega corporations.



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Comments

9 Comments » for Why the Alberta Advantage was flawed from the beginning
  1. Mike says:

    I think this is ivory tower high level analysis, not based on reality. Every corporation I have worked for assess projects on an after tax IRR basis (as prescribed by modern finance theory), not accounting EBITDA. If I was choosing between an investment in the Northern half of the Bakken in Saskatchewan or the Southern half in the US, I’m going to choose the location that has the best commercial IRR, and tax / regulations will be a major factor in that analysis. We can see the reality of that now, Alberta oil companies are increasingly investing in the US Bakken ahead of Canada, not because it has better reserve, but because it is lower cost for a host of reasons, including government support of industry. That support no longer exists in Alberta, and the capital isn’t being invested accordingly.

  2. arne says:

    Ireland drastically cut taxes a few years ago. investment has boomed:

    Ireland has benefited from $277bn (£182bn) of US direct foreign investment in the past two decades – gaining more from American firms than Brazil, Russia, India and China combined.

    The figures from the American Chamber of Commerce in Ireland go back to 1990 and show corporations continued to cross the Atlantic even during the dark years of the recent recession.

    The ACCI’s latest report into foreign direct investment shows that 700 US companies based in Ireland now employ 130,000 people.

    • Andrei says:

      You are quite muddling the issue as Ireland (incl. Luxembourg and Holland) have low corporate taxes to attract foreign Euro H.O. by offering easy financial plays. The usual techniques like intra-Euro subs expensive loans or license fees.

      On another level, Albertans have been bribed into silence for the low corporate tax & and wholesale pollution by not having PST.

  3. Thomas Conway says:

    Canada can boast one of the strongest records of business tax reform among industrialized nations. Since the turn of the millennium, federal and provincial governments have reduced the tax burden on businesses from the highest in the OECD to the middle of the pack. Not only has the corporate tax structure become internationally competitive but the tax burden is now spread more evenly among different sectors of the economy.

  4. Kevin Syvret says:

    The acronym EBITDA is actually Earnings Before Interest, Taxes, Depreciation, and Amortization. And as a previous poster stated, no business with competent managers will use this as the basis for any large decision. The only thing that should matter is bottom line profitability. IRR (Internal Rate of Return) is the way to go.

  5. Wayne Wiebe says:

    You can segment and analyse all day long but it is really empowered people verses empowered government. People individually and people making the decisions in corporations. The Alberta advantage is when the people are given the choice because they are closest to the situations and they know what is best for themselves. The disadvantage is government involvement that limits the choice or removes options for individual or corporations. The thinking of a government who overextends its reach into areas they are far removed from and that they think they know better then the “people” who are far closer to the individual situations.
    Let’s take it to another area and apply the principle. How many parents would tie up there child’s arms and send them off to school to do better then all the other children in the world? I would like to think none, but if you think about it, over reaching government tax or policy handcuffs the very people they are supposed to support.
    Good governance is tough but making the people your represent feel disabled should be a BIG warning flag. I realize there are different warnings of political policy in the other direction. But I think they have long disappeared in the rear view mirror. Need to hold government to account to find more balanced solutions, as recently we have swung so hard in one direction. We can only pray we don’t experience, what seems inevitable, opposite pendulum swing in the next few years. This other direction has its issues but I actually feel more empowered to be able to do something in that direction instead of handcuffed. Wishing my fellow Albertan’s all the best success.

  6. Mark says:

    Absolute rubbish. As an oil and gas economist I can say with 100% certainty that taxes are taken into account when making investment decisions.

  7. r graham says:

    Mike has it right. Companies invest where income is predictable, and Alberta, with their new political zealot govt., has removed any positive predictability. Watch investment flood out,, along with taxpayers who will have fewer jobs if they stay.

  8. Bill MCCoy says:

    Mature Albertan with two university degrees, many transferable skills and excellent people skills seeking a chance to enjoy Alberta advantage by finding open minded, forward thinking employer in Alberta looking for long term employee for fair wage. To receive resume from individual, provide email address to

    smokylake05@gmail.com

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