Don Cayo: In my opinion

Consistent rate: A rent tax would bring in extra revenue in a more logical and fair manner

If B.C. stopped collecting royalties and instead taxed resource-harvesting companies’ profits, it could make more money without discouraging investment.

How can resource- rich provinces like B.C. make hay while the sun shines — that is, rake in big bucks when non-renewables are selling for top dollar — yet remain competitive when prices tank during downturns like the one we’re in now?

The answer, according to a new study, is to follow the lead of other richly endowed jurisdictions that no longer rely on royalties to cash in on their resources. Instead, says the study released this week by the C.D. Howe Institute, governments should tax the profits resource-harvesting companies earn on projects in the province — a strategy that can increase revenues without discouraging investment.

“The key problem with current resource taxes in Canada is not the tax rates,” the study says, “but the design of the taxes.”

The idea behind the study’s proposal is to shift the basis for taxation away from traditional measures such as price per unit of the resource extracted, companywide profits (as opposed to profits from a given project), or the commonly used hybrid systems that tax at a low rate until a company’s costs are recovered and a then higher rate.

In place of these, the idea is to tax what economists call “rents” — that is, the difference between the normal return on capital and what companies earn from a project, or “all revenues from resource sales less all current and capital costs accrued in the year.”

If such a system were well designed, it argues, a consistent tax rate would bring in maximum revenue in good years when companies are enjoying high prices and lesser amounts when times are tough. But the net result would be more money coming in. And there’d be less disincentive to invest, not only because companies wouldn’t be hammered by taxes in the bad years, but also because with a fixed tax rate, as opposed to the variable ones they have now, the tax breaks resulting from an investment would also be consistent in good years and bad.

The nitty-gritty details are, of course, more complex, and the study examines in depth how various tax systems treat companies’ costs, both long- and shortterm, and how deductions can be made more logical and fair.

Current practices in Canada vary widely. B.C. is singled out as going in the right direction when it comes to mining taxes, but not so much with a new tax on natural gas.

Our mining tax is a version of what the Howe Institute suggests, although it doesn’t have all the same deductions, and its rate (13 per cent) “is relatively low for a rent tax.”

But, the study says, B. C.’ s unique new tax on LNG (a levy of 3.5 per cent of net income from processing plants, but not applicable to production activities) is structured as a rent tax, yet is unnecessary because a broader rent-based tax on all phases of natural gas production would accomplish the same thing.

Resource-based revenues add up to a big deal for Canadian governments, which collected about $79 billion from 2009 to 2013, the study says.

As well, “From 2009 to 2013, B.C. collected $2.3 billion from resource-right auctions and a further $2 billion from gross-revenue royalties.”

Over this same period, “Total non-renewable resource revenues, which include mining taxes, averaged four per cent of total provincial revenues.”

There’s room for this revenue to grow, the study argues, because — even though provinces often worry about keeping their rates competitive — there’s no clear evidence that this matters much when resource-related taxes are based on rents.

“Since resources are fixed in location, normal tax competition effects do not apply. Gross-revenue royalty rates are typically lower than rent taxes because they are a more inefficient revenue vehicle and because they do not allow costs to be deducted.”