Why the Alberta Advantage was flawed from the beginning

Any economic strategy needs to focus on helping all Albertans over the long term, and counting on a volatile energy industry is not the answer

alberta advantageEDMONTON, Alta. Jan. 9, 2017/Troy Media/ – 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 U.S.”

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, 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.

More to the story: [popup url=”http://www.troymedia.com/2016/12/10/alberta-slide-attract-investment/” height=”1000″ width=”1200″ scrollbars=”1″]Alberta in long, slow slide to attract investment[/popup] by Ken Green and Taylor Jackson

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 our province, while serving the needs of all Albertans, not just mega corporations.

Robert McGarvey is chief strategist for Troy Media Digital Solutions Ltd., an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is [popup url=”http://amzn.to/2bOsixk” height=”1000″ width=”1200″ scrollbars=”1″]Futuromics: A Guide to Thriving in Capitalism’s Third Wave[/popup]. Robert is included in Troy Media’s Unlimited Access subscription plan.

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