Is Alberta about to lose its competitive advantage in oil sector thanks to Donald Trump?

Canada Rig Encana photo.

Saskatchewan will become one of highest-taxed oil-producing jurisdictions, Alberta will be middle of the pack globally

Is Canada about to lose the competitive advantage it currently enjoys in attracting investment to its oil sector? With a U.S. tax reform package on the horizon, the answer could be yes, according to a new report from the University of Calgary School of Public Policy authored by economists Daria Crisan and Jack Mintz.

“Canada may be about to lose the competitive advantage it currently enjoys in attracting investment to its oil sector, namely, its low corporate tax and royalty rates compared to the U.S. While we will start to know better the details of a U.S. tax reform package in the next month or so, two reform plans provide a basis to analyze potential impacts,” said Mintz, who is a professor in the Haskayne School of Business and Faculty of Law.

If the Republicans succeed in passing a version of their tax-reform proposals, Alberta will slide quickly from one of the most tax favourable destinations for oil investments to somewhere in the middle of the pack.

Saskatchewan will become one of the highest-taxed oil-producing jurisdictions.

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Also, should rising oil prices trigger higher royalty rates in both provinces, they will become even less competitive.

The report also ranks Alberta and Saskatchewan against other jurisdictions on tax rates on investment for 2017.

“The tax-reform “Blueprint” put forward last year by the Republican-controlled House of Representatives, and President Donald Trump’s own reform proposals. Either one, or even a hybrid version of the two, would make tax and royalty effective tax rates on new investment in the U.S. oil industry significantly more attractive to investors,” said Mintz.

Alberta, for example, which currently offers the lowest marginal effective tax and royalty rate (METRR) on conventional oil investments of all the Canadian provinces based on a $50 per barrel West Texas Intermediate price, also offers a lower METRR than nearly all comparable U.S. states measured (except Pennsylvania).

If the Republicans succeed in passing a version of their tax-reform proposals,  Alberta will slide quickly from one of the most tax favourable destinations for oil investments to somewhere in the middle of the pack.

Saskatchewan will become one of the highest-taxed oil-producing jurisdictions.

Yesterday’s increase  of BC’s corporate tax is another blow to Canadian tax competitiveness.

It is unclear at the moment what will be the final shape and form of the corporate tax reform in the U.S., but Alberta and Saskatchewan policy makers need to understand this looming threat, and develop plans to respond to it if they hope to keep attracting investment to their provinces.