Reboot Alberta

Wednesday, January 17, 2007

What is Stephen Harper Thinking?

Nicole Martel is asking why Stephen Harper is doing so much to alienate his base in western Canada. First the income trust betrayal and now he is looking at non-renewable energy revenues as part of the calculation for equalization payment calculations, as a pander to Quebec. Saskatchewan and Alberta are upset as is Newfoundland and Danny Williams is speaking in Fort McMurray on January 27th. I am sure he will have some choice words for Prime Minister Harper on equalization formulas.

Top that off with rumours of a $1.4 Billion payment to Quebec to restore the Harper Cons position there. It won’t hurt Jean Charest either, which is a good thing with his pending election.

Wasn’t it just this kind of pandering to Quebec politics that started the Reform Party in the first place? Wasn’t Stephen Harper around then?

Then the recent Globe and Mail poll done by The Strategic Counsel is being parsed in the media for its meaning with a plethora of preconceived notions. The fact that Dion is in a horse race with Harper so shortly after a leadership change and so close to Adscam is amazing. Harper has dropped from 49% to 41% support in the west in the year since the last election. He is down 10% in Quebec from 25% to 15%. In Ontario Harper is at 32% trailing Dion at 45%.

The next election is being touted as far off because the tight race between the major parties. Lets face it the next election will be called when Jack Layton decides he is ready because he has the votes to sustain or bury Harper. So we have to watch just how much and how fast the Greens are closing in on him too.

In Ontario the Greens are up to 9% and the NDP are down to 15% since the last election. Enough said! Jack Layton can hear the Birkenstock footsteps right behind him and they are getting louder. That trend will determine the next election based as much on Jack Layton’s fear factor over Elizabeth May’s Green Party emergence.

Old line Reform/Alliance types must be shaking their heads and asking themselves “Stephen – what are you doing?”

8 comments:

  1. Anonymous7:39 pm

    Hi Ken -- we need to inject some facts into this discussion before we get 'alienated' for no reason.

    First on income trusts. I will leave the issue of political promises to your political scientists. Here is the economics:

    All the top tax policy economists agree -- income trust are distorting Canada's corporate structure and allowing the deferral (and, in the case of foreign entities, avoidance) of legitimate taxation. The province hardest hit by this was Alberta -- since we have many energy trusts here. We lost the corporate income tax and trust holders (most of whom don't live here) paid income tax in their own jurisdictions. The former Alberta finance minister supported this change (although not very vocally) for that reason. The income trust change has put a lot more revenue back in Alberta's coffers -- revenue that was leaking into other jurisdictions. So cheer up.

    On equalization. The previous Alta gov't position was completely incoherent -- except to pander to the Alberta Alliance types. Alberta's resource revenue has ALWAYS part of the equalization formula, even though provincial resource revenue has NEVER contibuted to paying for equalization. All Canadians pay for equalization through their federal taxes, full stop. No sensible formula will ever give Alberta equalization -- so we really don't have any interest in this debate -- except that we care about Canadian unity.

    Finally, the so-called gains of Quebec and losses of Saskatchewan need to be considered carefully. Quebec's so-called gains are relative to the temporary equalization formula in place now. Saskatchewan's losses are compared to that temporary formula too. The formula proposed by the federal Panel (which had 2 of 5 members from Alberta -- Al O'Brien and Mike Percy) is a compromise that addresses key concerns of all provinces while making none of them perfectly happy. John Richards of SFU calls it "a fine Canadian compromise".

    Based on the pre-2004 formula, Quebec is not a big winner and Saskatchewan would receive nothing -- because its oil and gas bonanza has made it a have province. As a former SK Finance official, I've been cheering their good fortune at getting a bundle of windfall revenue and breaking free from equalization -- Roy Romanow's dream.

    So... let's not lower the flags yet. We in the west (and especially Alberta) are not hard done by either through income trusts changes or proposed changes equalization.

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  2. Anonymous10:11 pm

    Thx Paul - just so I understand - Alberta resource revenue is part of equalization because it is part of what contributes to Albertan's personal and corporate taxable income as Canadians right?

    Taxes revenues for equalization payments are paid by Albertans as citizens of Canada, just as they are paid from every other Canadian regardless of province of residence.

    Those are the funds that are used by the government of Canada to pay equalization. Do I have that right?

    The inaccurate framing of the equalization issue to make Albertans people think it is GOA non-renewable resource royalty revenue that is being "shipped" to Ottawa to pander to Quebec in the form of equalization is bogus...right?

    There is not any government to government revenue payments involved in funding equalization. Right?

    If all this is correct we need to demand more clarity as part of our demands for more openness and transparency from our Alberta government.

    AND we better start calling the myths of the political perpetrators of this mis-information too.

    One more thing Paul - do you think Guy Boutilier, our Minister who is responsible for this file on behalf of Albertans actually understands this from the things he is saying in the media?

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  3. Anonymous10:39 pm

    paul, your statement:

    "All the top tax policy economists agree -- income trust are distorting Canada's corporate structure and allowing the deferral (and, in the case of foreign entities, avoidance) of legitimate taxation. "

    ...is not a true statement, if taken in its entirety. Trusts may be "distorting" the corporate structure if by that you mean that various companies are (well, were) considering conversion to a trust structure in order to create shareholder value. The demand for income product in a low interest environment is significant, and trusts are (were) filling that role. The valuation bump that many received for converting would likely not continue ad infinitum, as eventually income-oriented investors would have their fill.

    But trusts ARE NOT allowing for the deferral of tax for taxable Canadian investors (which comprise a significant majority of the investment dollars in the sector). Rather, it has been shown that total taxes collected on the cash distributions from businesses that converted are in many cases significantly larger than what was being collected from the corps. Take any oil and gas company as an example. Whether taxes are collected from the business entity or individual investors should be of no consequence. After the Oct. 31 announcement Telus and BCE both again announced that they would again not expect to pay any cash taxes in the following year(s) while still staying in corporate form. Comparisons using statutory rates are worthless, as deferred taxes have no value. You can't pay for social programs with deferred taxes. Try paying your mortgage with "deferred salary".

    It is noteworthy to mention that governments collected signficiant tax in the form of realized capital gains when companies converted from a corporate to a trust structure.

    Trusts do allow for the deferral of tax when held in tax deferred accounts. But tax is also deferred when these same investors hold any fixed income instrument (interest is tax deductible for the corporation and then slips into the RRSP to be taxed when the RRSP is collapsed). Last I heard, RRSPs were a good thing.

    Trusts also do not allow for tax avoidance when held by foreign entities. Tax is paid in the form of witholding tax on the distributions (15% for U.S. investors according to tax treaty). If 15% is deemed to be "not enough", then institute a higher witholding tax, or offer a higher tax to all and then a credit for domestic investors.

    This "cure" in the form of the Tax Fairness Plan will do more harm then good. Many foreign companies will step in and just acquire the now-cheaper Canadian assets - and then you will collect NO TAXES on those assets, as they will be levered up with debt and the cash flow repatriated to the foreign jurisdiction. There is not even any witholding tax on interest payments for debt securities with a term of 10 years or more at time of creation. So you, I, Canadians will receive nothing, when before we at least received something.

    Alberta does lose tax on a net basis because the provincial portion of corp tax is not collected, but I believe that this loss is compensated for by the considerable capital employed in the oil & gas sector by investors that otherwise would not invest in that industry. Until the arrival of oil & gas royalty trusts, E&P companies thought it was their God-given right to spend all of the shareholders' money drilling holes in the ground. Return on capital employed in the sector was terrible.

    Harper is making a big mistake with this proposed "solution". He will not achieve the stated aim - tax fairness - and may even lose the next election over it. The irony is he is receiving the same (bad) advice from the same Dept of Finance officials that were advising the previous Liberal government - and now the Liberals are poised to profit by trying to appears as the "good guys" (even though they will never repeal this if Harper manages to push it through).

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  4. Anonymous8:28 am

    Ken and Mr. Anonymous:

    Resource revenues are the royalties, land sales etc the province receives from energy companies exploiting the resources owned by the Crown. These revenues belong to the Alberta government, none are shared with any other government for equalization or anything else. Its been that way since The Natural Resources Transfer Agreement of 1930 and the O'Brien Report does not propose any change to this constitutional principle. To suggest that our resource revenues are somehow in danger is simply false. Premiers and Cabinet Ministers should know better and I hope Premier Stelmach and Minister Oberg (the Minister who is actually responsible for the file) are clear about it in their public statements.

    Equalization is paid by the federal government and is financed by the income taxes and sales taxes that all Canadian individuals and firms pay.

    Per-2004, we based equalization payments on a five-province standard (excluding Alberta and the Atlantic provinces). Alberta's revenues were not included in the complicated formula used to calculate equalization, but Alberta's tax rates were. Other provinces' (like SK) natural resource revenues were included in the formula.

    Premier Klein said we wanted Alberta in the formula (a 10 province standard) but not our resource revenue (???). Whatever changes are made, Alberta won't get any equalization -- so what did he care as long as the program is fair and provides the 'glue' that helps bind the federation? If natural resources are fully excluded (as proposed by SK and NF), equalization will be shifted from provinces like PEI and NB (and Quebec) to resource-rich provinces like SK and NF? Is that fair?

    That is why the O'Brien report proposed the compromise of 50% inclusion of resource revenue in the formula. Some people think it is dishonorable for Mr. Harper to agree to a compromise. I think its wise.

    So fairness to other provinces(not money) is Albertans' only interest in this debate. Will Premier Stelmach be a leader on this issue? I don't know.

    As for the income trust issue. This comment is already long so I will be brief. Its easy to take cheap shots at public servants who can't respond. Sadly, its a common tactic in Canada these days.

    That said, all the government tax experts I have talked to (in Alberta and elsewhere) applaud the reform. So do academics like Jack Mintz and Ken McKenzie of UofC. Mr. Anonymous, I suggest you read their views and think about them. Or you could just attack their integrity...

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  5. Anonymous8:58 am

    paul,

    I reread my entire post. Saying that bureaucrats are giving the current (Harper) administration bad advice is hardly attacking their integrity. One can quite honestly give someone bad advice. You are merely deflecting my points by saying that "experts agree" and that to question the public service smears their reputation. Are members of the public only constrained to being able to critize elected officials of the government, then, while unelected officials receive a free pass?

    If information has been made available to these people that unequivocally shows tax leakage, loss of competitiveness, whatever, then let the government put forth the evidence.

    Mintz' calculations were clearly flawed since he used the same basis of taxation for corps and trusts (not so) and implicity/explicitly assumed that corporations pay tax at statutory rates. Cash taxes paid are a fraction of the statutory rate, as corporations are adept at avoiding tax. They will spend $99 to save $100 of tax, because it makes economic sense to do so. And they have numerous means at their disposal to do so, such as intercorporate debt.

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  6. Anonymous12:02 pm

    Harper is held to a higher moral standard than Dion and the LPC. Dion flatly stated that Quebec should keep receiving more equalization payments and that the rumours out there are really in line with the LPC's policies.

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  7. Anonymous1:44 pm

    Anonymous at 12:02 - what is your authority and evidence should keep receiving more equalization payments?" Please provide the same on your statment re the "higher moral standard" for Harper too.

    What is the context around both of those remarks?

    Please provide more more substance and even a bit of evidence to support your comments would be helpful - especially if you are wishing to be anonymous.

    If you can't or won't provide more substantiation for what you say or who you are, then tell me why we should be paying any attention to your comments under such circumstances?

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  8. Anonymous3:22 pm

    I saw Dion on CPAC stating that the rumour of another $1.5 billion in equalization payments to Quebec was already budgeted by the LPC and, therefore, that Harper wasn't giving Quebecers anything new.

    Sorry, I haven't searched the CPAC website for transcripts.

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