Budget (2) – Subsidies continue for the oil sands

Budget coverThe budget cuts the tax break for developments in the oil sands, but it stays intact till 2010 and only completely disappears in 2015. The Tories argue that it wouldn’t be fair to cut the knees out from companies, even profitable polluters, that had projects in the pipe whose financing depended on it. That’s annoying and all the more so for being true.

The money amounts to a subsidy, though it’s sort of technical. There’s a surprisingly readable paper (PDF) on offer from the finance ministry explaining it, but the paper was written in 2001 so it’s a little out of date, and “surprisingly readable” isn’t quite the same as “readable” for the layperson.

In essence, whenever businesses spend money on capital projects — like opening a new extraction operation in the oil sands — they get to subtract the cost of the stuff they buy from any profits those projects make, but only at the rate the government figures the stuff they’ve bought is wearing out.

There are all kinds of different classes of goods, but in principle, if I’m a freelance writer and I buy a laptop and the government figures laptops have to be replaced every five years, I can write off 20 per cent of the price of my laptop every year for five years, when it’s time to buy a new one. In the case of mining and oil equipment, the government lets extractors write off 25 per cent of their capitals costs each year for four years. It’s called a “Capital Cost Allowance.”

Since 1996 (meaning the Liberals brought it in), the government has let oilsands operations write off 100 per cent of their capital costs immediately. Effectively, the government collects no tax from them till they’ve made their investments back. Good deal. Strictly speaking it just means the oil extractors pay taxes later rather than sooner, but it puts more cash in their pockets early on, frequently for them to use on other oilsands projects.

In 2001, the Finance officials figured the oilsands “accelerated capital cost allowance” would end up costing $338 million between 1996 and 2030, but since we’ve long-since hit the government’s estimate for oilsands production in 2020, it’s safe to assume we’re on track to spend quite a bit more.

From the Tories’ budget (this part is bull):

ACCA [Accelerated Capital Cost Allowance] was provided for investments in the oil sands at a time when it was an emerging sector and special support was appropriate to help offset some of the risk associated with early investments.

This part isn’t:

Budget 2007 will phase out the existing ACCA for assets in this sector, leaving in place the regular 25-per-cent CCA rate for these assets. This will improve fairness and neutrality among the oil sands and other sectors, particularly other oil and gas and renewable energy resources.

The tax break actually encourages oil companies, when given a choice between the tar sands and a conventional oil well, to choose the tar sands, the environmentally unsound choice.

It’s obviously dumb now that practically anyone can take a shovel up to Fort McMurray and come back a millionaire, but even when oil was cheap and developing the oilsands didn’t make economic sense, it was dumb. It never makes sense to give favourable tax treatment to an uneconomic activity, whether it’s fishing for fish that aren’t there or making cars nobody wants, but most especially if it involves extracting and selling a non-renewable resource like Alberta’s oil. In 1996, when oil was comparatively cheap, it was much better to leave the stuff in the ground until it was worth more. You’ll notice that there was no oil boom in the late 1990s — that waited until oil topped $50 a barrel, whereupon government tax benefits maybe sped things up by all of six seconds.

And now we’re stuck with it, forgoing tax dollars to encourage companies to do things that we’d on the whole prefer they didn’t. Bad policy then, bad policy now, and definitely bad policy in 2015.

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