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REF NO.: 92

SUBJECT: Report challenges conclusions of University of Calgary study on Newfoundland and Labrador oil and gas taxes
DATE: Dec. 15, 2010

Does Newfoundland and Labrador receive unfair oil and gas subsidies? According to Dr. Wade Locke of Memorial University’s Department of Economics, the answer is no.
In a Leslie Harris Centre of Regional Policy and Development report, Dr. Locke argues that despite the claims of publications released this year by the University of Calgary (one authored by Dr. Jack Mintz and the other by Dr. Mintz and Dr. Duanjie Chen), the oil and gas industry in Newfoundland and Labrador is not unfairly subsidized.
To test the University of Calgary papers, Dr. Locke performed four separate mathematical simulations and found that none of the test results were consistent with the conclusions of Dr. Mintz and Dr. Chen: there was simply no evidence of an inappropriate subsidy, he said.
Dr. Locke cites a number of problems with the assumptions that Dr. Mintz and Dr. Chen use to support their claim. For example, the Calgary researchers ignore the risk inherent in the offshore industry, neglecting to account for the major costs, long lead times and general uncertainty that go along with offshore investments.
“Newfoundland and Labrador cannot afford to take these claims lightly,” Dr. Locke said. Consider Dr. Mintz and Dr. Chen’s implication that Newfoundland and Labrador’s tax rates on oil and gas are too low: “If an expert says an industry is subsidized, the inference is that tax rates are too low, which could cause concern that the fiscal policy isn’t as effective as it could be.
“These papers are out there saying this is a problem: if there’s no debate, the next logical step is for pressure to be put on the provincial government to change the royalty policy and increase tax rates, a move which could be disastrous for the prosperity of this province,” he explained.
There is also the fear that the questionable conclusions of Dr. Mintz and Dr. Chen could influence federal decision-makers. Take the Atlantic Investment Tax Credit, a credit that encourages investment across a range of natural resource-related industries, including oil and gas, as well as areas like fishing, farming and forestry.
While the credit is not the focus of the University of Calgary papers, part of the “subsidy” cited by Dr. Mintz and Dr. Chen includes support from the program. “There is no constitutional commitment to fund the Atlantic Investment Tax Credit. With the federal government always looking for ways to improve its deficit situation, misinformation about this program could have repercussions for a range of Atlantic industries beyond oil and gas.
“What my paper is meant to do is to give people some information to help them understand and discuss whether or not these issues ought to be reflected in the current policy, or ought to be changed,” said Dr. Locke.
“This is a complex mathematical argument that goes beyond the ability of most people to fully understand,” he said. “Ultimately, they don’t need to understand the technical issues, they just need to know that there are significant problems with the Mintz and Chen papers, to the point where public policy makers shouldn’t feel the need to pay attention to the claims they make.”
Dr. Rob Greenwood, director of the Harris Centre, said Dr. Locke has often contributed to clarifying complex public policy issues. “His work sheds light on the Canadian equalization system, on oil and gas royalties and on other issues that have profound impact on people’s wellbeing in Canada, but which often go unquestioned because of the technical complexity of examining the data, the assumptions and the conclusions.
 “Dr. Locke put in a tremendous amount of work on this issue and his conclusions are important for all governments in Canada and for all citizens.”
Dr. Locke’s report is available at www.mun.ca/harriscentre.
 
Cited papers:
http://mun.ca/harriscentre/reports/wade_report_final.pdf
http://www.policyschool.ucalgary.ca/files/publicpolicy/cashcow1b.pdf
http://www.policyschool.ucalgary.ca/files/publicpolicy/mintztechtaxoilgas.pdf
 

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