Potash revenue mess costing the province billions every year
It is important to be engaged in the events and policies that directly affect us. Consider this, the average Saskatchewan family of four has forgone 60,000 dollars of revenue over the last 10 years, due to a very generous incentive to the Potash Industry, at least half that much again has been lost in poorly thought out incentives and royalties to the oil and gas industry.
Research on this topic will bring up the name of Jack Mintz a highly regarded and awarded economist. Dr. Jack Mintz was appointed to the Palmer Chair in Public Policy at the University of Calgary in January 2008. Dr. Mintz has consulted widely with the World Bank, the International Monetary Fund, the Organization for Economic Co-operation and Development, the governments of Canada, Alberta, New Brunswick, Ontario, and Saskatchewan, as well as various businesses and non-profit organizations. Dr. Mintz has this to say about our governments arrangements with the potash industry
“For a government’s fiscal program to best serve the public interest, while also ensuring sufficient public revenue collection, it has to meet three criteria: efficiency, simplicity and fairness. Unfortunately, the royalty and tax system currently in place for Saskatchewan’s robust potash-mining industry is none of these three things; it has actually reached the point of incoherence and absurdity, or a mess.”
How did this happen?
Imagine that you own a farm. Your operation turns a fair profit, some years it is modest but you have seen positive cash flow for at least 9 out of 10 years. Now imagine that the government will credit you on taxes and other expenses like interest for the cost of any expansion you decide to undertake, plus 20%. So for every million dollars you invest you will receive one million dollars plus two hundred thousand above your investment as a credit against taxes and other costs. Sweet deal. Now it won’t take long before every farmer that is cash flow positive to realize that they can in effect actually make money simply by expanding. The more they expand, the more money they make, the more taxes and utilities they will have to pay, however they will be given credits against those costs simply by borrowing if needed and expanding further. This is what is called in economic terms a distortion in the market place. Farmers are not being rewarded for being efficient or for keeping their operations in line with demand and supply. The risks of expanding the business are being absorbed in large part by the public purse creating an economic ‘moral hazard’, as well as encouraging expansion that will if in place too long will negatively impact the price.
It is called a moral hazard because it rewards behaviours that are economically unsound and this may have a disastrous outcome if left unchecked. Farmer’s with such a cost plus incentive will expand production rapidly as long as there is a profit to be made. There will be those who will move aggressively, overtaking and buying out smaller more prudent operations, pushing everyone to capitalize on the money to be had by maximizing the returns on the the incentive. Eventually if the market segment being stimulated is large enough, the production increase will cause the commodity price to collapse and the house of cards falls down. This is a market intervention that if it comes to a bad end, the cost will be born to a large extent by the public. Moral hazard number two; business will not be expected to pay for bad economic choices made by the public that caused the situation in the first place.
This is what is happening now in the Potash industry in Saskatchewan, (and it has happened before). The policy currently in place is the 120 per cent “super capital cost allowance” allowing companies to claim 120 per cent of their capital expenditures against their royalties and taxes. It has resulted in expansion projects totalling over $13 billion in the past 5 years. Multiply that by 1.2 and you have $15.6 billion in credits that the tax paying public will absorb. This incentive is an economic weapon of mass destruction for the province that will leave a nuclear sized crater. It is madness to put in place an incentive the rewards cost plus 20%. A thirty percent incentive would have been reasonable and even that should have been shut down by now. This industry is currently very profitable and has no need for further public incentives at this time. Even more troubling is that Saskatchewan is the biggest supplier of Potash in the world. In effect we control the price. If we expand beyond market capacity the price will drop, and with the capital cost credit over our heads it could cost us ever increasing amounts in the near future.
by the numbers
cost to the provincial treasury
$2.4 billion in both 2010 and 2011
and $3.6 billion for 2012 and 2013
when you factor in previous years and current data the total easily exceeds 15 Billion dollars. This lost revenue will grow ever larger with new larger credits to pay out. As citizens of the province we may find ourselves again in a tax loss situation regarding potash even though the industry itself making billions.
“the government incurred a tax loss in three of the four years and generated very little revenue in 2011 through the potash tax.”
That is absurd.