Resource Royalties vs. Structural Deficits

Briarpatch printed my article, “Dirty Deeds Done Dirt Cheap: Saskatchewan’s Multi-billion Dollar Resource Giveaway,” in its December 2008 edition. The magazine’s editor has a knack for excellent rock-themed titles: my previous contribution on Saskatchewan’s business tax cuts was entitled “Money for Nothing, and the Sultans of Spin Get Their Tax Cuts for Free.”

When I submitted the article and spoke to the Saskatchewan Federation of Labour on resource royalties, oil was selling for about $70 per barrel. With that price now below $40, oil extraction entails less economic rent and hence less potential to raise public revenue by increasing royalty rates. (However, since Saskatchewan’s royalties were too low even when oil was worth only $20 per barrel, there undoubtedly still is room to raise them.)

As I noted in a letter to the Regina Leader-Post, the provincial government should consider not only current resource prices but also the potential range of future resource prices in setting royalty rates. Now is an opportune moment for governments to enact much higher royalty rates on oil sold for more than, say, $50 per barrel.

Such a change would not immediately generate any revenue or impose any cost on the petroleum industry. But it would position the public to reap the windfall if and when oil prices spike again.

More generally, concerns have been raised that economic stimulus packages will lead to “structural deficits”. The conservative response is to limit the amount of stimulus. A more progressive response may be to focus much of the stimulus spending on investments (such as infrastructure and education) that will produce greater prosperity, and hence more government revenue, in the future.

Another defence against structural deficits is to enact tax structures that will raise significantly more revenue as the economy recovers, without sucking out too much money as it deteriorates. Higher royalty rates above current resource prices would serve this purpose. Higher tax rates on corporate profits would also automatically generate substantially more revenue as the economy recovers without affecting businesses that are currently unprofitable.

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