Saturday, April 7, 2018

A Closer Look at the Tax Benefits from LNG

In support of LNG development, the provincial government stated that even with its latest tax concessions, the development and operation of the LNG Canada project in Kitimat would generate $22 billion in tax revenues. Though not the windfall the previous government originally touted, it is still a seemingly impressive amount, enough in itself to justify the government’s enthusiasm.

The government did not release the analysis underlying its $22 billion estimate, nor did it explain the methodology and assumptions it used.  However, as I suggested in my last blog and confirmed in discussions with a senior official involved in the calculations, this number does not in fact indicate what the net benefit for taxpayers would be – what additional tax revenues the government could expect to receive should this project proceed.

The $22 billion includes an estimate of all of the income taxes that workers for the plant, pipeline and related natural gas industry activity would pay to the provincial government. But that doesn’t indicate what additional or incremental income tax revenue government would receive because it fails to take into account what those workers would otherwise have done and amount of taxes they would have otherwise have paid if Canada LNG did not go ahead.

It is the difference in the taxes workers would pay with versus without the project that measures the additional revenue and net benefit for government. Unless one makes the incorrect assumption that all of the workers involved with LNG would otherwise be unemployed, the additional income tax revenue due to the project would be a much smaller number than what the government included in its $22 billion estimate

Also included in the $22 billion is an estimate of all of the royalties that BC natural gas operators would pay on the gas they produce and deliver to the LNG plant. But that fails to take into account how much of that gas would have been produced for the North American market and how much royalties would have been paid without the Canada LNG project. Again, it is not the total royalties that measures the additional revenues for government, it is the difference between the royalties that would be paid with versus without the LNG project going ahead.

Finally, the $22 billion includes an estimate of all of the corporate income taxes, sales taxes and motor fuel taxes paid in the construction and operation of the plant, pipeline and related activity. The problem here is that this ignores what economists term general equilibrium effects. There are constraints on what any economy can produce and major increases in investment and activity in one sector will have some offsetting impacts on other sectors. The mechanisms by which this takes place are varied, including for example, upward pressure on wages and resulting labour market constraints in other industries; upward pressure on the exchange rate and resulting competitive pressures for exporters and firms facing import competition. The net effect requires some complex modelling to estimate properly. What one can be certain of, however, is that estimates that don’t consider these effects will overstate the net gain for government.

The fact is that the $22 billion figure simply does not provide any indication of the value of the project to taxpayers. It does not attempt to estimate what the increase in government revenues would be.

Even if the $22 billion had some validity, which it doesn’t, the number in itself fails to indicate the present value significance of the impacts in dollars with the same purchasing power or value as dollars have today. The $22 billion is the sum of tax impacts over a 45 year period, without any adjustment for inflation or the time value of money. With much of the tax impact in the later years of the project, the equivalent present value (what those impacts would be worth today) would be markedly less.

The problem in all of this is not just that there are serious methodological errors in the government's tax estimate -- a matter more of an annoyance for economists than anything else. The problem is that the number itself, unqualified and uncorrected, seriously distorts the public policy debate. If the gain for taxpayers really was $22 billion, that could provide a strong case for proceeding regardless of the GHG emissions that gas liquefaction and related activity entails and without any careful consideration of how those emissions should be addressed. 

The government has suggested, and its Green partners have demanded, that British Columbia would still meet its existing GHG reduction targets even if LNG goes ahead. British Columbians would have to further reduce their GHG emissions in order to 'make room' for the emissions from LNG and related gas industry activity. But as I said in my last blog, that would impose great costs on British Columbia households and industry -- costs that would almost certainly swamp a valid estimate of the additional tax revenues government could expect from LNG development and operations. 

My own view is that if LNG projects are to proceed we need to modify our GHG emission reduction targets to recognize the impact of LNG exports from BC on emissions elsewhere. There wouldn't then be the same costly need for British Columbians to further reduce their emissions in order to 'make room' for LNG.

However, one thing a methodologically correct estimate of the tax benefits from LNG would make very clear. If BC is not prepared to modify its emission targets to take into account the global impacts, one has to ask: what is the public policy rationale for proceeding. There almost certainly would be significant net costs for the general public -- for those not directly involved in the project.