Direct transfers are the easiest to calculate, since these are clearly documented in government budgets. The novelty checks are also helpful in this regard. There are few of these transfers in the oil and gas industry in Alberta.
Unequal tax treatment is more difficult to assess. The two types of programs most often cited are enhanced tax credits for exploration and development expenses and accelerated capital cost allowance programs. Both of these may increase the after-tax value of oil and gas projects, relative to projects with the same costs and revenues in another sector, depending of course on the tax relief programs from which that other sector benefits. The International Institute for Sustainable Development, in a 2010 report, estimated that the Canadian federal government allows the oil industry to claim special tax deductions and exemptions, over and above standard corporate income tax deductions, worth $1.4 billion per year.
Should these tax credits count as subsidies? It depends on your perspective. Some, including Jack Mintz of the University of Calgary, argue correctly that oil and gas exploration is risky and taxing risky investments at the same rate as low-risk ones would discourage these activities. You can also make the case that research and development activities are risky, and so should benefit from enhanced tax relief. Further, if tax credits increase the value of an oil play, then that increased value should be reflected in lease and land sale prices. If so, only firms drilling on land leased or purchased before drilling credits were announced are subsidized.
Should the tax system be used to level the risks between investment opportunities or to advance a set of goals? If you believe that it shouldn’t, then profits should be taxed at the same rate across all industries, and any industry-specific tax credit is a subsidy. The value of goods and services sold by governments to firms at below market value is most difficult to assess. Imagine if the government were leasing office space to your least favorite industry at half the market rate charged for similar space from commercial providers. You would likely scream and yell that the industry should not be subsidized if it can’t pay its own rent. Well, what’s good for the goose is good for the gander.
Andrew Leach is an Associate Professor at the Alberta School of Business. He blogs on energy, environment, and oil sands issues at http://www.andrewleach.ca
and is on Twitter @andrew_leach