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Premier Brad Wall of Saskatchewan is now under fire for his 2015 Budget that promises a potash tax review as well as a curb on some investment incentives for the potash industry. Some are calling his bold move a “Stelmach” moment, comparing the ever-popular Saskatchewan Party’s premier to Premier Ed’s royalty review for the Alberta’s oil and gas industry in 2007-8.
Saskatchewan’s royalty review is far from being a comparable situation to Alberta’s. Brad Wall inherited a clumsy complicated potash royalty system devised by the NDP in 2001-2 while the Alberta royalty system was relatively well designed before Stelmach started stirring the pot.
If anything, the Stelmach government was making the system worse with proposals that increased rather than reduced distortions. Moreover, Stelmach’s play was a revenue grab while Wall has finally taken a step to clean up a messy system with the promise not to raise revenues under the review. If there is any criticism to be laid, it’s that Wall should have acted sooner.
Wall now has a unique opportunity to not only reform potash taxation but also to ensure a politically stable tax system that has the right balance between competitiveness and public revenues. The major flaws in the current Saskatchewan system are threefold.
First, the system is unfair with differential treatment of potash companies depending on whether they existed before or after 2001-2. Companies after 2002 are taxed on their volumes differently than companies operating before this time. Perhaps a transition was needed at that time but one cannot run a railroad forever based on a year’s distinction.
Second, potash taxes excessively encouraged investment with a 120% write-off of capital expenditures in excess of “normal” capital expenditure (normal capital expenditures are written off at a 35% “declining balance” rate). “Normal” capital expenditures were measured according to the history of companies: Those companies existing before 2002 would have normal capital spending at 90% of their 2002 investment expenditure.
For the rest of this article, click here: http://business.financialpost.com/2015/03/24/jack-m-mintz-brad-walls-good-potash-play/