*Alberta Streaks Ahead

Frontier Centre, Taxation, Uncategorized, Worth A Look

Two years ago, Louis Dreyfus Canada Ltd. picked up its office and 10 employees and moved to Calgary after 60 years of handling grain in Winnipeg. The Canadian arm of the Paris-based commodities conglomerate was planning an expansion of its grain trading and shipping operations from 10 people.

“We opted for Alberta because of the difference in marginal tax rates,” said company president Brant Randles. “We thought that under that tax regime the company could bank more money and the people that work for us could bank more money.”

The company has not looked back and now has 26 employees. It is not alone. Louis Dreyfus has been joined by a stampede of businesses heading to Alberta in search of a friendlier tax environment, a young and energetic work force and an entrepreneurial spirit that has pushed the province from strength to strength.

Ontario has also found that if it cuts taxes, business and economic growth will come. Even Saskatchewan, always in the shadow of its stronger neighbour, has made some innovative changes to its tax system this year. But Alberta and Ontario, both governed by Progressive Conservative administrations, are still streaks ahead of other provinces in attracting business, employment and growth, creating a domestic brain drain that makes the pull from the United States pale in comparison, analysts say.

“You’d have to say Alberta’s advantage has widened and that’s primarily reflecting the cumulative impact of tax cuts,” said Mary Webb, senior economist at the Bank of Nova Scotia.

Alberta has been lowering taxes since 1997 and on Jan. 1 it became the first province to switch to a single-rate income tax system, dropping the levy to 10% from an originally planned 10.5%. The move is the culmination of measures introduced since 1999 that have saved Albertans $1.5-billion. It will cut its small-business tax rate to 3% by 2003, from 5%, and plans to slice its corporate taxes to 8%, from 15.5%, by 2004, part of a four-year program starting this spring that will lop $1-billion off business taxes in the province.

The results have been dramatic for Calgary. The city now boasts the largest banking, corporate headquarter and brokerage communities in Western Canada.

A stream of high-profile firms have moved west since Canadian Pacific Ltd. surprised by moving its corporate offices to Calgary from Montreal in 1996. Sears Canada Inc., Walmart Canada and Canadian Tire Corp. Ltd. all have recently announced they will build their Western Canadian distribution centres in Calgary.

Last year, Montreal-based Air Canada’s regional arm and BCE Inc. unit Bell Intrigna revealed they would base operations in Calgary rather than Vancouver. Even Jimmy Pattison Lease decided to relocate to Calgary last year. The firm is part of the Jimmy Pattison empire, a British Columbia icon.

Calgary’s boom has reduced the unemployment rate to 4.5%, the lowest in Canada, and put upward pressure on wages. The city’s vacancy rate for apartments, at 1.3%, is also among the lowest in the country amid an influx of job seekers. The rest of the province has also blossomed, resulting in population growth of 6.1% last year.

“The one thing about this continuing move down in the tax rate is that it’s a robust economy, it’s energetic,” Mr. Randles said. “We can recruit bright, young people here.”

Alberta’s balance sheet has rarely been in better shape. The government’s budget has been balanced for the past seven years. In 1999, its net debt was eliminated, meaning the value of its stock of assets outstrips its liabilities. In its third-quarter update, the provincial government said it will put $5.6-billion toward repaying debt, reducing accumulated debt to $6.9-billion from $12.5-billion. At this rate, economists predict Alberta will be entirely free of debt within the next couple of years.

Alberta’s fiscal rebirth won the province’s debt a coveted Aaa rating from Moody’s Investors Service last month. Only 10 U.S. states are deemed fiscally fit enough to hold a triple-A rating from Moody’s, the New York-based agency that grades companies and governments on their creditworthiness. A higher rating generally means borrowers can secure lower interest rates. Japan does not have triple-A status, and neither does the Canadian government because of its large debt and the risk, however small, of Quebec separation.

“Triple-A is not an easy thing to achieve,” said Catherine Fleischmann, senior credit officer at Moody’s in New York.

Certainly, oil and natural gas revenue, which has been filling up Alberta’s coffers in the past few years, has been a huge driver in attracting business, driving growth and putting the province in the black in recent years.

Projected resource revenue is $10.3-billion for this year, up $6.2-billion from the budget estimate and almost double the previous record of $5.2-billion in 1984-85.

The dramatic increase has allowed the province to hand out energy rebates of almost $1,700 for the average two-adult household to cushion the blow from higher energy bills as the province deregulates its industry.

But it does not tell the whole story, analysts say. The province began to turn the fiscal corner well before oil prices began to shoot higher in early 1999, argues Finn Poschmann, senior policy analyst at the C.D. Howe Institute in Toronto. Mr. Poschmann said Alberta ultimately had to cope with falling and persistently low oil prices under the Conservative administration of Don Getty in the late 1980s, even though oil and gas revenue had been strong through much of Mr. Getty’s time as premier. “They did not pay attention to their finances,” Mr. Poschmann said. “They let expenditures grow and taxes did fairly soon after. Look what’s happened since. There has been a profound shift of policy and much more attention to expenditure and bringing taxes down. It’s produced just a terrific economy, head and shoulders above their neighbours in employment and income.”

Ms. Fleischmann at Moody’s added: “Alberta has a tremendous windfall from energy but what remains crucial to us is they remain conservative with that windfall.” By using surplus funds to retire debt it removes the temptation to fritter away its savings. “The debt-servicing costs are lower, therefore they have more flexibility.”

Ontario went about tackling its unemployment and fiscal problems differently, cutting taxes first instead of rushing to balance the books. The province expects to report a budget surplus of $1.4-billion in 2000-01 and also recently won a positive review from Moody’s.

Meantime, the tax cuts that Ontario Premier Mike Harris began to introduce when he came to power in 1995 have fuelled an economic boom that has swept through the province.

“Those two provinces are now in the virtuous cycle that most governments were in the opposite of in the 1990s,” said Jason Clemens, director of fiscal studies at the Fraser Institute, a Vancouver-based economic think-tank.

“Ontario and Alberta are experiencing the benefits from reducing the tax burden, which creates economic growth. Economic growth translates into income growth and governments can provide goods and services without taking such a large bite of the economic pie.”

That becomes especially important as the economic pie starts to shrink, as may happen rapidly in Ontario as the downturn in the U.S. economy takes a bite out of Canada’s industrial heartland.

Low taxes not only attract business but also investment, according to the Fraser Institute, which has polled investment managers each year since 1996 on matters of public policy.

Competitive personal tax, corporate income tax, capital gains tax and corporate capital tax are the top four issues for 1,000 investment managers in Canada and the United States when asked to rank 10 policies required for positive investment sentiment. Adequate infrastructure also rates highly, while subsidies to business and government-provided social services come in at the bottom of the list.

While Alberta and Ontario have been sucking in expertise and capital with their mixture of low taxes and spending restraint, NDP-governed Saskatchewan has been quietly making headway on its own in getting its fiscal house in order.

“Alberta’s tax cuts have been spectacular and it is trailblazing, and Harris is also cutting taxes, but oddly enough the other province that gets a high fiscal rating but is having trouble filling out the rest of the story is Saskatchewan,” said Ms. Webb at the Bank of Nova Scotia. “This is a province that balanced its books back in the mid-1990s and subsequently each year stayed in the black, paid down its debt and put in a significant tax cut each year.”

Saskatchewan also instituted quite an ambitious personal income tax system this year, Ms. Webb said, the first year provinces have been allowed to carve out a separate tax system from the federal government. “It’s not a single tax rate but it is a relatively flat structure,” she said. “There’s no question it provides significant savings for a lot of Saskatchewan households.”

While Saskatchewan’s economy has been depressed by weak grain prices in recent years, diversification and prudent fiscal management have allowed it to maintain positive growth.

Quebec, still one of the highest-taxed jurisdictions, has taken a different approach to attracting business in recent years.

Instead of lowering taxes to attract investment, it is offering hefty subsidies and tax incentives to specific industries such as multimedia and e-commerce to entice investment.

Nearly 100 companies have moved into the Cite du Multimedia on the edge of Old Montreal since its creation two years ago, pushing up the number of jobs there to 4,600 from 2,300. “It’s quite a different approach and it reflects that the government has been a more integral part of their economy than most other provinces,” Ms. Webb said.

Only time will tell whether the provincial government has made the right bet by investing in the New Economy enterprises and whether they will eventually pay for themselves without pushing the province into the red first.

At the other end of the spectrum lies B.C., which has ranked last out of the Canadian provinces every year in the Fraser Institute study in terms of its investment climate.

“A lot of people still attribute the problems in British Columbia to the Asian flu and the drop in commodity prices,” Mr. Clemens said, referring to financial crises that swept through Asia in 1997-98. “But if you look at the economic data, the decline started in 1990-91 — that’s when B.C. had a seesaw change from a province of fiscal conservatism with low taxes and low spending to one of the higher tax jurisdictions in the country.”

Mr. Clemens, who is working on a 25-year retrospective of the B.C. economy, adds that he has found several sectors of the economy — including forestry, one of the province’s mainstays — where investment is not covering the depreciation of its stock of assets.

“That has serious repercussions for future productivity,” he said. “B.C. is experiencing a decline in its real assets. No matter what happens from here, that is going affect us for the next year.”

Ms. Webb said the NDP government under Premier Ujjal Dosanjh has made some progress in attracting business back to B.C. It has cut the province’s small-business tax rate to 4.75%, making it the lowest in Canada. Some sectors of the province’s economy, such as software, multimedia and biotechnology, are flourishing.

The province has “accomplished a significant amount of diversification but there is this dampening influence on business and consumer confidence that is restraining growth,” she said.

A new administration could not only bring in tax cuts but break that psychological logjam in much the same way as the new government of Mr. Harris did in Ontario.

Psychology is important, said Mr. Randles at Louis Dreyfus in Calgary. “It’s very upbeat,” he said.

“People are very positive, very entrepreneurial and outward looking.”