LNG tax not the only tricky issue

Federal government also has role to play in potential industry

Today marks the 409th anniversary of the infamous Gunpowder Plot in which Catholic dissidents attempted to blow up the English House of Lords and all within it, including King James I.

The plot was foiled when someone in the know tipped off the authorities who descended on the basement of the Lords to find one Guy Fawkes guarding 36 barrels of gunpowder.

To this day in England they celebrate Guy Fawkes Night on November 5th. Part of that is kids making a “Guy”, essentially a scarecrow type of effigy, taking it from house to house, knocking on the door and singing out, “Penny for the Guy”.

We have just witnessed a modern day version of that with the kids being played by LNG proponents and a model of an LNG plant replacing the Guy.

The big difference is that when the LNG proponents came aknocking at the door of the provincial and federal governments, they were looking not for a few pennies but hundreds of millions of dollars.

And if they didn’t get it they were going to blow up their plans for LNG plants on the northwest coast of B.C.

And on October 21 the province bowed to the pressure and unveiled its scaled down version of the LNG tax.

The original 1.5 per cent until the capital investment is paid off stayed.

Any tax paid at the 1.5 per cent level could be credited against the tier two taxes (again the same).

The big difference is that tier two number of 3.5, half the number the province was throwing around to begin with.

Now the Liberals can argue that they never said it would be 7 per cent, only “up to” 7 per cent.

But the crazed revenue figures it originally predicted clearly were tied to the higher level – and more plants than are going to be built in the foreseeable future.

As was to be expected the proponents made positive noises about the climb down but the reaction was well short of any kind of commitment.

As AltaGas executive president of business development noted, while at first glance it looked good, “this is tax legislation and so it’s complicated.”

(Having read the proposed legislation I can tell you it is not just complicated, it is mind-numbing!)

The numbers that caught my eye were those provided by the government as to the total amount of LNG tax revenue that it would receive from a 12 million tonne per year liquefied natural gas plant over a period of 10 years under the proposed regime, namely $800 million.

But factor in the provincial sales tax, natural gas royalties, corporate income tax, carbon tax and property taxes and that same plant is going to have to cough up $8.1 billion over those same 10 years.

In other words, even if there was no LNG tax that plant would pay $7.3 billion.

So, if the province is going to receive more than $7 billion over the next decade from a single plant, is it really so important to claw another approximately 10 per cent?

From a pure revenue point of view, probably not.

But in terms of saving face after the extravagant promises of the last election campaign in 2013, the one in which Premier Christy Clark put forward her vision of a $100 billion legacy fund and which arguably contributed to her victory, it is vital.

Footnote: Getting the province to buckle has achieved the first part of the LNG proponents’ agenda.

Part two is getting a change of the federal tax rules concerning capital cost allowance.

Under the existing rules an LNG plant would be classified as a distribution operation which means capital costs would be written off over about 25 years.

If it was reclassified as a manufacturing unit that could take place over as little as eight years.

Which would translate to earlier profitability for the plant.

And I suspect this is even more important than the provincial levy.

Retired Kitimat Northern Sentinel editor Malcolm Baxter now lives in Terrace, B.C.