By Jensen, Randy on August 15, 2020.
Rural municipalities are concerned they could be getting the shaft if proposed changes to how oil and gas infrastructure is assessed for tax purposes are approved by the province.
Under four potential scenarios, the Province of Alberta has proposed sweeping changes to tax assessment on oil and gas properties which would greatly increase the rate of depreciation on these assets to the detriment of municipalities.
Under the current assessment process assets have a fixed or base depreciation value based on Alberta’s Construction Cost Reporting Guide over the entire life of the asset, with older assets assessed at a lower value than younger assets, but the provincial government, in response to industry lobbying efforts, proposes to abandon this fixed system.
In the least impactful scenario proposed by the province, wells would have 10 per cent of their assessed value sliced off the top immediately, and then would depreciate five per cent every subsequent year for the next 16 years until reaching a maximum of 90 per cent depreciation. Pipelines would also have 10 per cent of their value sliced off the top and then depreciate over 26 years until reaching a maximum of 90 per cent.
Under the most impactful scenario, the value of the oil wells would be sliced 25 per cent off the top, depreciate eight per cent after the first year, and then four per cent every year after over 16 years until reaching a maximum of 90 per cent depreciation in assessed value. Pipelines under this same scenario would experience a depreciation of 25 per cent over the first four years, and if under 10 inches in diameter, would depreciate over 16 years. They would depreciate over 26 years if over 10 inches in diameter to a maximum of 90 per cent.
In some of these proposed scenarios, even if these assets (wells, pipelines or other oil and gas infrastructure) are still being used in the production of oil and gas, they could eventually be depreciated to zero; thus not allowing the municipalities to charge any taxes on them despite remaining profitable assets for the companies.
The Rural Municipalities of Alberta is concerned jurisdictions with oil and gas infrastructure would lose between an average of seven per cent of those properties’ assessed value under the least onerous scenario to potentially as much as 20 per cent in the worst-case scenario in the first year of implementation alone, thus losing collectively about $290 million in local tax revenue by 2021.
“This is a big problem for the members I represent, being counties and the MDs,” says Al Kemmere, president of the RMA, “It’s a huge loss in assessment which then turns into a huge loss in taxes we can claim, and then passing it on to other taxpayers within those municipalities.”
Kemmere says he understands the Alberta oil and gas industry has seen significant challenges the past few years, but he does not understand how bankrupting municipalities to help oil and gas companies is going to help the overall economic situation within the province if these changes are brought in.
“In the southeast corner of the province is where the most significant impacts are going to take place, recognizing that it will affect all municipalities to some extent,” says Kemmere. “I believe in Cypress County they run the risk of losing between $10-11 million in the first year. Newell County, which is just north of them, will lose even more than $11 million. For others it is such a big piece of their budget, some of them in the neighbourhood of 20 to 25 per cent. The choices are you either recover that from the other residential and non-residential taxpayers, or you increase the rates on the industry itself to a regulated maxim. But, in reality, we have a handful of members that are having to examine a third option: which is will they even be viable going down the road within five years? And if they aren’t, what are their choices but to turn their assets over to the province?”
As referenced by Kemmere with his southeast corner example, those jurisdictions like Cypress County or Newell County with older oil and gas fields would be most heavily impacted by these proposed assessment changes; however, all jurisdictions with oil and gas would also be impacted to some extent.
In the MD of Taber Reeve Merril Harris says under the least impactful scenario proposed by the province his municipality would lose $3.1 million in 2021 alone, and it could get progressively worse from there.
“The worst scenario is a $4.1-million loss in revenue for the MD,” he states, “so that’s a huge impact on the MD.”
Harris says there is just no real way the MD can take that kind of revenue hit without having severe repercussions for municipal tax rates and local services.
“Things around the MD will certainly change,” he says. “We will either have to cut services for residents, and perhaps increase taxes to make up the difference on residents, farmland and other non-residential properties. Our urban neighbours will perhaps suffer, too. We currently transfer money to Taber, Barnwell and Vauxhall, and everything will be on the table if we have to look at that kind of revenue decrease as a municipality.”
Harris says he and his fellow councillors have already been speaking to Associate Minister Grant Hunter, who is one local MLA, about this issue, and they have scheduled a meeting with their other MLA, Joseph Schow, who is also a member of the UCP government, to explain the dire consequences to local ratepayers if these changes go through.
“I know other municipalities have also met with their MLAs, and we have heard they are going to support us and do what they can at their level to stop this,” he says. “This will turn the MD upside down in terms of what services we can offer our residents. I don’t think municipal taxes are the reason the oilpatch is suffering; so I think there has got to be other policy options at the provincial or federal level that will help oil companies out rather than downloading this onto municipalities.”
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