Following on from our last issue in which we highlighted the funding pressures facing Alberta’s municipalities due to reductions in provincial government transfers, today we take a closer look at another area of fiscal concern: the accumulation of property tax arrears among oil and gas companies across rural Alberta, and the crossroads that have been reached in balancing industry competitiveness with community viability.
Municipalities across the province – particularly those with smaller property tax bases – are already encountering challenges as infrastructure demands continue to rise, cost obligations for some services (e.g., policing) are increasing, and the forthcoming shift to the Local Government Fiscal Framework is expected to entail lower baseline levels of provincial funding. Municipalities’ capacity to raise their own revenues, meanwhile, has also come under pressure as successive years of weak growth has reduced assessment values for residential and commercial properties, while their ability to raise revenues via other means (e.g., sales taxes, user fees) is limited. Given these dynamics, non-payment of property taxes presents a significant challenge to the fiscal sustainability of many rural municipalities and reignites concerns regarding longer-term viability.
Some companies in the oil and gas industry have been accused of ignoring their property tax obligations, leaving the municipalities in which they operate in a precarious position. The most recent (March 2021) member survey by Rural Municipalities of Alberta (RMA) puts the figure of outstanding property taxes at just under $250m, with this bill more than tripling in the past two years (Figure 1). The average amount owing to a municipality is $3.5m, while five municipalities have unpaid taxes of over $10m. The fact that over half (57%) of these taxes are owed by companies that continue to operate has introduced an unfamiliar layer of tension into a previously symbiotic relationship.
In response, Alberta’s municipalities have noted that tax rates for other property types will have to rise in order to offset these losses, or essential services will have to be cut further as legislation prevents them from running deficit budgets.
The challenge for municipalities is complicated by legal provisions which prevent them from applying tax recovery tools (e.g., asset sales) that are ordinarily applied to residential and commercial properties. This is because oil and gas companies often only lease a portion of the land on which they operate a well or pipeline, meaning that it would be unaffected by a tax recovery tool on the property itself; while oil and gas-related equipment and assets can be quickly moved to other sites when needed. In the case of bankrupt companies, meanwhile, legal decisions (e.g., Redwater) have prioritized environmental concerns over debt repayment, with proceeds from asset sales to be set aside for well cleanup. Again, this leaves municipalities that are owed property taxes at the back of the queue as they are considered unsecured creditors.
Both the provincial government and industry have welcomed these decisions due to the mounting costs of well cleanup and fears that these would fall on remaining industry members. Figure 2 sets out the number of orphan wells in Alberta and their rapid increase in recent years as energy companies have gone bankrupt. In principle, the cleanup costs are to be covered by the companies themselves, and, in the case of bankruptcies, by the industry-funded Orphan Well Association (OWA). However, the provincial government has already provided hundreds of millions in grants and loan funding to accelerate the process of well decommissioning and reclamation, with the federal government also launching a $1.7bn fund in 2020. To higher levels of government, then, the municipalities’ concerns over property tax arrears must be weighed against these environmental risks, as well as the broader intention to maintain industry competitiveness and employment levels.
Industry responses to the issue have stated that: (i) the scale of the problem is small relative to the number of operators who continue to pay their taxes without delay; and (ii) high property taxes are adding to operating costs in an industry that has already been struggling for a number of years. This latter point is particularly interesting as, despite the economic challenges facing Alberta in recent years, property tax receipts for Alberta’s municipalities (excluding cities) have actually increased.
More concretely, even though real GDP in Alberta was still around 1% lower in 2019 than in 2014, municipal property tax revenues (excluding cities) were over 10% higher (Figure 3). These figures are not broken down further into property taxes relating to oil and gas specifically. However, Figure 4 illustrates the trend in both linear assessment values – i.e. types of property which include wells and pipelines – and crude oil prices in recent years. Linear assessment values have indeed fallen from earlier levels, coming in around 4% lower in 2019 than in 2014. However, oil prices fell by around 40% over the same period. These challenges have become even more acute in the context of the COVID-19 pandemic and its economic spillovers, including for the energy sector.
At the very least, this points to a problematic disconnect between the revenues that oil and gas companies are able to earn from the properties on which they operate, and the taxes they must pay for the privilege to do so. Unlike activity in most other sectors which is, broadly speaking, indifferent to where the business owner decides to operate, oil and gas companies are restricted to locations based on resource availability. This is compounded by the fact that well production decreases over time, with industry stating that much of the arrears issue relates to older properties which are no longer economically productive. These wells are not able to cover their operating costs, much less pay for property taxes. In view of the environmental concerns outlined earlier, it is reasonable to argue that remaining revenues should be used to pay for cleanup costs.
The industry viewpoint has garnered sympathy with the provincial government which has consistently argued that the best route towards having oil and gas operators pay their property taxes is through getting the industry back on its feet. This approach has entailed numerous tax cuts and investment incentives, including:
Many of the details for these measures – e.g., the exact definition of ‘lowering assessments’ for less productive oil and gas wells – are being worked out, as is determining where the fiscal burden will fall. These also come on top of the supports provided to industry throughout the course of the COVID-19 pandemic, including: lowering provincial corporate tax rates; public funding of the AER levy (at a fiscal cost of $113m); extension of companies’ resource tenures; loans to the Orphan Well Association ($100m) and introduction of the Site Rehabilitation Program; and introduction of the Alberta Petrochemicals Incentive Program.
Despite this exceptional level of support, it is broadly recognized that these are only stopgap measures, with the provincial government committing to more thoroughly tackling the issue of assessment values over the coming years. Indeed, these measures run until 2024, by which time the provincial government intends to have a revised property tax assessment framework in place. Early efforts at revising the framework were published in July 2020 and drew widespread concern from rural municipalities given the revenue cuts implied (more on this issue in our next publication).
It is important to note that the industry’s current challenges are unlikely to be addressed through tax measures alone, particularly in view of the wider policy shifts facing fossil fuels and the push towards renewables. There are varying estimates of the marginal effective tax and royalty rate (METRR) on capital investment in Alberta depending on the type of resource being extracted (i.e. conventional vs. oilsands) and prices. However, several estimates suggest that Alberta’s METRR already compared favourably to other jurisdictions (including in the US), bolstered even further by the wide range of tax and incentive measures that have been implemented the current provincial government. As such, while there may be challenges facing some in the sector because of older assets or less productive wells, it is difficult to pin the sector’s deeper issues on a lack of tax competitiveness. Instead, the provincial government would be well-advised to focus on framework conditions and structural reforms that will underpin growth across many industries – not just energy.
Such reforms will likely have to include a reassessment of municipal government and how it is funded. The current misalignment of incentives (i.e. the provincial government prioritizing the energy sector’s competitiveness) and consequences (i.e. the municipalities shouldering the burden of non-payment) is clearly not functioning in an environment of weaker energy prices and an assessment model that is no longer fit for purpose. A realignment of these incentives and consequences at the appropriate level of government (provincial) would address moral hazard issues, as well as ensuring that enforcement mechanisms are appropriately legislated for.
The tax revenues lost by the municipalities could be replaced by a dollar-for-dollar grant from the provincial government, or numerous other ways in which the provincial government can incentivize good municipal fiscal governance and maintain the thrust of the MacKinnon Report that pushes for a leaner, more efficient network of municipal governments. This will also require thinking through what infrastructure and service provision at the municipal level looks like in an environment of plateauing energy demand, slower revenue growth, and longer-term municipal viability more generally. For those municipalities with low populations and smaller tax bases, the demands for infrastructure and other services cannot be maintained in the absence of oil and gas revenues to which they have become accustomed.
It is difficult to overstate the vital importance of the energy sector in rural Alberta, accounting for around 30% of economic output and 6% of total employment across the province, while also contributing enormously to government revenues and broader economic prosperity. The province’s future growth prospects are inextricably linked to shifting the sector towards cleaner and higher value-added output, and its rural municipalities will play a key role in facilitating this through appropriate policy frameworks and supports at the local level. The challenges facing both sides of the discussion in ensuring long-term viability and prosperity will require continued collaboration for many years to come; setting the current strains on the relationship to one side provides some welcome perspective on their significantly more important shared interests in the long run.
The Ballad Auger is written by Research Analyst, Alan Gilligan.
 As an illustration of Canadian municipalities’ high reliance on property taxes to fund local services, OECD data shows that revenues from property taxes amounted to 3.9% of GDP in Canada in 2019 compared to just 3% of GDP in the US.
 It should be noted that the scale of the issue has been questioned. Referring to the 2020 survey figures, CAPP executive Ben Brunnen, stated, ’While there is anecdotal evidence about the scope of the issue, hard data collected by the province is required’.
 Other areas of increased industry-community tension include missed and renegotiated payments for surface area leases for wells, pipelines, and rights of way as wells have become less productive and economic conditions have worsened.
 In 2019, Canada’s Supreme Court overturned earlier rulings concerning Orphan Well Association v Grant Thornton (Redwater), providing paramountcy to environmental responsibilities over bankruptcy law.
 Of this $1.7bn in total funding, $1bn is available for well cleanup specifically in Alberta.
 Given the rural focus of this report, property taxes relating to cities (as identified in the Municipal Financial and Statistical Data) are excluded.
 It should be noted that these figures also include other ‘linear’ property types (e.g., electricity, networks).
 There are similar findings for natural gas (as measured by Henry Hub spot prices) which also fell by over 40%.
 The provincial government has provided the municipalities with some relief in the form of a tax credit for the Provincial Education Requisition Credit (PERC) to offset revenue losses from non-payment of property taxes, as well as the Municipal Operating Support Transfer (MOST) which provided $600m to municipalities to compensate for higher costs and lower revenues due to the COVID-19 pandemic. However, municipalities have at times criticized the complexity and burdensome application processes of these measures.
 All scenarios that were published in July 2020 entail reduced assessment values ranging from 7% (Scenario A) to 20% (Scenario D), with this consequently entailing revenue losses for the municipalities.
 The METRR is a composite measure of corporate income taxes, sales taxes, capital taxes, transfer taxes and real estate fees, and profit-based resource levies and royalties.
 Such enforcement mechanisms could include making it a requirement that outstanding taxes must be paid before a license is granted.
 In that vein, the roughly $70m in unpaid taxes in 2021 amounts to just 0.1% of provincial government spending for fiscal year 2021-22.