a royal squabble

It can sometimes be hard to tell the Yukon's political parties apart.

It can sometimes be hard to tell the Yukon’s political parties apart. If you read their brochures from left to right, all will claim to be in favour of public health care, education, social housing, government-owned electricity generation, economic development subsidies and so on.

Even on the highly controversial question of protecting the Peel Watershed, the differences are smaller than sometimes made out. The pro-mining Yukon Party has managed to avoid having to say before the election exactly how much of the Peel it would protect from development. But even if it ends up being just 50 per cent, that represents the creation of a huge new park bigger than many European countries.

The Yukon Party activists who campaigned so actively against the Yukon Protected Areas Strategy when they were in opposition must be biting their lips as they contemplate the next Yukon Party government (if they win again, of course) creating another big mining no-go zone, even if it is smaller than the opposition parties would like.

On royalties, however, we may see some real differences between the parties.

For readers who don’t follow tax policy as a hobby, royalties are a form of tax that resource companies pay when they extract public resources, like copper or oil. Now that a bunch of mines are in production, with more to come, mineral royalties are undoubtedly going to come up on the hustings.

But first, a primer on royalties.

Royalty schemes are notoriously complex, but to keep it simple let’s just talk about two kinds. Ad valorem royalties take a percentage of the revenue, less some shipping and similar expenses. On the other hand, profit-based royalty schemes, like the Yukon’s, take a portion of the mines’ profits. The key difference is that mines have to pay ad valorem royalties when they extract public resources whether they are profitable or not.

There are pros and cons to each.

On the one hand, some people say miners should pay royalties when they extract public resources, since those resources are public and the public needs to be compensated for them. On the other hand, others say that such taxes discourage investment and jobs, especially for mines that have low profit margins for various technical, locational, or other, reasons.

There are many other choices too. Do you have a sliding scale based on the size of the mine to benefit smaller operators? A “super tax” that kicks in when commodity prices go through the roof? An allowance for companies to get an upfront tax credit for all the money they spent exploring before the mine opened? Should royalty rates be high or low? And so on.

There is no universally “right” answer to these questions. It all depends on what your government is trying to accomplish.

If it is creating jobs, then a profit-based scheme with low rates and lots of tax credits would be in order (this choice is also good if you like corporate profits). If it is to raise revenue to pay for other government programs, then you might make other choices.

In the Yukon, we have two kinds of mining: placer and hard rock. On the placer side, the Yukon has traditionally had a “pro jobs” royalty regime. There is an ad valorem royalty of 2.5 per cent, but based on a price of gold fixed back in the days when gold was at $15 per ounce. With gold well over $1,500 per ounce, we can assume that a royalty of 38 cents per ounce is not killing any placer mining jobs.

It’s more complicated on the hard-rock side. Fortunately, tax nerds at the federal Department of Natural Resources analyzed how a “typical” mine would fare under various royalty schemes in the Yukon, Southern Canada and in other mining jurisdictions abroad. They included corporate income taxes, various royalties and capital taxes (but not things like the Yukon’s fuel-tax exemption for miners).

The upshot is that for their “typical” mine, the Yukon was in the middle of the pack. The “typical” Yukon mine had an average effective tax rate over the life of the project of a bit less than 30 per cent. This is a bit higher than the other Canadian jurisdictions studied and Chile, but lower than Mongolia, Peru and some Australian states.

Alaska, of course, was one of the lowest tax mining locations. Suggesting higher royalties in the 49th state is about as popular as telling people at a Sarah Palin dinner that you are a vegan.

The study also noted that Canadian royalty regimes are more stable than in many countries, which is important in attracting investment. Miners don’t want to sink billions of dollars into the ground only to have a new government hike royalty rates. Last year, Australian PM Kevin Rudd announced a plan to significantly increase Australian royalties with a commodity boom “supertax,” but the ensuing uproar was one of the things that cost him his job.

Venezuelan strongman Hugo Chavez, on the other hand, has made extracting more money from the mining industry a major part of his populist program. For gold mines, he didn’t even bother to raise royalty rates. He just nationalized all the mines last month. Unlike Kevin Rudd, he’s still in power (at least for now).

So watch your candidates in the upcoming election and see if anyone breaks from the pack, in either the Alaskan or Venezuelan direction. Or if they just keep their heads down and refuse to say anything specific at all.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.