Published on: 1/29/2014 2:19:01 PM Print | Font Sizes:  Normal Text Large Text

Not paying the rent


By: David Robinson

David Robinson, Economist, Laurentian University, drobinson@laurentian.ca.
David Robinson, Economist, Laurentian University, [email protected]

One of the best things about teaching is that you actually learn more than your students do.

I teach Natural Resource Economics at Laurentian University and I’ve learned a few strange things about Ontario’s mining policy.

I’d like to share a couple discoveries with my friend, Minister of Northern Development and Mines Michael Gravelle, and with his deputy minis ter, George Ross. In fact, I’d like to share the lessons with everyone in Northern Ontario.

The most shocking lesson came from one of Canada’s leading economists, Jack Mintz.

Last year Mintz and Duanjie Chen, at the University of Calgary, looked at how Canadian provinces tax the mining industry. “Ontario’s system,” they concluded, “is redundant, expensive and wasteful.” “Redundant, expensive and wasteful” is pretty strong language coming from the most respected tax analyst in Canada,

but there is more: Ontario has the second-lowest level of provincial taxes in the mining industry. BC basically pays companies to take its resources. Ontario seems just to give the resources away.

This matters to the North. The definition of sustainable development for mining is collecting a share of your mineral wealth and investing in other productive assets.

The net wealth produced by a resource is technically called resource rent. If you don’t invest your mineral rents in other assets, you end up with nothing but holes in the ground. You end up poor.

“Rent” is an old idea in mineral economics.

According to the classical economists, workers got wages, capitalists got profits on the capital they invested, and the owners of natural resources got rents.

Rents were special because natural resources like land, mineral deposits and forests weren’t created by saving.

They were the “free gift of Nature.” After you pay the workers and capitalists for their labour and investment, whatever is left over was produced by “nature.” We still use the term “rent” for the price you pay a landowner to use his land or to live in a building on his land.

The owner gets the rent. With natural resources a share of the rents were paid to the king. The payment was naturally called a “royalty.” Today it represents the Crown’s share of the profits from a public resource.

Why should the king, or the province, or the little people of Ontario get a share of the rents from a mine? Because the Crown, the province and the people own the resource. Mining is a public-private enterprise, a P3.

The company contributes capital and management. The public contributes its resource. The company and the Crown share the profits. That is basic mineral economics.

Mintz and Chen calculated the shares Canadian provinces take. They took into account the various rules and exceptions to rules. They came up

with the “marginal effective tax and royalty rate” (METRR) for each province.

METRR is an ugly sounding expression, but every word in the name matters. Marginal is important because we economists think people make decisions “at the margin.”

It just means it’s the price of things you are about to buy that matters.

Marginal means it is the royalty rate for the next mining investment, not the average rate or the historic rate.

Effective means this is the price after all the discounts, not the sticker price. Ontario’s official tax rate on taxable profit in mining is 10 per cent for nonremote mines and 5 per cent for remote mines. Companies get an automatic $500,000 annual deduction before the tax kicks in, so it only applies to companies making more than half a million dollars a year in profits.

There is also a $10-million profits exemption for new/expanded mines. The effective royalty rate after the first $10 million for startup and the first half-million each year is 2 per cent.

I was stunned to find out that the province only collects 2 per cent of the gross return to capital from mining in Northern Ontario and only from the largest,

oldest mines. No wonder there is no money for Northern development: the province is giving away its mineral resources.

The goal in managing public resources is to get as much rent as possible. What I learned from Mintz and Chen is that Ontario is minimizing the rents that go to the people of Ontario.

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