An Opportune Time to Raise Gas Taxes?

This will surely be an unpopular view, but it's time the province of Alberta considered raising taxes on the bargain prices that is gasoline. The low prices have benefited many industries and users, including transportation (airlines, shipping, and rail), agriculture, restaurants, hospitals, first-responders, governments, and vehicle drivers. The shift in profits from mega-corporations to small businesses and families is a welcoming trend. However, sustained crude prices below $45 US a barrel (and today $27) have harmed governments in Alberta and Canada as income taxes, property taxes, and oil revenue has dried up, pun intended.

According to Alberta Energy, the Alberta government's royalty revenue from oil sands in the fiscal year 2014-2015 was $5.0 billion unaudited. Conventional oil royalties was $2.2 billion. The Notley NDP government announced at the end of January 2016 it had made minor changes to the royalty agreements tied to the many industries related to energy, however, it might not be enough to get the province out of a deficit.

The provincial government predicts that deficit to be $6.5 billion this year. Revenue from non-renewable energy may decline almost two-thirds; income tax revenue will also decline. Trying to justify a tax increase to its voters and citizens during economic hardships and recessions can lose a government its power, however, Canada is not in a recession - defined by two consecutive quarters of negative growth. With GDP growth tepid but existent and employment opportunities still abundant, this is a good opportunity to capitalize on low prices coupled with gasoline affordability.

Charging a five cent tax on gasoline as a way to reclaim revenue lost from the decline in oil is fit for this government. Gasoline prices are very inelastic and consumers are more inclined to pay higher prices because it is such a necessity in our economy. In 2014, when gas prices were near record highs, Alberta consumed over 6.5 trillion litres of gasoline and 4.4 trillion litres of diesel at gas stations, the highest rates from 2010 to the present and presumably the highest rates in Canadian history (view statistics here).

This five-cent tax increase by the province of Alberta would generate, using the figures of 2014, more than $500 million in tax revenue at the pump alone. This excludes fuel used in jets, boats, and trains. An aggressive government could tack on 20 cents and yield $2 billion in revenue. Gas prices would soar to 80 cents overnight and could anger Albertans, however, these prices are still the lowest seen this century. Governments could reduce the taxes as oil revenue rose to shift the burden away from vehicle drivers. With many citizens wanting and willing to pay more to get people back to work and governments back in the black, this is a huge opportunity that cannot be ignored.

Falling Loonie May Boost Canadian Earnings

A depreciated loonie could help Canadian companies' bottom lines as we head into earning seasons here up north. Many companies with US exposure are expected to see a boost in its earnings per share projections, such as banks and energy companies. The falling dollar, now valued at 1.37 US, provides a cushion for many corporations who report in Canadian dollars but generate revenue in the US.

How so? Most Canadian companies have expenses in Canadian dollars. All things being equal, if they are now receiving 30 per cent more in Canadian without changing their business models, implementing any new strategies, or growing their brands, there is an automatic hike in revenue after conversion.

Canadian banks exposed to the US include TD and Bank of Nova Scotia. These two have entered the US years ago and may reap the benefits of a falling loonie.

Energy companies have seen oil prices crash over the last year, but the falling dollar has made times a little easier. The spot price of WTI is currently trading around $33 a barrel; this is $45 Canadian. When oil was at its peak, the Canadian dollar was near par. The drop in oil itself has significantly lowered expectations. Suncor has posted earnings today with the stock rising over 1 per cent on news it lost 2 cents per share in this quarter. Other major oil companies include Canadian Oil Sands and Imperial Oil.

Should the Bank of Canada lower interest rates?

JP Morgan mentioned just prior to the Bank of Canada interest rate decision that lowering the lending rate in Canada would indeed help the country's economy. The reduction in the interest rate to below 0.50 per cent in theory would have lowered the Canadian dollar even further, but as an exporting country, this would improve GDP.

The depreciation of the loonie could have helped kick start inflation as well. Canadian inflation rates have meandered below the 2 per cent target for an extended period of time which is often an undesirable situation. Inflation encourages spending and the flow of money as consumers that make purchases are more likely to do it sooner rather than later. If a deflationary economy exists, spending could halt and a recession could be ignited.

Disclaimer: the author of this article has household members that own Bank of Nova Scotia and Canadian Oil Sands. This article is for information purposes and does not make recommendations on buying or selling any of the companies listed. Please review your investment holdings and speak to a professional prior to any decisions.