The announcement by Imperial Oil that it intends to move its headquarters from Toronto to Calgary must have sent shivers down the spines of Bay Streeters. Toronto, once the vibrant center of commerce in Canada, is now on the losing side of the competitiveness battle, and the publicity for Calgary could not be better.

Unfortunately, much of this has to do with the policies of Ontario’s current government. You can bet Ol’ Ralphy (Klein) is sitting back and smiling. Critics will say that Toronto is still the dominant location for business in Canada. In 2003, for example, 37% of the top 500 Canadian corporations’ headquarters were located in there, ranking it first among Canadian cities for headquarter activity. Montreal ranked second, with 16% and Calgary a distant third with just 10% of the top 500.

But this simple count of corporate head offices, with no accounting for the size of the cities, is misleading as it ignores the real effect corporate headquarter concentration can have on an economy.

When considered more appropriately in terms of headquarters per 100,000 population, Calgary is, by a substantial margin, the Canadian leader in corporate headquarter concentration. Specifically, Calgary had 5.0 corporate head offices per 100,000 people in 2003, 35% more than second-ranked Toronto with 3.7 corporate head offices.

While the direct effect of Imperial’s move will be a loss of roughly 500 jobs, the final impact will be much larger. Far more important than the direct employment effects that corporate headquarters have on a region are the enormous spin-off effects that their activity generates. Supporting professions such as lawyers, consultants, and accountants all tend to locate near corporate headquarters, and thus tend to be more prevalent where a greater concentration of headquarters exists. This has the effect of not only creating a larger professional community, and a resulting increase in employment, but also creates a greater concentration of knowledge and easier access to high-quality services for other nearby companies. Lose those headquarters and the supporting cast also dwindles.

Imperial Oil was, of course, facing natural pressure to move its offices to Calgary. Of the major Canadian energy companies, it is the last to move its headquarters west and many of its major investments are already allocated in the West and the North. But just four years ago, Imperial’s CEO claimed that every time we looked at the arithmetic about whether it makes sense to relocate somewhere, whether it’s in Calgary or elsewhere, we couldn’t make that arithmetic make sense.

Now, just four years later, the arithmetic does make sense. So what has changed in such a short period of time? Since coming to power in 2003, Ontario’s Liberal government has signalled that a competitive tax regime is not a priority. It raised corporate income taxes, u-turned on the previous government’s commitment to eliminate corporate capital taxes, and have proven unwilling to eliminate sales taxes on business inputs. The end result is substantially higher taxes for business. You can bet that when the numbers were crunched, Imperial’s tax bill was substantially less in Calgary and this time the benefits outweighed the costs. Comparing business taxes in Ontario to those in Alberta shows just how uncompetitive Ontario really is. Ontario’s general corporate income tax rate of 14% is well above Alberta’s 11.5%, and Alberta has committed to further reducing its rate to 8% by 2006. Ontario still has corporate capital taxes, which economists regard as the most damaging of taxes, particularly to capital-intensive industries such as oil and gas. Alberta eliminated its corporate capital taxes back in 2001. And finally, Ontario continues to charge sales taxes on business inputs (yet another tax on capital) while Alberta has no sales tax. When these and other business taxes are combined, Ontario’s effective tax rate on capital is 32.7% compared to just 24.6% in Alberta.

Unfortunately for Ontario, this immense tax differential has real impacts on business decisions. A recent study, done by Professor Eugene Beaulieu and colleagues at the University of Calgary, shows that higher tax levels chase business away. They found that every percentage increase in effective taxes leads to a one-third of a percent drop in the creation of new businesses.

With an effective tax rate on capital in Ontario that is nearly 33% higher than that in Alberta, it is no wonder that Calgary leads the country in headquarter activity.

The departure of Imperial Oil is yet another sign that Alberta’s policies attract business. If Ontario wants to send similar signals, it must reconsider its stance on tax policy. If not, we will likely see the business continue to move to where the action is increasingly taking place: Wild Rose Country.