It’s funny what people focus on when a report gets released. I have had several conversations in the past few days with economic development types about my recommendation that the government look at tax-based incentives to stimulate development in New Brunswick rather than grants or loans.
A tax-based incentive (such as investment tax credit or a tax free zone, etc) program, in my opinion, is a far better approach to stimulating new business investment than giving out grants with the obvious exception of cash strapped firms who need the grant up front to get a project off the ground.
For the companies, grants have tax implications. They are shown as revenue into the company and as such will eventually have tax implications for most companies (i.e. those that pay tax). A tax break goes against taxes payable and therefore – has more value to an organization than a grant (i.e. a million dollar grant versus a million dollar tax break taken off taxes payable).
For the public, grants are riskier because if the company doesn’t achieve the economic activity that was promised for the grant (i.e. we will create 100 jobs and sustain them for five years) – the public (taxpayer) is out the money. Tax incentives go against future taxes payable and there is zero risk to the public. If the company doesn’t generate the economic activity, it doesn’t get the tax break.
Further, grant programs tend to be limited to small projects while tax-based incentives can apply to very large projects. If an auto plant was considering setting up in Belledune, for example, with a billion dollar project a broad-based tax incentive program (i.e. no corporate tax for 20 years, 50% reduction on property tax, etc.) could be worth $100 million or more over 20 years but wouldn’t cost the taxpayer a penny out of pocket. Trying to come up with $100 million grant for an auto plant not located in Ontario would be very difficult.
Truthfully, grant programs are really best suited for projects that cannot raise enough money in the private market.
I’m going to stop the discussion at this point because if I go further, I’ll get hammered as not wanted to help ‘the little guy’ or against ‘helping out New Brunswick companies’ and other similar criticism when I discuss this particular topic.
But if you think it through long enough, you might agree with me. Tax-based incentives make more sense on a wide variety of levels.
By the way, I will conclude with my position that tax-based incentives are far more investment stimulative than broad-based tax cuts. There is nothing to ensure that tax cuts will find their way back into business investment but tying the tax cut to specific investment activity is by definition stimulative.