Cash vs. Tax Incentives

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.

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6 Responses to Cash vs. Tax Incentives

  1. Anonymous says:

    Bang on. To make it worth, we have to develop a convenient photo opportunity for tax breaks and it might appear to the politcians.

    The other major advantage is that more start ups would progress further. What I mean by that is the relentless effort start ups put into going from one grant to the next. Each program has different timing and different objectives so companies are expected to bend and compromise to fit the program. Next thing you know, the execs are putting far more time into grant applications and kissing up than they are putting effort into managing their business. It is a death spiral and we have seen several promising start ups go down the drain chasing it.

    If the grant money stops early, traditional sources of moneey will have to be pursued. VCs and the like will make companies better by insisting on solid plans and on having capable management in place. This is still work but useful work. And guess what, there will be a few rejected busines ideas that will be sorted out earlier than if grants flowed.

    For some, the ‘glamour’ of chasing grants is attractive; true entrepreneurs find the glamour in building a successful business. Tax breaks will apppear to the real entrepreneurs who are more concerned with generating profits than generating publicity.

  2. mikel says:

    Keep in mind that the NB government is not black and white on these types of issues and tailors benefits to specific companies. In the case of Saskatchewan Potash, what was most valuable to them (since they don’t have headquarters there and pay little corporate tax and don’t need grants) was a ‘break’ on the royalties payable. When Irving wanted to develop an LNG terminal, which they knew would be immensily profitable and grants and other concessions useless, they created a law to limit property tax at 1/16th the property tax value.

    Along those lines as well, NB is one of the few provinces where manufacturer’s, such as most of the Irving refinery (less the storage tanks as you may recall), pay NO property tax at all (on their manufacturing facilities). That creates a special hardship for many communities.

    That goes back to the basic ‘we will do whatever you want’ business approach of New Brunswick, and again, that is the result of a business run society. It is SO bad that most companies have become quite leery of it in a globalized world. And of course its also that inferiority complex (also exemplified by government not even bothering to approach companies like RIM, where they at least have a chance).

    So its not like government simply says ‘we only do grants’, its simply that in reality corporations are doing very little expansion. Finally, when you look at the fact that the province houses insurance companies, banks, huge companies like Irving and McCain, UPS, Molson, amongst others, and the fact that they all contribute only 3% in taxes (I believe financials said they contribute 100 million, which leaves only a TINY amount to the other conglomerates)-and the result is that in New Brunswick, historically, new investment setups pay almost NO tax anyway. So when you give something away for free, its hard to advertise a deal. Which is why they have to go to “not only can you operate for almost nothing, we’ll pay all your infrastructure costs, plus have almost no environmental costs, PLUS, we’ll even GIVE you money. That is a deep cultural mindset that is pretty messed up, something very popular in third world countries, but which only serves to scare most modern investors who look at third world countries with suspicion, knowing that at some point bad publicity or the people themselves will turn against them. It would probably be better to simply advertise as THAT: “third world savings at developed world rates” and investors might pay some attention.

  3. Anonymous says:

    Sounds like you have been working on your sales pitch Mikel. So are you going to help expel some evil profit seekers and relocate them to New Brunswick so Ontarions can live in peace? We are ready to welcome them here and fully realize that, after a few decades of prosperity, we too might get tired of it.

  4. mikel says:

    No, YOU are ready to welcome them there, the rest of the province is far more wary, as the letters to the editor, comments section, and call in shows show. Here in Waterloo the area is ‘prosperous’ because of RIM, Open Text, and the contributions from the university-thats only about ten years(if people recall, the seventies were far from ‘prosperous’ for much of southern ontario). Like I said on another thread, I was just in Thunder Bay, and you can see exactly what all that ‘foreign direct investment’ did for the area. The ONLY private employers of note are Abiti Bowater, which employs 1000 people but is closing most of the plant, and I can’t remember the one other, the rest is ALL government.

    But there are all kinds of facilities that can remind people of the result of ‘welcoming’ all those evil profit seekers. Namely, great big giant eyesores that are now closed with no money to renovate or do anything with. Giant warehouses long closed, and a downtown with empty buildings all over. Go to youtube or flickr and have a look at Thunder Bay downtown, don’t take my word for it.

    That’s the REALITY, which is why economic development has to make sense, have regulations, and be smart. Thunder Bay no doubt welcomed every company in that wanted in, even dredged the harbour, and look what happened. Tax subsidies helped dredge the harbour, and now tax subsidies and donations are helping fix what was done decades ago because its of no use to business anymore. So if people THINK what they have is cheap and worthless, then the rest of the world will see it that way.

    So that’s not really a ‘sales pitch’,thats just the reality of how the New Brunswick government operates, all thanks to the data David has provided over the years. However, I would HAPPILY be part of any organization that wanted to bring RIM to New Brunswick, they are far too big for Waterloo, a tiny city where they are wrecking what little natural environment is left, for a location in New Brunswick, where the cities have tons of space for them. Unfortunately, as you may have noticed, the NB government hasn’t even bothered to contact them, saying that they simply don’t feel they could be successful.

  5. Anonymous says:

    Sorry Mikel, you are wrong; NB been in contact with RIM. While it is being quietly pursued rather than generating a public bidding war, hints are available from:

    http://propelict.com/node/1512

    And there were certain RIM execs who were special guests at this event to see their new aquistion receive an award:

    http://www.enterprisefredericton.ca/calendar/237602

    They spent a couple extra days touring and discussing what NB had to offer.

    However, unless the Federal government is willing to support New Brunswick ventures like they support Ontario and Quebec, for example: http://uk.blackberry.com/newsroom/news/press/release.jsp?id=814
    I don’t think they will be relocating any time soon. With billions of federal dollars available for Ontario manufacturers, it is tough for NB to compete. NB has to convince the Feds to redirect some of the hockey rink and highway money to supporting R&D for RIM and like companies.

  6. mikel says:

    That’s true, I wasn’t talking about the liberals but about Lord’s government, which stated publicly that they ‘couldn’t compete’ to bring RIM to NB (which the article notes).

    The article is a bit misleading, making it seem as if Scott Brison singlehandedly brought RIM to NS, which wasn’t true (at least according to public interviews). In this case the province is quite fortunate because RIM is very unlike other corporations, where we have the two main leaders who are very patriotic and want to deal locally as much as possible. Many people don’t know that blackberries are manufactured in Canada. They COULD outsource them to China, and maybe someday will, but so far they are made in Canada. As I’ve often said, the owners have singlehandedly set up at least half a dozen scientific research institutions in the city, by contrast what has Irving or McCain done lately?

    These are two different issues though. In the first place, it shows the importance of education, as companies like Google and RIM often set up shop in places where they purchase smaller companies. In some ways this is bad, because that office becomes a satellite of RIM, and they are usually first on the chopping block when the parent company loses ground, and they also don’t get to expand as much as could be possible. You don’t get ‘more Irvings’ if Irving buys up all the companies.

    However, it should be kept in mind that with a fraction of the population, NB doesn’t NEED the level of investment that ontario does. A company like RIM has the effect in one city here that it could have for the entire northern region of New Brunswick.

    As for the feds, thats a bit of a misnomer, because the province hasn’t been ASKING the feds to ‘redirect some of the highway money’. Graham kept making a point of claiming they wanted to be ‘self sufficient’ and begging for more federal dollars, but he wouldn’t ever say exactly what he wanted it for. Meanwhile, he announces even more highway dollar spending, more money for Atlantica Gateway projects, etc. There are very few corporations or companies doing research the way RIM does, so there is simply no place to put investments. When and if RIM sets up shop in NB, then it can be discussed about research dollars, but for now, what research there is usually gets funded.

    For example, Irving set up a wallboard manufacturing facility, which got $50 million from the federal government. They also opened a new diaper manufacturing facility. Now, wallboard and diapers don’t exactly require a whole lot of ‘research’.

    There MAY be sectors where the feds purposely avoid investing, we just don’t know. As stated previously, there were lots of ACOA applications that were refused, but we don’t know what they were. The feds don’t just ride into town and throw money around, the facilities have to exist FIRST, and that’s what we aren’t sure of. Like I’ve said before, the Perimeter Institute for Quantum studies just got $57 million, more than all of NB combined. This is an institute that is quite unique, it does research in areas that don’t have a profit motive, and also has strong public outreach programs. My question would be-what similar research institutions are in NB, partly connected to universities, but also privately funded, are being ignored by the feds? What manufacturing facilities are there that are being ignored?

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