Incentive wars – will they ever end?

I have been chatting off and on with an American economist, Kenneth Thomas, whose research is meant to point out the problems with business subsidies.  He has a good blog today contrasting the U.S. and European experience.

Dr. Thomas’ disgruntlement with the use of incentives to lure investment is well placed.

I have said it many times before but it is worth restating that my view on incentives is simple. It is very hard to unilaterally disarm.    Take the issue of digital tax credits.  These are widely used to incentivize digital media across North America.   NB doesn’t have a program and this is a main reason we have almost no video game and related development here.  The few firms that are here are threatening to leave (understandably) because in neighbouring provinces they can get 40 to 60 percent of their development labour costs covered by these programs.

Like nuclear weapons, if jurisdictions across North America got together and agreed on a framework to stop the spread of these incentive programs and eventually to reduce them, it would be a good thing.

I am not even sure companies would balk at this.   Most tell me the reason why they seek incentives is because their competitors receive them and they don’t want to be put at a competitive disadvantage.

In a world with no grants, low interest loans, tax breaks, etc. jurisdictions would have to compete on core value elements such as skilled labour, infrastructure, R&D environment, tax rates and others.

I think reducing or eliminating these incentives will be very hard but it is worth pursuing.  Dr. Thomas should petition the National Governors Association or other broader groups to get a dialog started.

If he can do a more comprehensive job of linking the incentive wars to the declining competitiveness of America for investment, he’ll have a stronger argument.

I’ll make one final point.  Many people say that the main reason why governments (at least in Canada) offer grants and loans to companies is the lack of access to traditional sources of capital. They claim banks are not interested in peripheral places and other sources of capital are also reluctant to invest in places like rural New Brunswick.  That may be so and, if so, I don’t see a problem with a government supported bank offering access to capital at normal market rates.

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