Deconstructing the benefits of tax cuts

Just a mini rant this a.m. about the so-called benefits of provincial tax cuts. I won’t touch Federal tax cuts because I am looking at the opportunity cost of tax cuts in New Brunswick and it is likely that if there weren’t cuts at the Federal level, the money wouldn’t accrue here anyway – thus I tend to support Federal tax cuts as one way to get Federal bucks down here (one way other than Equalization which I generally dislike/distrust for reasons elucidated on about 6,000 blogs here to date).

Anyhoo….

According to the propaganda sent out to me a couple of weeks ago, Bernie and the boys have cut taxes by approximately $1.1 billion since 1999. There is no explanation of this figure – but let’s assume it’s accurate.

The Benefits of Tax Cuts
One assumes that the purpose of tax cuts is to stimulate new business investment, job creation, lower the cost of living and stimulate personal and corporate spending.

Well, I can’t find any evidence to support that New Brunswick’s tax cuts have lead to any of these outcomes. The # of small businesses in New Brunswick has dropped by 7% since 1999 (that’s declined with a ‘d’ Captain Kirk). In addition, there is evidence that most of the job creation since 1999 has been among larger organizations such as government (health care, public administration, etc.) Retail sales growth is below the national average. Business investment is among the lowest in Canada (excluding government capital spending). In addition, these tax cuts have not led to broader economic benefits. Net 0ut-migration has continued now for 14 straight years. Population continues to decline.

So, why haven’t the tax cuts worked? Well, I’m no economist but it might have something to do with the fact that the total tax cuts over six years works out to be about 70 cents per person per month. That’s it. 70 measily cents per month. Far less than the increases in electricity, insurance, gas and other cost of living components (not to mention the rapid rise of property taxes and other ‘fees’ which have increased massively since 1999).

The opportunity lost from those tax cuts
I would propose that the opportunity lost from those tax cuts is far greater than any benefit – most likely because I can’t find any tangible benefit at all.

A study in the US found that best practice economic development agencies can develop and implement industry development and business investment attraction strategies that support the creation of one job per $10,000 of direct cost (not including tax abatements or job creation grants/funding). So, even if we assume another $20,000 per job in tax breaks, grants, etc. we would still end up with over 36,000 direct new jobs from investing this $1.1 billion in best practice economic development. The indirect job creation would likely be between another 20,000 and 30,000 jobs. Combined, this would have given New Brunswick the second best job creation rate in the country since 1999.

So the trade off here? Which do you prefer? 70 cents per day per New Brunswicker or 60,000 new private sector jobs – economic growth in all parts of New Brunswick?

Now, you naysayers are scoffing that New Brunswick could never put together a ‘best practice’ economic development effort. You give me $200 million per year, take off the shackles of bureaucracy and big p Politics and try it. We have never actually tried spending serious dough on economic development. It’s easier and politically astute to make these marginal tax cuts.

And for those of you that just love tax cuts, I would propose a method that would have worked much better than the Tories 70 measily cents per day tax cut – tax cuts for direct job creation (i.e. for every export-oriented job you create, I’ll cut your corporate tax burden by $10,000 per year for 10 years). This would have resulted in about 19,000 direct jobs created and about 30,000 direct/indirect – again not government jobs.

This tying of tax cuts to job creation has worked in other jursidictions and it gives government’s additional flexibility because the financial benefit is based on ‘incremental taxes’ – which wouldn’t have been paid anyway. For example, a state government recently gave an auto manufacturer $150 million in state tax breaks to set up 1,500 good paying jobs in the state. These 1,500 jobs generate $24 million in direct income and sales taxes for the state. If they hadn’t attracted the firm, they wouldn’t have benefited from the jobs or the income/sales taxes.

So, what’s the verdict? Are you with Jeannot Volpe, Bernie, et. al and like small tax cuts or are you with me and for significant investments in serious economic development?