Taxpayers are often the losers in the incentive game

When one government offers incentives and another one doesn't, then the comptetion to attract new businesses is no longer a level playing field

Doug FirbyWhen Toronto-based Wattpad chose Halifax over Calgary as the site of its second headquarters last month, the question on many people’s minds was: Which of the two cited factors was the deciding one – concerns about Western separatism or cuts to Alberta’s tax credits for tech companies?

The answer isn’t quite as simple as either/other. Yet the question of whether subsidies should have been available is a vital consideration as Alberta attempts to pivot from its over-dependence on the oil and gas industry and grasp the Holy Grail of diversification.

Alberta’s former NDP government was very big on trying to force-feed diversification. Before it was defeated in the April 2019 provincial election, it had set up a series of programs to encourage tech firms to locate or expand in the province. When Jason Kenney’s UCP gained power, however, the programs went on the chopping block – disappearing, one by one.

The UCP has ended a $5-million tax credit for capital investment, credits for scientific research and economic development, and interactive digital media tax credits, as part of a much broader campaign to get Alberta’s fiscal deficit under control. The government claims those cancellations will save taxpayers more than $400 million by 2022–2023.

I didn’t listen to every life-lesson my parents tried to teach me but I’m reminded of this one: It’s easy to be penny wise and pound foolish.

Businesses put it another way. They say it takes money to make money. Usually, that means one has to invest their own resources, find venture capital and, of course, throw in tons of sweat equity to make a business take flight.

But today, in a globally competitive world, too often it also means throwing in a little taxpayer largesse.

Let’s not kid ourselves: Much as we hate corporate handouts, Wattpad was not subtle about seeking subsidies from its suitors. The Globe and Mail reported that Wattpad’s request for proposal stated it would prefer a host city willing to help secure government subsidies.

There were other relevant criteria that put Calgary on the edge, including a stipulation that the city be within a three-hour flight from Toronto and have fewer than 1.5 million people. Nevertheless, Calgary Economic Development submitted a proposal.

And it’s worth noting that the winning city – Halifax – was a joint bid initiative that included Dalhousie University, the Atlantic Canada Opportunities Agency, Nova Scotia Business Inc. (NSBI) and the innovation hub Volta. NSBI offers several business incentives for firms operating in Nova Scotia, including payroll rebates and an “innovate to opportunity” program, which provides up to 35 per cent of the salary of a new graduate working in tech.

NSBI has not said whether Wattpad would apply for the assistance or if it has been offered incentives under these programs. Hmmmmm. Let me guess.

So if you agree with me that the Wexit threat cited by Wattpad as one reason for taking on pass on Calgary is pretty much a red herring, then it’s highly likely that subsidies played a significant role in the company’s decision to pick the Eastern city.

Now, in principle, I hate the use of subsidies to attract companies (as much as I hate subsidized arenas to keep National Hockey League teams). The problem is that when a jurisdiction takes a stand on principle and offers no subsidies and yet others do, then the sensible thing for a business is to take the offer that includes a taxpayer handout. Nine times out of 10, that means the principled jurisdiction will not land the new company.

The research on the long-term value of such subsidies is mixed at best. Remember, for example, the hundreds of millions of dollars that Ontario gave General Motors a few years back to keep the Oshawa auto assembly plant open? That didn’t work and all that taxpayer money went up in smoke.

And sometimes even the offer of subsidies is fruitless, as Calgary learned with its bid for Amazon HQ2. Turns out subsidies have little pull if a company is just not that into you.

Early this year, Forbes magazine surveyed a number of prominent U.S. economists on the efficacy of subsidies to attract and hold businesses in certain communities. Those economists told Forbes that, “The primary winners of such ‘beauty contests’ are likely to be the companies themselves, rather than the chosen locations.”

Forbes went on to ask whether the U.S. government should prohibit states and municipalities from offering tax subsidies. The results were less than conclusive – 33 per cent said there should be such a prohibition, yet another 26 per cent were unsure and 17 per cent disagreed.

I understand the hesitation. Any new federal regulations threaten to deepen the pile of red tape that businesses also cite as a disincentive to success.

But in this case, I think such intervention is justified. If provinces and municipalities don’t have enough restraint to keep from playing the incentive game, then government needs to step in and do the right thing.

Compete on a level playing field, having labour talent, wage rates, access to markets and other straightforward factors as the key criteria for choosing the right business location. Taxpayers will be the better for it.

Doug Firby is Editor-in-Chief of Calgary’s Business and Edmonton’s Business.

© Troy Media


incentive game, subsidies

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