David Campbell: Should we dole out cash to attract industry?

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Over my more than three decades involved in economic development, I have observed there are few topics that get people more riled up than corporate subsidies or incentives to convince companies to invest in a jurisdiction and create new jobs.

In the 1990s, several southern U.S. states took the use of corporate incentives to a new level. They doled out hundreds of millions of dollars worth of incentives to attract automobile manufacturing plants away from Michigan and Ohio. Now, the incentive wars have reached a fevered pitch in the United States with favoured industries such as computer chip manufacturing and electric vehicle (EV) production receiving billions of dollars to locate in specific jurisdictions.

The Canadian government, along with provincial governments in Ontario and Quebec, has come to the table to try and attract some of this investment. The recent government subsidies to attract EV and EV battery plants to Ontario and Quebec have been nothing short of breathtaking. According to media reports, Volkswagen could receive up to $13 billion in incentives to set up a plant in Ontario.

There are different kinds of government incentives. One widely used in the United States is corporate tax breaks. This involves governments forgiving some or all corporate taxes owed over a period of time to convince companies to locate in one community over another. This can include corporate income tax, property tax or other taxes and levies normally paid by companies to municipal, state/provincial or federal governments.

The logic with this type of incentive is simple. If the company sets up in the community, the money it pays out to its workers and suppliers will generate tax revenue normally well above the tax dollars the firm would pay itself. Government loses corporate taxes but increases tax revenue from workers and suppliers. It is now common to see companies in the United States receiving 20 to 25 year tax abatement deals.

Another type of incentive widely used is the use of taxpayer cash to convince a company to expand. This is primarily the tool used in New Brunswick to attract industry. In this model, government either provides grants upfront to a firm or agrees to provide a cash payment after a firm has met some commitment (e.g. after they paid out $5 million to employees the government cuts them a cheque).

What can be confusing in Canada is governments have decided to rebrand cash subsidies as “tax credits” implying the cash doled out has something to do with the payment of taxes. It does not. Companies receive the cash just for spending money in the jurisdiction independent of how much tax they pay. I guess tax credits sounds better than grants.

There are other types of business incentives including low interest or no interest loans and investments in infrastructure.

I should point out here in most jurisdictions the government subsidies are available to local as well as national or international firms. It is also important to note most jurisdictions do not offer subsidies to all industries, normally restricting support to those that are not competing for local business. For example, if Walmart is looking to put a regional warehouse in a community, government might offer incentives but not if Walmart wants to set up a retail store to compete with other local retailers.

I have honed my personal view on corporate incentives after being involved in economic development for many years. I have seen too many good projects wooed away from New Brunswick over the years just because some other jurisdiction decided to pony up more cash. Because of this I do not believe we have the luxury of saying no to all incentives but I also firmly believe there must be a clear rationale for any financial support.

What is the purpose of using taxpayer dollars to attract companies? The main argument is the incentives are needed to be competitive with other jurisdictions. This is why the Canadian federal government is offering so much cash to attract new green industries. The United States is doling out cash so we will have to do the same to attract our share of these industries.

Years ago I came up with what I called a return on taxpayer investment (ROTI) model. This was a simple formula governments could use to evaluate what levels of incentives would be appropriate for specific projects. The ROTI formula evaluated all taxes that would be induced by a new company investing in a community over a period of time. These taxes could be tallied up and then compared to potential levels of taxpayer support.

For example, a company is looking to establish a 100 person manufacturing facility in New Brunswick. It will induce $350,000/year in taxes for the provincial government. Using the ROTI model, the government could provide this firm with a million dollars worth of incentives and receive a ‘payback’ on that taxpayer investment in three years. Starting in Year 4, all the tax revenue induced by the company could then be used to pay for health care, education and other public services.

An ROTI model allows governments to clearly identify the upper limits to taxpayer cash to support industry investment.

Take the aforementioned example of Volkswagen and its $13 billion package. Some are saying the plant will have 3,000 workers. That works out to $4.3 million in taxpayer cash per worker. Even if you use a reasonable estimate of the economic ‘multiplier’ it still works out to more than a million dollars for every direct and indirect job created across the country.

Based on my calculations, it will take at least 30 years to get a taxpayer payback on that investment. This means other taxpayers will have to subsidize the cost of public services consumed by the employees of Volkswagen and its suppliers for decades.

There is no other way to look at it.

My friends in Ontario shrug and say “what was government supposed to do, let the auto manufacturing industry die?” I understand the politics of it but even with all the incentive in previous decades, the auto manufacturing industry still was a major contributor to the taxes that paid for public services in Ontario and beyond.

Whether we like government using cash to woo industry, the practice is likely here to stay. If government is to offer these incentives, they should at least base the funding using some kind of logical return on taxpayer investment model.

David Campbell is president of Jupia Consultants Inc., an economic development consulting firm based in Moncton, and New Brunswick’s former chief economist