Corporate income tax is not the critical investment factor claimed by the right

Published in the Telegraph-Journal 28th February 2012

More than 20 per cent of the capital delivered over a six year period by Business New Brunswick was contributed to companies that declared bankruptcy or ceased operations, according to the Canadian Press. The response by BNB Minister Paul Robichaud to news that about $150 million in repayable loans, loan guarantees, equity investments and grants was disbursed to companies that no longer are in business was that his department is going to improve the selection of future investments to increase BNB’s investment success rate.

University of Moncton academic Donald Savoie took the opportunity to advance his thesis that New Brunswick can no longer afford to subsidize business in this province. Because New Brunswick has a deficit it cannot sustain and federal transfers are almost certain to decline in future, “some tough decisions need to be made,” Savoie said.

To Savoie, one of these tough decisions should result in the elimination of economic development agencies such as Business New Brunswick in favor of promoting New Brunswick’s per cent corporate income tax rate which at 10 per cent is tied with British Columbia and Alberta for the lowest in Canada.

What assumptions underpin this solution and do they hold water?

The first assumption is that the corporate income tax is the critical or most powerful factor in business investment decisions. In fact, business investment decisions do consider tax impact as well as labour, management and infrastructure as part of a cost evaluation strategy. But investment evaluation criteria also involve other key factors: the availability and cost of real estate and physical structures; the quality of information technology infrastructure including the presence of technology vendors, bandwidth scalability, last mile reliability and coverage and the cost of redundancy; the availability and reliability of power, water, gas and other utilities; availability and provision of basic services and the cost of living; and the quality of public and private transportation. Of critical importance are human resources factors such as the size, availability and education and experience characteristics of the workforce, labor costs and soft issues related to work performance and attitude. When considered together, tax policy is only one factor among many for businesses to consider. Those jurisdictions that have chosen lowest tax as their sole business investment attraction feature have, without exception, never possessed any lasting competitiveness advantage.

The second assumption is that government has little or no role to play in determining regional competitiveness or prosperity. But key advantages such as receptive and collaborative government policies involving competitive incentives and subsidies are often an important component of location decisions when firms consider their investment options. Today, government is heavily involved in virtually every business location success story whether through the provision of workforce training, support for innovation networks or the development of technology parks. Whether analyzing business successes in Finland, Ireland, France or Silicon Valley, government has been prominently involved in providing the physical and in some cases intellectual infrastructure that underpinned their success. Closer to home, the achievements of Ontario’s Technology Triangle, the emergence of burgeoning health care and biotech clusters in London, Hamilton and Toronto and the surging oil and gas centers in Calgary all have government inducements, incentives and subsidies at their core.

The profound challenge for government is to ensure that it does not contribute to distortions in markets at the same time that it ensures that public investments are transparent and accountable. But every successful business area in the world has an organization with BNB’s mandate at its core. The government needs to ensure that it engages the mechanisms to make that BNB and others in its orbit operate effectively and efficiently. If relying on corporate income tax as the sole inducement for business investment has any chance of working, it is incumbent on its proponents and supporters to prove evidence that it represents a desirable solution with measurable benefits to New Brunswickers.

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Filed under Business attraction, Business strategy, economic development, Tax policy

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