On taxes and economic development

David Murrell, economics professor at the University of New Brunswick, said last week in the Telegraph-Journal that tax incentives should be used to attract new companies and investments.

I am not opposed to this but I have a few what I think are critical considerations:

*Across the board mini corporate tax cuts don’t work. Just look at New Brunswick. The province cut small business income taxes to the lowest rate in Canada but forgot to mention that small businesses don’t really pay much income tax anyway. So the impact on the provincial finances was to drop a few million from revenue and there was, as far as I can see, no visible positive impact on the small business sector. Job creation post the tax cuts has been worse and the number of new small businesses created is lower than in other Atlantic Canadian provinces. It was a fantasy to think that cutting taxes by the amout of a cup of coffee per day per small business would result in billions in new investment.

*Similarly, across the board small tax cuts for large corporations won’t work either. It will drain the provincial finances of valuable revenue and not result in new investment. Companies that are here to exploit a local market opportunity (Wal-Mart, Home Depot, etc.) won’t increase their investment just because taxes are cut.

What’s needed, in my opinion, is for the province to target a few key sectors where we have already a competitive advantage for location such as e-Learning, certain kinds of manufacturing, etc. and hone in on a tax reduction plan that stimulates new investment – directly – not indirectly.

To spell this out – if you invest $100 million, we will forgive your corporate income tax for X years.

But it’s not fair, you say, to give one company a tax break and not another. This is patently false. As I continue to say, we need to attract significant new foreign investment into New Brunswick. We need to gear programs to make this happen. If Irving wants to invest billions – hallelujah – give them a tax break. But across the board tax breaks will do nothing but imperil already weak public finances.

So when I hear Jeannot Volpe is look at this:

One area he leans toward is a gradual declining break on property taxes for new businesses, in order to help the new ventures land on their feet during the critical opening years of operation.

I shudder. I shake. I sigh. Who freakin’ cares about ‘new business’? I want old, established (or newer established) firms that are well capitalized, that have established markets, that are in growth mode and that are looking around for the best place to locate a manufacturing, back office, help desk, development shop, etc. That’s what we need.

If we use the word ‘critical’ – I get really scared. We have spent billions in Atlantic Canada over the past 30 trying to stimulate small businesses and where has it got us? The weakest economy in North America. Go out and get more Norandas. More UPM-Kymmenes. More Bowaters. More Michelins. More IBM. More Xerox. More UPS.

The ‘opening years of operation’ for these firms are not ‘critical’ in the lack-of-start-up-capital-no-markets-no-real-idea-of-what-needs-to-be-done sense that Minister Volpe is talking about.