Tax credits can hurt more than they help
Subsidies key in attracting industries, but Quebec can no longer afford them
The lobbying and armtwisting has already begun over the Quebec government’s plan to reduce the generous tax credits that so many businesses have become hooked on in this province.
The budget brought down this month by Finance Minister Carlos Leitão announced a 20 per cent cut in the taxcredit system, which subsidizes the salaries of workers in a range of industries from video games to information technology.
The noisiest opposition so far has come from the Quebec film and television industry, which has formed a coalition of producers, directors, scriptwriters, actors and technicians that says it represents 50,000 workers and entrepreneurs.
“Thousands of jobs would be affected in the short to medium term if the government moves forward with these cuts,” the coalition says.
The government would be a net loser if production moves out of the province, it warns, because provincial tax revenue from the film and television industry exceeds the fiscal cost of supporting it.
This is an argument you often hear from people who’ve made a fine art out of taking money from the taxpayer. It’s an investment, not an expense, they say.
The folks who run Montreal’s Formula One Grand Prix are a case in point. The event is hugely successful and profitable, yet somehow they’ve managed to squeeze a $219-million subsidy from three levels of government for the next 10 years. Just because they can threaten to walk away.
What we hear by way of justification is that the spinoffs from the race are hugely important for downtown businesses, hotels and restau- rants, so therefore it’s money well spent.
Well, it’s not. We’re not talking about an investment in science and technology that might pay off for the whole economy. We’re talking about a big, fat profit margin for Formula One entrepreneur Bernie Ecclestone.
Tourists and race fans would be coming to Montreal regardless of that subsidy.
One could argue the same thing about information technology or video games.
Yes, tax credits were important in initially attracting these industries to Montreal. But once a critical mass was reached and the city developed a deep talent of skilled workers, the case for aid became much less compelling.
It morphed into something different: a payoff to keep businesses from jumping to locations with even more attractive tax breaks.
So along comes the newly elected Liberal government with a fiscal crisis on its hands and a deficit nearly twice the size of previous estimates. Looking for a quick and easy way to save money, it discovers that a 20 per cent cut in tax credits saves almost $300 million a year.
The question now is whether the reduction will be a short-term one or whether the government will have the stomach to stick to its game plan.
Leitão says affected industries will get a chance to make their case before a special committee that will study Quebec’s tax system beginning in September.
The film and television industry, for one, says it’s counting on that opportunity to change the government’s mind.
“It will be clearly demonstrated before the commission on tax systems that each dollar in tax credits is not only repaid in full, but also generates positive tax revenue for Quebec” through additional investment of hundreds of millions of dollars, the coalition says.
The film and TV industry won’t be the only one looking to hold on to its advantage. Saying no will require some courage on the government’s part.
But it’s the right way to go. The long-term issue in Quebec is a lack of private investment, and that can only come from a fairer and more transparent tax system, says economist Robert Gagné at the Centre for Productivity and Prosperity at HEC Montreal.
As Gagné points out, only a very small minority of businesses wind up benefiting from tax credits and subsidies, while the other 85 or 90 per cent have to pay the higher taxes required to finance such programs.
That’s what the TV producers and other groups miss: This is all about equity and opportunity for everyone.