The sobering reality behind business incentives

Being out-gunned in the incentives game can carry a heavy cost

Recent news stories from both sides of the Canada-U.S. border highlight the growing role of business incentives and “subsidies” in shaping the climate for corporate location and expansion decisions.

The big three U.S. automobile producers are in the midst of downgrading their presence in Ontario as they build new plants in various American states as well as Mexico. Asian and European automobile producers are also stepping up capital spending in the U.S. and Mexico.

One of the factors behind this trend is the rich incentive packages provided by U.S. state and local governments keen to secure auto-related manufacturing plants and jobs. While the Ontario and Canadian governments have also been prepared to spend taxpayers’ money to lure automobile investment, so far they have been unwilling to match the stupendous sums on offer in states such as Kentucky, South Carolina, Tennessee, and Michigan.

What is unfolding in the automobile sector may be the tip of the iceberg. Other industries that are receiving attention from U.S. jurisdictions hungry for high-paying jobs include aerospace, pharmaceuticals and bio-technology, energy, advanced materials, transportation and logistics, and the information and communications technology sector.

A recent report from the U.S. Council on Foreign Relations calculates that state and local governments together are deploying $80 billion every year to entice companies to make “greenfield” investments. “Greenfield investments” result in new factories or business activities, and thus differ from investments that companies routinely make in their existing operations. Importantly, the $80 billion estimate does not include tax incentives that are widely available to all firms within an industry, such as film production tax credits, accelerated write-offs for investments in manufacturing facilities and equipment, or tax incentives to support business research and development. Instead, the figure primarily captures tailored financial packages that state and local government agencies put together to convince individual companies to invest.

The table below lists the 10 biggest incentive packages granted to companies in the United States in 2014, according to a leading site location consultant. The examples in the table add up to more than $25 billion, albeit the benefits conferred extend over multiple years and do not always feature up-front payments to the corporate recipients.

Aircraft manufacturing giant Boeing tops the list. It extracted $8.7 billion from reluctant Washington state legislators, in exchange for pledging to produce its 777X jet in the state. The tax benefits to Boeing will flow over 30 years.

The incentives used by U.S. states and cities often take the form of abatements or exemptions from income, sales or property taxes for companies that undertake significant new investments. In some cases the tax breaks may be supplemented by government grants to underwrite the cost of worker training, free or subsidized land, below-market power rates, or dedicated infrastructure improvements.

Tax and other financial inducements alone are rarely sufficient to dictate where businesses invest. Proximity to markets/customers, access to skilled workers, the quality of infrastructure, the (tax-inclusive) cost of electricity and other sources of energy, and the regulatory climate all factor into the decision-making process at large enterprises. But the availability of incentives can make a difference once a company has developed a short-list of otherwise comparable investment locations.

Governments in Canada are understandably reluctant to engage in a race-to-bottom competition to boost incentives to firms contemplating new investments. The vast sums spent by some American state and local governments to attract business can be counter-productive from the perspective of the taxpayers who ultimately foot the bill.

But Canadian policymakers need to recognize that being out-gunned in the incentives game can also carry a cost, as Canadian locations increasingly fall off of the lists compiled by site selection consultants and their corporate clients. If we are going to forswear the generous incentives favoured by many U.S. jurisdictions, then governments in Canada will have to redouble their efforts to make all other aspects of the local business environment as attractive as possible to prospective investors.

Top Ten Tax Incentive Deals for U.S. Companies, 2014
Company                State                      Amount (U.S. dollars)
Boeing                    Washington             $8.7 billion
Alcoa                      New York                $5.6 billion
Nike                        Oregon                   $2.0 billion
Intel                        New Mexico            $2.0 billion
Cheniere Energy     Louisiana                $1.7 billion
Shell                       Pennsylvania           $1.65 billion
Cerner Corp            Missouri                  $1.64 billion
Chrysler                  Michigan                 $1.3 billion
Nissan                    Mississippi              $1.25 billion
Tesla                      Nevada                   $1.25 billion
Source: Area Development OnLine

Jock Finlayson is Executive Vice President of the Business Council of British Columbia.

Jock is a Troy Media Thought Leader. Why aren’t you?

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