Troy Media – by Mark Milke
If you were faced with bills that outstripped your ability to pay, a top priority probably wouldn’t be donating scarce dollars to corporations. However, unlike average families, governments routinely do just that, but with tax dollars.
Case in point: Since 1991/92 and until 2008/09, Ontario governments of every political stripe have transferred $27.7 billion to businesses in the form of corporate welfare.
If that figure seems large, it would be even higher if statistics were available for the most recent, recession-era years.
Corporate welfare endemic in Ontario
However, in the last year for which data is available from Statistics Canada, Ontario’s corporate welfare bill was $2.7 billion in fiscal 2009.
From manufacturing to the auto sector to craft breweries, no business was too large or too small to receive taxpayer cash courtesy of Queen’s Park. Corporate welfare included payments, grants or loans (but never repaid) given to business for reasons other than the receipt of goods or services.
But that generosity came with a price tag. For any Ontarian who paid provincial income tax in 2008, the cost of corporate welfare was $424 each. For a working couple, that’s $848 that could have gone to, say, Christmas gifts, car repairs, or hockey equipment for the kids.
The Ontario government is upfront about this wasteful and unproductive bit of spending.
In the provincial government’s most recent budget plan, the government underscored how the Next Generation of Jobs Fund has “committed about $714 million to 33 projects.” The government also noted that between 2005 and 2010, the Advanced Manufacturing Investment Strategy made “loan commitments of more than $160 million.” Another note claimed the Strategic Jobs and Investment Fund funded more than $52.4 million in grants and $31 million in loans.
This political justification for corporate welfare – it creates jobs – is mistaken. Such “job creation” is an illusion; it’s obvious to anyone who takes even a cursory glance at the results of such efforts.
That’s why economists who have looked in-depth at business subsidies think they’re lousy policy. Timothy Bartik found that extra job growth in one locale due to business subsidies comes, in part, at the expense of reduced job growth in another region. Another economist, Margaret Dewar, found that programs aimed at specific distressed geographic regions show “almost no effects on the growth of these areas.”
Economist Terry Buss found that governments, in their corporate welfare justifications, routinely ignore what’s called the “substitution effect”. That’s where tax dollars and jobs are merely transferred from healthier businesses to those in pursuit of taxpayer cash. “Potential losers are always in other cities or states, and few people concern themselves with the national interest,” wrote Buss, who concluded that no new economic activity or jobs were created when the wider geographic area was considered.
A great example of this happened in Quebec years ago. There, in the 1980s, the federal government funnelled tax dollars to pay for the construction of a new fish processing plant at a cost of $2.2 million. The justification was that an additional 250 jobs would be created when the fish-processing facility opened its doors.
However, in a later review of this initiative, the federal Auditor General noted how the nearby existing fish-processing facility (which also received federal subsidies) closed with job losses equivalent to those created by the newly subsidized plant. Net employment gains were zero. Jobs were transferred – not created – at the cost of additional taxpayer subsidies.
That’s an old example but plenty of newer ones exist. Corporate welfare handouts have occurred regardless of whether the party in power was the NDP, Tories or Liberals. What’s also common is that the $27.7 billion in Ontario corporate welfare over almost two decades has been an expensive, failed experiment.
Lower business taxes work better
However, to its credit, the Dalton McGuinty government, along with the Progressive Conservative government that preceded it, has actually helped job creation in a more substantive manner: by lowering business taxes.
Lowered business tax rates make much more sense given that taxes paid by every corporation at the same rate is an inherently neutral policy (vis-à-vis any one business). Besides, tax relief isn’t corporate welfare. After all, money earned by individuals or businesses belongs first to those who earned or created it. So no one is being “subsidized” merely by getting a tax break.
The McGuinty government ought to follow up sensible, neutral business tax policy with neutrality on the spending side: don’t pick winners and losers in the business world by favouring some corporations with tax dollars.
In a year where Queen’s Park predicts a $16.3 billion deficit, corporate welfare is the first thing that should be chopped from any government budget.
Mark Milke is a Senior Fellow with the Fraser Institute and author of the new study: Ontario’s corporate welfare bill: $27.7 billion. Mark.email@example.com.
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