Past to present: tax credits still key to supporting our high growth sectors

Open Letter

Bernard Landry, Pauline Marois, Michel Audet, Monique Jérôme-Forget and Raymond Bachand

In the past few weeks, much ink has been spilled about the Québec government giving tax credits to both local and foreign companies for the production of multimedia titles. We implemented or supported this tax measure throughout our respective terms in office and we believe it is our duty to state the fundamental arguments that need to be taken into consideration when assessing the validity of this measure, from the past to the present.

GLOBAL TAX COMPETITION

Incentives around the world have grown significantly over the past few years, particularly in the United States and especially when it comes to winning over strategic projects from cutting-edge sectors. Some U.S. jurisdictions recently granted staggering tax credits—we’re talking hundreds of millions and even billions of dollars—to big corporations such as Boeing, Intel, Tesla and Facebook, despite unemployment rates that were hovering around full employment. The request for proposals that Amazon initiated a few days ago for the site of its second North American headquarters is another prime example of investment that a number of cities will be vying for with tax incentives, including Montréal, Toronto and Vancouver.

But why invest so much? Simply because international investments are key drivers of economic growth. In Greater Montréal, foreign-owned subsidiaries make up only 1% of businesses, but they account for 10% of jobs and 20% of the region’s GDP. All the talent, resources and technology these subsidiaries draw from all around the world help all local SMBs. Companies under foreign control in Canada accounted for 50% of all exported goods and 37% of corporate R&D expenditures.

With a market of only 8 million people, Québec cannot afford to just walk away. A 2008 report entitled “À armes égales” (on equal terms) by the working group on tax assistance in resource regions and the new economy (Robert Gagné, Luc Godbout and Guy Lacroix) had already came to the same conclusion: “From what we see around the world, this type of assistance is paramount if we want to succeed in developing high-value-added activities…” [Translation]

CREATING SPECIALIZED JOBS IN HIGH-VALUE-ADDED SECTORS

In order to ensure its economic development, Greater Montréal must target high-growth sectors in which it has the highest chances of excelling. By leveraging this strategic approach, Montréal is now ranked among the Top 5 global hubs for video games, visual effects, AI and aerospace, and drawing in the biggest players.

Let’s not forget that these high-value-added sectors generate well-paid jobs that stimulate the entire economy. In 2014, economist Enrico Moretti stated in The New Geography of Jobs that for each new job created in high-tech, five other jobs are created in the economy. Although many tech companies in Québec are facing challenges in recruiting skilled workers, it’s really only a matter of moving jobs around. Tax credits on the other hand, clearly foster the creation of tech jobs.

Statistics Canada data show that the IT sector (e.g., video games, eBusiness, IT services) is one of the key drivers that create jobs in Québec, with an annual average growth of 4.2% in the past five years. In comparison, total employment only went up by 0.5% on average annually for the same period. What’s even more important: among the 100,000 new jobs created in Québec between 2011 and 2016, more than 12% were in the IT sector alone. That is twice as much as Massachusetts and three times as much as Ontario and California!

Additionally, if we were to consider the lack of inflation in IT wages, which rises at a stable 2% on average every year in Montréal, clearly the pool of skilled workers is still adequate to satisfy the growing needs of employers in Québec.

RETURN ON INVESTMENT

The 2014 studies produced by the Québec Taxation Review Committee confirmed that tax credits granted by the Québec government to tech companies generate significant economic spinoffs that largely exceed their cost. This holds true for the tax credit that applies to the video game industry and eBusiness sector.

These tech companies generate additional revenue for the government, in addition to revitalizing some neighbourhoods, developing a culture of innovation and boosting Québec’s international profile. In just a few years, these companies have changed the economic landscape of Montréal.

REAL SOLUTIONS

However, we must keep on our toes… Developing a knowledge-based economy such as the one Québec is building lies mainly on its talent pool. We must work together to expand our pool of workers and ensure we have the next generation of workers by implementing real solutions, such as promoting specialized training programs and university diplomas, attracting and retaining foreign workers and international students, and integrating immigrants into the job market.

Let’s be clear. Québec tax credits are not intended only for foreign businesses. All foreign and local businesses that operate in eligible sectors have access to tax credits. There are no exceptions. Limiting them to local businesses would be discriminatory and hamper Québec’s small economy, for which its growth is fundamentally linked to the extent of its economic openness.

Rather, the Québec government should consider expanding the scope of the tax credits to include other high-value-added sectors with strong tax competition and high-growth potential. This is how Montréal will be able to keep its spot among the most technological cities in the world and thereby strengthen the ecosystem on which its future economic development will be founded.