End ‘inefficient’ Quebec tax credits, cut small business levies: HEC report

Absent a change in policy, Quebec risks falling short of the government’s goal of matching Ontario’s standard of living by 2036, the report warns.

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Quebec should scrap its corporate tax credit programs and start cutting small-business levies because existing measures have proved to be inefficient and too expensive, a new report suggests.

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Tax credits for businesses cost Quebec $2.4 billion in 2021, at least twice as much as Ontario, according to a report published Thursday by HEC Montréal’s Center for Productivity and Prosperity. This follows Quebec’s decision to dish out about $20 billion in tax credits during the 2010s — while imposing a higher burden on all businesses to make up for the revenue shortfall.

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Absent a change in business-support policy, Quebec risks falling short of the government’s goal of matching Ontario’s standard of living by 2036, in part because our companies traditionally invest less and are comparatively less innovative than their out-of-province peers, the report says. To catch up to its larger neighbour, Quebec would need to boost productivity by two per cent a year, twice as fast as the historical trend.

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“Our entire support system for companies is flawed,” Robert Gagné, who heads the business school’s Center for Productivity and Prosperity and co-authored the study, said in an interview. “It costs billions of dollars annually, but it has never demonstrated its worth. We’ve had the same recipe for 40 years. Basically, we over-tax and we over-subsidize. Maybe it’s time to try something else.”

Although Quebec’s standard of living has improved relative to the Canadian average over the last four decades, the gap with other developed economies has grown wider. Gross domestic product per capita in the province was $58,642 in 2021, about 17 per cent below the $70,598 average for Organization for Economic Co-operation and Development member countries. In 1981, the difference was about five per cent.

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More than 80 per cent of the Quebec government’s tax support for businesses aims — directly or indirectly — to stimulate employment instead of competitiveness, the report says. This is not only ill advised in an era of chronic labor shortages, but also tends to favor large companies rather than helping businesses of all sizes become more competitive.

Tax credits represented 15.2 per cent of all payroll taxes paid by Quebec businesses in 2019, more than double Ontario’s 7.4 per cent, the report’s authors calculated. That year, tax credits amounted to 0.74 per cent of the gross domestic product attributable to Quebec companies, about triple the corresponding figure for Ontario.

Limiting government intervention, rather than constantly offering new income tax credits, would give Quebec companies more breathing room so they can grow in a healthy, competitive environment, the authors argue. For example, they say, Quebec would do well to exempt small businesses from contributing to the health services fund — a payroll tax that significantly increases their fiscal burden.

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“We think the government should stop being so generous,” Gagné said. “If I were (Finance Minister Eric) Girard, I would do a major cleanup in tax credits and at the same time, use the resulting leeway to lower corporate tax rates. This would not cost the government anything. To those who warned that companies would immediately leave Quebec, I would ask: Are we sure? If a company is only here for the tax credits, then maybe it shouldn’t be here.”

Authors of the report take aim at Quebec’s multimedia tax credit, which was set up in the 1990s and now represents the province’s third-largest business subsidy.

The program, which subsidizes more than one-quarter of eligible wages, has allowed Quebec to become one of the world’s leading video-game hubs. It has also resulted in large players hogging subsidies: In 2017, 70 per cent of the tax credit’s total value, or $145 million, went to 13 companies, the report shows.

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“The problem is that the strategy has been maintained far beyond the end of its useful life,” Gagné said. “It makes no sense that companies get such a large subsidy on salaries. Meanwhile, companies in other industries are fighting to hire the same employees, without any subsidy.”

Still, Gagné is under no illusions that the Coalition Avenir Québec government will start addressing the issues raised by the report in next week’s budget.

“There’s a lot of inertia in the government machine, so I don’t think anything will change,” he said. “There’s enormous pressure not to touch these subsidies, and a lot of intense lobbying that goes on. But when you see that the profits of some companies are equivalent to the tax credits, maybe it’s time to ask ourselves some questions.”

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