Alberta should not enable corporate welfare

Alberta’s United Conservative Party made economic growth a major issue in its recent successful election campaign. Some of its proposed measures—reducing the corporate income tax rate, for example—should help jolt the province’s economy. But one recent proposal, which may seem appealing at first glance—granting municipalities the ability to offer tax incentives to specific industries in hopes of spurring economic activity—could prove problematic.

There’s nothing wrong with giving municipalities more flexibility in how they govern their fiscal affairs—quite the contrary. And the non-residential property tax burden in Alberta cities remains a serious issue that should be addressed. However, favouring certain businesses or land uses over others increases the chances of municipal “corporate welfare.”

There’s a major difference between broad-based tax relief and tax incentives for certain companies. There’s a long tradition—notably in the United States—of wooing large companies through various subsidies. Incentive packages often include tax breaks on property (as proposed in Alberta), income (many municipalities levy income tax in the U.S.) or exemptions from various permits. Consequently, the jobs such deals attract often cost taxpayers while favouring some businesses or industries over others.

Property tax incentives are sold as tools for economic development, but in many cases they simply shuffle jobs across jurisdictional lines rather than create new jobs. Like with Amazon’s infamous HQ2 location selection process, companies seeking subsidies can pit jurisdictions against each other and help divert public funds from other priorities.

These incentive packages also tend to have little bearing on future economic growth. Recent work by U.S. economist Timothy Bartik finds that, for all their short-term political appeal, economic development incentives offered by state and local governments typically do not significantly affect gross domestic product (GDP) over time.

Now, the legislation in Alberta focuses solely on the property tax side of incentive packages, not other forms of corporate handouts. It’s also not prescriptive about what municipalities ought to do with these newfound powers. However, it does allow cities to “establish an eligibility criteria and application process to streamline tax incentives offers.” Basically, municipalities can get more specific about who they want to target with tax breaks.

Rather than using targeted tax incentives, the Kenney government and municipal governments should focus instead on ensuring a more competitive playing field for all businesses. That’s a far more certain path to prosperity than attempting to pick winners and losers.