Corporate welfare doesn't work and must end
Fri Jan 31 2014
Byline: Mark Milke
Fri Jan 31 2014
Byline: Mark Milke
In the land of government plenty - that vast landscape populated with the tax dollars of Canadians - there is no shortage of politicians willing to hand out and defend subsidies to business and no dearth of corporations willing to take the cash.
Bombardier Inc., which recently announced it would lay off 1,700 people, has been one chronic seeker and a regular recipient of such taxpayer assistance. The Montreal-based aerospace company is thus a useful example of corporate welfare in action, the tax dollars at stake and the regular, inflated claims about the beneficial effects of such subsidies.
Bombardier's corporate welfare began, at least federally, in 1966 when it received its first disbursement of $35 million from the federal department of Industry Canada. In the decades since, various Bombardier iterations received over $1.1 billion (all figures adjusted for inflation) in 48 separate disbursements from Industry Canada alone. That includes two 2009 cheques worth $233 million.
Most of the money, excepting $55 million in grants, came in the form of "conditionally repayable contributions," conditional loans where repayment depends on the performance of a particular project. That $1.1 billion doesn't include tax dollars received from any other federal department or other governments, including in Ontario, Quebec and even Great Britain - $298 million, in the latter case. But if taxpayers wish to know how much money has been repaid back of just the amounts above, they're mostly out of luck.
Publicly, Bombardier claims it has repaid $275 million on two government loans originally worth $187 million. That ignores the dozens of other disbursements and much larger amounts loaned to the firm.
Some other scraps of information are available, though. In 2008, Industry Canada's department performance report noted a $108.4-million loan guarantee write-off. The department didn't specify which company benefitted when taxpayers covered the loan, but media reports noted it was for government guarantees connected to Bombardier's turboprop aircraft.
Beyond such glimpses, my Access to Information requests to Industry Canada are regularly returned with the repayment records of most companies (not just Bombardier) blacked out.
Under the federal Access to Information Act, the department must, legally, withhold such information if a company might suffer financial loss or have its competitive position undermined. In addition, Bombardier has also filed in Federal Court to prevent access to such numbers.
There are even larger corporate welfare recipients than Bombardier, however. For example, Pratt & Whitney has garnered $3.3 billion from Industry Canada since 1970.
Despite the multiple claims for subsidizing businesses with tax dollars - higher economic growth, more jobs and extra tax revenues - justification for such corporate welfare wilt when examined closely. For instance, one of the world's foremost experts on business subsidies, Terry Buss of Heinz College, Carnegie Mellon University, has noted how the various claims often result from correlation-causation errors. (That the rooster crows and the sun rises, doesn't mean the former caused the latter.)
Also, the government and industry studies that promulgate such myths fail to account for how "gains" to one region are necessarily offset by losses elsewhere.
The simplest example of this substitution effect occurred in 1986 when Industry Canada helped pay for the construction of a new fish-processing facility in Quebec at a cost of $2.2 million.
The justification was that an additional 250 jobs would be created when the new plant opened its doors. However, as the auditor-general noted in 1995, the nearby existing fish-processing facility (which also received federal subsidies) soon closed with job losses equivalent to those created by the new market entrant.
Net employment gains were zero because jobs were transferred - not created - at the cost of taxpayer subsidies.
Corporate welfare isn't inevitable as policy. In the 1990s in Alberta, after a plethora of loans and loan guarantees signed during the Peter Lougheed years went south, leaving taxpayers with a $2.2-billion loss, former premier Ralph Klein's then-government decided it was out of the business of being in business. It was a pledge and a legislature-approved policy to which the Klein government mostly stuck.
There is nothing contradictory about wanting Bombardier, Pratt & Whitney or other businesses to thrive and yet opposing taxpayer subsidies based on the empirical evidence.
Corporate welfare is costly and taxpayers don't need to be continually dragged into corporate battles for market share.
Mark Milke is a senior fellow at the Fraser Institute and author of Tax Me I'm Canadian! A Taxpayer's Guide to Your Money and How Politicians Spend It.