The following is my submission to the Nova Scotia Finance Minister on the province's tax review, which I sent yesterday:
Dear Ms. Whalen,
I’m writing you during your budget consultation process to encourage you to liberalize the Equity Tax Credits, which is essential for sustaining the fastest growing segment of the Nova Scotia economy.
I join Jevon MacDonald in his call for a minimum investment ceiling of $250,000 and that the credits be extended to trusts and businesses as well as individuals. I’d like to go beyond his call for a pan-Atlantic ETC by saying the credit should be awarded to investors in Nova Scotia companies regardless of where they reside.
A liberalized ETC rewards excellence in the Nova Scotian economy. The startup boom is a global phenomenon, and Nova Scotia competes with the best in the world in the creation of cutting edge, innovative companies. According to Entrevestor data, there were about 160 startups in Nova Scotia at the end of 2013. Startups (including exited startups) employed about 1600 Nova Scotians. Their staffing grew 43 percent in 2013, and their revenues 30 percent. In Atlantic Canada, the average wage at a startup is about $53,000. International startup specialists such as Colin Mason, Professor of Entrepreneurship at the University of Glasgow, are studying Nova Scotia as a burgeoning startup community developing in a challenging economy.
Governments around the world recognize the growth potential of startups, which is why most developed jurisdictions have some form of investment tax credit. My own research shows seven Canadian provinces and Yukon offer such credits. (The exceptions are Alberta, Ontario and Saskatchewan.) In the U.S., 30 states (or 71 percent of the 42 states with personal income tax) offer investment credits. Some states, such as Arkansas and Minnesota, offer tax credits that benefit investors living inside or outside their states. (You can find more information on the Minnesota program here.)
Here’s why ETC Improvements are a good idea:
1. The ETC channels private capital into the fastest growing segment of the economy. Nova Scotia’s economy rarely grows by more than 1 percent annually, exacerbating pressures on the provincial treasury and the out-migration of productive citizens. The best way to grow the economy is to channel money into the segment that is growing the fastest.
2. Almost two-thirds of the capital lured by ETCs comes from private investors. That means the government makes a minority contribution. The private investor, not the government, choses the investment target, increasing the chances of success, and the government doesn’t have to answer questions if an investment flops.
3. ETCs encourage companies with headquarters in Nova Scotia. That means the provincial economy and society benefit immensely due to the growth of large businesses headquartered here, paying taxes here, donating to charities here. It’s a far, far stronger economic strategy than offering incentives for the attraction of foreign businesses.
4. It’s relatively inexpensive (even before the resulting tax gains are calculated). The most recent figures I’ve seen (2010-11) show ETCs cost the Treasury $5.1 million a year. That could be quadrupled and the ETCs would still be a modest economic program.
5. What’s more, it would probably increase tax revenue. A 2010 study, commissioned by British Columbia’s Ministry of Small Business, Technology and Economic Development, concluded that for every $1 of provincial tax credits issued under the province’s venture capital program, recipient companies generated $1.98 in provincial taxes.
6. By increasing the maximum investment to $250,000, we can free up management time at startups. This is a huge factor. If a company needs $1 million in capital, it’s a lot easier to find four investors than 40 investors. By cutting the time involved in raising capital, we’re allowing managers to focus on operations, increasing their chance for success.
7. Finally, Nova Scotia has the opportunity to become the first province in Canada to offer investment tax credits to people outside the province. That would draw national attention to the province’s startups and attract private capital to create great jobs here. By being first, it would be easy to get the national media to highlight the investment opportunities here.
The arguments against ETC improvements can easily be proven weak:
1. “The Treasury will lose money.” Point No. 5 above shows that the B.C. government has concluded the government doubles its revenue from investment tax credits. If the Nova Scotia Finance Department is worried about losing too much money, it could easily cap the program each year.
2. “The government can’t choose the companies seeking investment.” This can be a benefit, because it means the government isn’t responsible for high profile failures. What’s more, the government can narrow the focus of the program to ensure the money is channeled into high profile companies.
3. “Investors would make these investments regardless of the tax credit.” Individual investors may back some of these companies regardless of the ETC. But by increasing the ETC, the government will increase the overall amount that the investment community in total can sink into young businesses. There is a huge demand by these young companies for capital, and the expanded ETC would help them meet that demand.
4. “The duty of the Finance Department is to raise government revenue, not nurture economic growth.” This statement is a fallacy. In the short- and the long-term ability of the government to raise revenue depends on the strength of the private sector. A plan to nurture high-growth companies is the best way to ensure that Nova Scotian-owned companies support the government today and in the future.
I hope your consultation process results in improvements to the tax system, and that these include a liberalized Equity Tax Credit. If you or your officials wish to discuss this issue further, please don’t hesitate to contact me.
Yours,
Peter Moreira
