Too much of a good thing?

Mar 25, 2019

The Sunday Business Post, 24 March 2019, Being in New York City around St Patrick's Day, little enough local news gets an airing compared to the wall to wall coverage of the Parade and the celebrations.  Successfully breaking through the wall of shamrock though were comments by the New York Mayor Bill De Blasio about the use of incentives to attract business.

 

Cities and states across the US compete aggressively with each other for jobs and investment using tax incentives, infrastructure undertakings and grant packages.  In the US, local government really means something and local authorities and mayors have significant resources and significant control over how resources are deployed. 

 

It was big news here a few weeks ago when Amazon decided to pull out of building a major headquarters in New York despite a very generous package of incentives.  Making the news this week was a project called Hudson Yards, a new 28 acre complex of office buildings, apartment blocks and shops on the site of a former railway yard on the west side of Manhattan.  According to the New York Times, the tax breaks and other government assistance for Hudson Yards have reached nearly $6 billion.  A big part of that was to do with extending a subway line to the new venue, along with some tax sweeteners for the companies promising to locate their businesses there.  The project is now largely complete, but while Mayor Bill de Blasio was initially a supporter of the Project, he is now talking about re-evaluating state and local economic development programs.  It is as if the incentive regime has gone too far.

 

He may have a point.  The kind of government largesse which New York City can dole out can really only be dreamt about on the island of Ireland.  That's because, even in a post Brexit situation, neither the UK nor the Irish administrations will be inclined, either by law or by temperament, to provide tax breaks for any one development or any one company.  The main reason for this is of course the EU rule which curtails providing selective state aid. 

 

State aid is all about having a level playing field across Europe for all citizens and companies.  The playing field cannot be level if all the playing field is located in one particular EU country or city.  Even though, at the time of writing, the eventual departure date for the UK coming out from under the EU umbrella of rules and regulations is still in doubt, it strikes me as unlikely that the UK will want to wander too far from EU expectations and norms as it tries to hammer out its future relationship with the EU. 

 

It can't be stated often enough that the EU/UK withdrawal agreement would be better described as an extension agreement – providing a window of opportunity for the negotiation of the future relationship.  In the context of such negotiations, a UK government offering New York style incentives say for Liverpool would not go down well with representatives of the EU governments who can't put in place similar incentive packages for Limerick or Lyon or Lisbon.

 

Nor is it just the State Aid rules which have a bearing on what EU countries can and cannot do.  Some EU rules become almost invisible, because in many respects they are profoundly uninteresting.  Included in this category are directives which pasteurise and homogenise the approach to taxing companies across Europe.  Some EU tax plans do make headlines – like the attempts to put in place an EU wide corporate tax system called the Common Consolidated Corporate Tax Base, or the proposals on how to tax high-tech companies in the so-called digitalised economy.  But in tax terms the real success of the EU in recent years has been getting cooperation and collaboration between its tax authorities on the one hand, and between the Departments of Finance and Treasuries on the other.

 

There is one potential problem with all this worthy initiative at EU level.  It may not be in the best interest ultimately of EU citizens.   While the authorities in New York were busy working away at extending rail lines, the EU Competition authority vetoed the proposed mega-merger of Germany’s Siemens AG and France’s Alstom SA’s rail businesses last month.  Disquiet at this decision in French and German government circles is understandable.  It seems legitimate to point out that such a merger was more about challenging competitors from outside the EU than about preserving competitive advantage within the EU itself.

 

Nor is this a new phenomenon.  It is almost 15 years ago the Irish government was obliged to withdraw a grant offer to a major US multinational because of state aid rules, even though it appeared at the time that Ireland was the only country within the EU in play for the investment.  While free for all competition is not always a good thing when it comes to some goods and services, particularly social services such as transport, having too many restrictions on competition is not good. 

 

There is a balance to be struck between overzealous competition regulation, and overgenerous subvention of the type which is now causing concern to Mayor De Blasio.  The evidence from the past month is that authorities on both sides of the Atlantic are not getting that balance right.

 

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland