Tax write-offs for manufacturing should be temporary, says think-tank

Ottawa, Ont. – The federal and Ontario governments made a smart move by offering manufacturers tax write-offs, but the deal shouldnít last forever, says a prominent Canadian think-tank.

According to the Conference Board of Canada, the move by both the federal and Ontario governments to help manufacturers adjust to the high value of the dollar by extending accelerated capital cost allowances for manufacturers was a good move. However, the Conference Board says the write-offs should be temporary.
“It is appropriate for the federal and Ontario governments to help companies adjust to the extraordinary rise in the value of the dollar over the past six years,” says Glen Hodgson, senior vice-president and chief economist. “But making these measures permanent would distort investment toward the manufacturing sector and away from other sectors of the economyówhich may lower Canadaís productivity growth in the long run.”
The briefing, “Should the Accelerated Capital Cost Allowance be Extended Any Further?”, argues that the federal government was correct to introduce a two-year window for accelerated capital cost allowances in its 2007 budget, and then to extend the measure to 2010. Ontarioís 2008 budget introduced parallel measures that extend through 2010-11, which is a welcome alignment of federal and provincial tax policy.
But is this enough time for Canadian companies to make machinery and equipment (M&E) investments that improve firm efficiency and raise productivity? Current evidence, in terms of new M&E investment, indicates that many manufacturers are taking advantage of the measure.
Overall M&E in the manufacturing sector is forecast to grow modestly over the next two years ó 3.7 per cent in 2008 and six per cent in 2009. However, these numbers are skewed by the sharp decline in M&E investment in the auto sector, which is bearing the brunt of the adjustment pain. Other sectors such as aerospace, food manufacturing and electronic equipment are forecast by the Conference Board to achieve double-digit growth in their M&E investments this year.