Over the years, Quebec has earned a reputation as being hostile to business due to persistent anti-business policies. As a consequence, Montreal has declined as a hub for major corporate headquarters. With a lower concentration of large corporate headquarters, the city loses out on many economic benefits.
Cities that host a high concentration of large corporate headquarters have several advantages. The local economy gains from the increased number of high-paying jobs as well as the spin-off benefits of attracting professionals such as lawyers, accountants, and consultants and other services that benefit all businesses. The presence of these high paying jobs also has the potential to expand government revenue and help fund vital public programs.
One way to illustrate the decline of important corporate headquarters in Montreal is simply by looking at the total number. Of Canada's top 500 companies measured by gross revenue, 96 were located in Montreal in 1990. By 2011 (the latest year of available data), there were 75 -- a decline of 21.9 per cent. Montreal's national share of these headquarters dropped over the same period to 15.0 per cent in 2011 from 19.2 per cent in 1990.
Another method is to adjust by population. Doing so indicates the concentration of headquarters in a city and better reflects the benefits expected for the local economy. The number of top 500 corporate headquarters in Montreal adjusted for population in 1990 was 2.9 per 100,000. Over the following 21 years this concentration decreased by 31.0 per cent, reaching 2.0 per 100,000 in 2011.
The above numbers could reflect a number of things, including corporations leaving Montreal or the corporations in Montreal falling off the top 500 list. In either case, they show the importance of Montreal as a major corporate city is in decline.
The decline of corporate Montreal has coincided with deterioration in the business climate resulting from adverse provincial policies. In a report titled "Canadian Provincial Investment Climate," the Fraser Institute has regularly measured business climates based on surveys of leading investment managers who indicated what policies and conditions they thought were important in creating and maintaining a positive investment climate. This research has shown Quebec is behind most other provinces; the 2010 edition ranks Quebec seventh out of 10.
The investment managers identified government fiscal prudence, the overall regulatory burden ("red tape"), labour market regulations, and transportation infrastructure as being important to their investment decisions. But they particularly pointed to both corporate and personal income taxes as being significant factors. By looking at taxation in Quebec we can better understand the cause of corporate Montreal's decline.
Quebec's corporate income tax rate currently stands at 11.9 per cent. This rate exceeds those set by the provincial governments in Montreal's main competition for Canadian corporate headquarters: Calgary (10.0 per cent), Vancouver (10.0 per cent), and Toronto (11.5 per cent). While the Quebec government has made Montreal less competitive by increasing corporate taxes in recent years, provincial governments in competing jurisdictions were reducing rates to make their business climates more attractive for investment and economic activity.
Quebec's high personal income taxes have also made Montreal uncompetitive as a locale for headquarters. In 2012, Montreal's top income earners paid a combined federal and provincial personal income tax rate of 48.22 per cent. This, again, compares unfavourably to the combined rates in Calgary (39.00 per cent), Vancouver (43.70 per cent), and even high-taxed Toronto (47.97 per cent). Higher taxes on upper-income Quebecers put Quebec firms at a disadvantage in attracting and retaining talent and makes corporations more hesitant to locate their headquarters in the province.
This disadvantage will only worsen this year with the Quebec government increasing its top income tax rate by 1.75 percentage points. Also troubling, the new higher rate will kick in at the relatively low income level of $100,000. This low threshold will apply to many skilled professionals and compound the difficulties Quebec firms face in attracting and retaining workers.
The government of Quebec should take seriously the long term decline of Montreal as a major corporate hub. Ever increasing taxes on corporate and personal income have made Montreal's business climate uncompetitive compared to other major Canadian cities. Making the tax system more competitive would be an important step towards securing and recapturing Montreal's position as one of Canada's corporate hubs.
This column was written with assistance from Hugh MacIntrye, Fraser Institute policy analyst.