The Manitoba Advantage
Appendix 2: Manitoba's Competitive Environment for Manufacturing
Manufacturing is Manitoba’s largest economic sector, accounting for 12% of provincial GDP and two-thirds of total foreign merchandise exports. Approximately 70% of Manitoba’s merchandise exports to the United States are manufactured goods.
In 2006, manufacturing industries employed over 66,000 people in Manitoba, or one in nine Manitoba workers. Many more Manitobans work in industries that provide goods and services to the manufacturing sector. Only in Quebec and Ontario does manufacturing account for a greater share of total employment.
Manitoba’s manufacturing shipments continued to grow in 2006, increasing 5.2% to $14.2 billion. This contrasts with Canada’s performance of a 0.6% decline. Manitoba’s shipments growth has outperformed Canada’s in five of the past six years.
Manitoba’s manufacturing sector is highly diversified, producing a broad range of industrial and consumer goods. Major manufactured goods include urban and intercity buses, aerospace equipment, smelted metals, industrial chemicals, machinery, pharmaceuticals, processed meats, processed vegetables and grain products, furniture, plastic products, manufactured windows and fabricated metals. Manitoba is North America’s largest manufacturer of buses. Canada’s largest furniture factory, owned by Palliser Furniture Ltd., is located in Manitoba. Maple Leaf Foods operates one of the world’s largest and most technologically advanced meat processing plants in Brandon, Manitoba’s second-largest city. Manitoba is also Canada’s third-largest aerospace centre.
Manitoba’s competitive and cost-effective business environment continues to attract manufacturing investment. Manufacturers are taking advantage of the province’s central location and its excellent transportation links to the rest of North America. Industrial and commercial land costs are lower than in many other major metropolitan centres, and Manitoba’s electricity costs are among the lowest in the world. Manitoba has a skilled and well-educated work force ready to take advantage of the opportunities provided by the province’s growing manufacturing sector.
Manitoba Finance’s competitiveness model is used to compare the tax structure and cost environment for a representative small and larger manufacturing firm. The model is used to assess Manitoba’s competitive position relative to several other North American cities.
The model simulates start-up costs, operating costs and financial and taxation profiles over a period of twenty years. It incorporates future changes in taxes that have been announced by the federal and provincial or state governments1. Manitoba measures that have been announced but which are subject to balanced budget requirements have not been incorporated into the model. The representative firms’ profiles have been updated using the most recent data available from Statistics Canada, local economic development boards and other public information sources.
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1 The model reflects information available as of March 22, 2007.
Interjurisdiction Competitiveness
The following indicators are used to assess cost and tax competitiveness for both a small and a larger manufacturing firm over a 20-year period:
- net cost of investment, or start-up costs (including applicable taxes)
- pre-tax net income
- effective tax rates
- internal rates of return
The model assumes actual costs for each city and calculates net revenue and cash flow, including start-up costs, based on the operating costs in each location. The results for each city are compared to the overall average of all cities for each of the indicators and presented in the charts that follow.
Net Cost of Investment
The costs of starting a manufacturing plant (land, buildings, and machinery and equipment) are lower in Manitoba than the average for all cities. Taxes have a negligible impact on net costs. Investment tax credits on capital asset purchases reduce the net cost of investment. The net cost of investment for larger metropolitan centres tends to be higher than the overall average, primarily because of the cost of land and construction labour costs. As a result of Manitoba’s growing economic prosperity, land values in Manitoba cities have increased at a higher rate than the average, but investment tax credits on capital assets have mitigated the land price increases.
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Pre-Tax Net Income
The model calculates pre-tax net income by subtracting from a common level of revenue the following location-sensitive operating costs:
- average manufacturing wages
- local utility charges (electricity and telephone)
- interest costs
- capital depreciation
Pre-tax net income is used to compare Manitoba’s cost competitiveness to the other locations. A higher pre-tax income indicates lower operating costs relative to another jurisdiction. The sales figures used in the simulation model are fixed across the cities, $4 million for the small firm and $45 million for the larger firm, for years five through 20. Production material costs are also fixed across jurisdictions.
Brandon and Winnipeg yield the highest pre-tax net income for both the small and larger manufacturing firms. A talented, well-educated and productive labour force, low utility costs and lower than average start-up costs contribute to the cost advantages of operating a manufacturing plant in Manitoba.
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Effective Tax Rates
Effective tax rates are generated by computing gross taxes as a proportion of pre-tax net income over the 20-year period. The following operating taxes are included in the analysis:
- corporation income taxes
- local property and business taxes
- corporation capital and U.S. franchise taxes
- payroll taxes
- workers’ compensation premiums
- statutory pension and unemployment insurance premiums
- employer-paid health premiums
The following tax expenditures that benefit the manufacturing sector are also taken into account:
- investment tax credits
- accelerated capital cost allowances
- preferential tax rates
Not included in the model are enterprise zones, grants, and other forms of governmental and third-party financial assistance programs.
For both the small and larger manufacturing firm, Manitoba’s effective tax rates are below both the overall average and the Canadian city average.
Overall Competitiveness
Overall competitiveness is compared by calculating internal rates of return. The internal rate of return is commonly used for business investment and location decision making. It measures the expected profitability of an investment. The higher the internal rate of return, the more attractive the investment. Generally, a firm will only consider investing in a project with an internal rate of return that is higher than the firm’s cost of borrowing or discount rate. The model calculates the internal rate of return for each city using start-up costs and cash flow over the 20-year period, discounted using commercial interest rates specific to a small and a larger manufacturing firm. The following charts illustrate the combined effect of taxes and costs on the internal rates of return for the representative small and larger manufacturing firms in the selected jurisdictions.
The internal rates of return for both Winnipeg and Brandon are above the overall average of the cities included in the study. Brandon has the highest internal rate of return and Winnipeg has the fourth-highest internal rate of return for both the small and larger manufacturing firms. Among cities with populations over 500,000, Winnipeg has the highest internal rate of return for both small and larger manufacturing firms.
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Conclusion
For the eighth consecutive year Manitoba has reduced corporation income taxes, with further cuts announced for 2008. For the third year in a row Manitoba has reduced the tax cost of making capital investments: one-half of the Manufacturing Investment Tax Credit is now refundable and 2007 is the third budget in which capital taxes have been reduced. As a result, the effective tax rates for Brandon and Winnipeg have both improved for the small manufacturing firm, and the effective tax rate for Brandon has improved for the larger manufacturing firm. Combined with having the lowest pre-tax net income because of low business operating costs, Brandon has the best overall competitiveness for both small and larger manufacturing firms, and Winnipeg has the best overall competitiveness among cities with a population over 500,000 for both the small and larger manufacturing firms. Low taxes and the best in overall competitiveness – that is the Advantage to manufacturing in Manitoba.
