The video game industry is worth billions of dollars, but this sector has gone through highs and lows on its way to becoming a behemoth. In the late 90s, the industry was still recovering from a recession a decade prior and its future was uncertain. Yet, in the middle of it all, lobbyist Sylvain Vaugeois and Quebec finance minister Bernard Landry took a gamble to improve the province’s ailing economy via arefundable tax credit for video game companies.
Today, this de facto subsidy is credited for attracting French video game giantUbisoft to the city of Montreal, and creating an entire industry in the province. However, the scheme being a tax credit, it is ultimately the taxpayers who are footing the bill for large studios. With additional concerns looming over the horizon about competition within the industry, some wonder whether this good idea might have run its course.
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How The Quebec Tax Credit Works
The Refundable tax credit for the production of multimedia titles covers up to 37.5 percent of labor expenditures for game studios if one of theirmultimedia titles is available in French. If no title is available in French, then only 30 percent of labor expenditures are refundable. Furthermore, the tax credit only applies to up to $100,000 per employee, so any salary that exceeds that amount will not be refundable under the policy.
The Quebec government estimates that this subsidy cost taxpayers $253 million in 2021. In exchange for that sum, Quebec is a global video game hub centered around Montreal where over 200 studios have set up shop. Last year several big names announced plans to move into the city, which most recently includes the studio behindGenshin Impact, miHoYo.
The Benefits Of The Tax Credit
This policy enticesvideo game studios from around the worldto create jobs in Quebec. In turn, the companies and their workers pay taxes in the province while growing the local economy. As such, the relative cost of the tax credit is theoretically offset by the economic activity spurred by it.
Additionally, the industry’s presence over the years heavily transformed the province’s labor market. With a constant demand for high-skilled workers in the technology sector, universities began offering game development programs that created a large pool ofattractive labor for video game studios. For example, Concordia University launched a partnership with Ubisoft in 2019 to provide an entire course on game design. Even the subsidy’s most vocal detractors can’t deny that it almost single-handedly fostered the entire video game industry of Quebec.
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The Downsides Of The Tax Credit
Though the tax credit greatly benefited the economy of the province, as an increasing number ofcompanies like Quantic Dream took advantage of it, critics started asking whether the policy had done its job and was ready to be phased out. There’s an argument to be made that it creates a significant barrier to entry for new firms. It significantly increases labor costs, for which those firms need to raise more capital. Local start-ups also don’t have access to the credit, so they’re competing for top talent with larger, heavily subsidized firms.
Because of the way the tax credit is designed, it also mainlybenefits foreign corporations like Warner Brosthat often set up satellite offices. Moreover, the policy gives a massive advantage to large multimedia companies over non-multimedia tech companies that have a harder time recruiting workers who prefer working for a higher salary.
Another argument against the subsidies is that they are a refundable credit. Hence, if a company owes less than their value in corporate taxes, the government cuts them a check every year to pay for the difference. Sincelabor is the biggest costfor video game companies, their profits as well as their corporate tax on it often fall short. In the end, taxpayers tend to line the pockets of large studios.
Lastly, there is the income tax argument. In Quebec, the marginal provincial tax rate is 20 percent, but the effective rate is about 14 percent. As such, the government is nowhere near recovering the 37.5 percent-per-employee through corporate and personal income taxes. Additionally, those workersenjoy generous government servicesthat are not included in the calculation.
Risks of Phasing Out Quebec’s Tax Program
After 25 years, it’s evident that there is astrong video game industry in Quebec, and it’s only growing stronger every year. Evidently, the government of Quebec has found that it becomes hard to pull the plug once everyone is hooked to it. In 2014, policymakers tried to reduce the tax credit by 20 percent, and large studios, including Ubisoft, threatened to leave the city if the proposal were to be adopted. Their employees, afraid of losing their livelihood, also sprung into action demanding that politicians save their jobs.
In spite of taxpayers footing a growing bill at the behest of video game companies, it looks like this government subsidyis here to stay, for now. Yet nobody knows what the future holds, and only time will tell whether the refundable tax credit for the production of multimedia titleswill withstand the test of time.
