A theoretical question

You know the old axiom about if a tree falls in the forest? I have a slightly different twist on it.

If your ‘incentive’ to attract a company is forgone taxes – taxes you would not have received anyway if you didn’t attract the firm – is it really cash out of pocket?

Alabama just beat out Lousiana for a german steel plant. The total incentive package was $811 million. A tidy sum to be sure – but on a $3.7 billion project. It still is far less than old McKenna used to give the call centres. Alabama ponies up about 22% of the value of the deal. 1990s call centres in New Brunswick would routinely get 25%-40% of the upfront costs. It’s just a ‘scale’ issue. $10 million for UPS on a capital/set up cost of $22 million compared to $881 million on a capital/set up cost of $3.7 billion.

The package for the steel giant includes $461 million in upfront incentives such as land acquisition, site preparation and work force training, and a total of $350 million over time in state and local tax breaks.

The tax breaks are money the state wouldn’t have recieved anyway.
There is another $55 million in road improvements that benefit more than just the company.
$45 million is for land acquisition – that may or may not be out of pocket (if the city owns the land).
$5 million to build a fire station for the whole community.
$20 million from the Port Authority – which will get easily paid back in contracts.

And in the end, voters will have to approve the $400 million via referendum.

So, is $811 million really $811 million?

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0 Responses to A theoretical question

  1. mikel says:

    That’s why its at least a better deal to have it decided through referendum. Since it is taxpayers who will pony up the dough, the taxpayers should get to decide. However, whenever a number like that is included, there are numerous things to keep in mind.

    First off, once you have the steel giant, is it going to turn into a pulp mill when the company has some bad years or the economy changes?

    Once the government has paid all that into it, suddenly when the company is on rocky ground, guess who comes knocking? UPN sound familiar?

    Likewise, steel is a heavy polluter. So again, sometimes the ‘cost’ is not worth it. Is it better to foster an economy with all sorts of small scale manufacturers so that that when it comes to envionrmental or economic decisions they don’t have you over the barrel?

    NB is a perfect example of that. Irving pretty much does what it wants with the environment, it breaks laws all over the place. Last year it got fined something like $7000 dollars and that is tax deductible.

    So the question is, do you let the giant in the door, or is there a better way? At least with a referendum the people make those decisions, and not some one party government who ‘claims’ to speak for the entire province.

  2. Anonymous says:

    If the steel mill can operate profitably and be global competitive, the incentives will be a distant memory of a drop in the bucket towards a good decision. Profitability and competitive advantage are the key factors that will determine if this is a good investment; what makes these sites better in the long run for the company’s success? The ports? Availability of energy? Stable labour? Proximity to the market?

    And don’t be thinking NB spends pocket change attracting such businsses; we simply choose death by a thousand cuts. Over $70M for a yarn factory in Altholville? Not sure of the perceived competitive advantage for that operation but whatever it was, it apparently has not worked out as expected.

    They cannot all be winners; we do need to take some calculated risk but we cannot lose sight that the companies must be successful beyond the incentives. The contact center industry had success because of a progressive telco and a readily bilingual workforce; we need to identify differentiating factors like these and couple them with government incentives.

  3. mikel says:

    A good point above, but the question is always, how do you identify winners? The above compares apples and oranges, a steel mill is a single company and that “IF” is a mighty big “IF”. There is a simple rule when dealing with expanding corporations….they want to make the profits, but don’t want to take the risks. All you have to do is promise to absorb the risks, which is what the government is doing in the case of the forest industry.

    For call centres, it was creating the right environment, namely the telecomm backbone, that attracted. But again, for how long? Many small states and countries are chugging along fine without the help of massive industries, so the idea that that is a saving grace is a subjective one. It MAY work, it may not. THere are currently two of the richest families in the world centred in one tiny province.. Manitoba doesn’t have that, neither does Saskatchewan…whose economy does better?

    So when even the idea that they should exist there at NO cost to taxpayers, thats a big caveat that taxpayers should PAY for the privelege. New Brunswickers already pay through the nose for the benefits of working for IRving and McCain.

    But there is never any knowing what will work beforehand, which is why a referendum comes in handy. If YOU are going to pay for it, you should be able to decide whether it gets done. Lots of people will say that taxpayers will NEVER vote to support companies, but there is no evidence of that.