Deconstructing an ‘incentive’ deal in NY

At first glance it looks like the New York government gave up a pile of cash to get 108 Norampac jobs but how much did this deal actually ‘cost’ New York?
The company got $60 million in brownfield tax credits, administered by New York State Department of Taxation and Finance. Cost to the taxpayer = zero. These are tax credits paid against actual taxes owed – and the company wouldn’t be paying those taxes if they didn’t set up the facility.
The company got 10 megawatts of hydropower, from New York Power Authority. Cost to the state = zero. I believe the NYPA is charging industrial clients for this power at the full cost of production (including capital). It is just that it is cheap to produce hydro-electricity and the NYPA is not adding in all the overhead and other costs that make electricity in NY among the most expensive in the USA. I argue that NB Power should do the same.  Making industrial customers pay their share of NB Power’s overhead and other other indirect costs was fine when the rates were relatively competitive.  Now that the rates are becoming a serious competitive disadvantage, we need to look at other options.  For example, convert Colson Cove to a Nat Gas fired facility and offer the power “at the full cost of generating the power and directly distributing it to the customer” without all the additional costs.  There are those that would argue this is not ‘fair’ to other rate payers.  That may be true in some sense but if these rates are contributing to businesses closing their doors or prohibiting new investments, I think it is something we have to take seriously.
The company got $5 million in Empire Zone tax credits. Cost to the state = ??. I think these tax credits are also based on taxes owed ( Again, if Norampac doesn’t set up in NY, the state doesn’t get the taxes anyway.
The company got $3.5 million from the New York State Energy and Research Development Authority to purchase/install energy-efficient systems (will conserve 31 million kilowatt hours of electricity annually). This is a cash benefit but it is part of state and federal programming to encourage energy efficiency.
The company got a $500,000 utility infrastructure grant, through National Grid’s Capital Investment Incentive program, and various resources from Niagara County Employment and Training, and the Niagara Falls Water Board.
It looks to me like if you back out the tax credits, there isn’t much taxpayer cash on the table here. The company makes a $400 million+ investment, creates over 100 jobs at $80k per job and the state forgoes some taxes for 20 years. Meanwhile, the state generates around $1.5 million per year in taxes off the employment income generated at the plant.

If that plant was in New Brunswick, they wouldn’t be paying HST on business costs (which they would be in NY but the tax credit program covers sales tax).  Their corporate tax rate would be lower here (reducing the impact of the tax credits).  They could receive energy efficiency programming (there are federal programs for this) and they could receive training support (there are programs for this).

It seems to me the only two roadblocks to NB being competitive for this NORAMPAC plant (aside from fibre issues – I don’t know the impact of this) would be the tax breaks and the cheap power.    I argue we should look at tax breaks because the NB government generates over 90% of its tax revenue from a new industrial project such as this off employment income anyway.  If the company sets up here and you waive all their taxes – income and property (the 10 percent) – the province loses nothing (over status quo) and gains (90 percent) a couple of million per year for 20 or 30 years in employment income-based taxation.

I know that a lot of folks don’t like this talk but please understand the important difference between cash grants (or forgiveable loans) and tax breaks.    One is taxpayer dollars out the door and one is ‘foregoing a small part of a future tax stream – 10 percent or so – to get 90 percent).  This risk burden is eliminated (no Atcons) and to the company a tax break is the same as cash (only spread out over a longer time horizon).

You get the same effect by dropping tax rates across the board but, as I have said before, you also lose the tax revenue from the 95% of businesses that are here because the market is here and they ain’t goin’ anywhere.  Those guys should pay a competitive rate of taxes.

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4 Responses to Deconstructing an ‘incentive’ deal in NY

  1. mikel says:

    Good post, almost worth the wait:)

    Just two points to add: its often the case that ‘announcements’ of what a company gets are not nearly the same as what actually happens. It’s also often the case that the company doesn’t offer nearly the jobs that were first assumed.

    IF hydro were such a big deal, then why wouldn’t they be setting up in Quebec, which has dirt cheap rates, and is right across the border from New York?

    Finally, we don’t KNOW that tax credits NEVER result in money back to the company (the article didn’t say whether the credits are refundable or non refundable). So what I find strange is that you thought it was a fine idea to end a tax credit program for film and video, but its a great idea when NY does it for an industrial plant. The government ‘claimed’ that it cost the province $3 million, yet that doesn’t take into account the number of jobs, which even conservative numbers meant that the taxes from the jobs and the investments at least meant that it was a money maker for the province (and since you were on holiday it was announced that instead of the tax credit program the government is now DIRECTLY subsidizing numerous film productions-or at least advertising its investment much more).

    Finally, if there were a clear cut case where Company X would ride into town, create X direct high paying jobs, then I suspect most, or at least many would support such a deal to lower hydro costs for job creation. That’s a policy that you (or somebody) should champion as at least a private members bill to some tory to at least introduce. However, it usually comes down to devilish details. But since power rates vary from year to year, its usually a case that a government will simply offer some other credit or perk to offset the power bill anyway.

  2. The NY tax credits – most of them based on the link I put in the post – are based on ‘taxes owed’. This is fundamentally different than the NB film tax credit which shouldn’t be called a tax credit program at all because it was a cash grant based on the amount of spending in the province. As I pointed out at the time, it is likely that most film production activity in NB under that program was costing the province more than it would ever receive in new tax revenue. I support tax credit programs that are tied directly to corporate taxes owed.

  3. mikel says:

    Don’t mean to give a hard time so soon, but just ONE production company in SJ has TEN full time employees. The Mayor of Caraquet even joined in by pointing out how much a Quebec production poured into his town over the fall season. The government states that AT MOST it only ever put 4.4 million into the program, while last year it was only 2.7 million. So by that standard at the VERY least the tax credit program paid for itself.

    I don’t know if that’s a typo, but clearly you don’t “support tax credit programs that are tied directly to corporate taxes owed”. First of all, in reading the article I found almost NO tax credit tied to taxes owed.

    The Empire Zone tax credit is being replaced because of the scandals that have plagued the program where companies did not create the jobs that it got tax credits for. It should be a red flag that it is even still being offered since it has been replaced with a smaller Excelsior program. The Brownfields Tax Credit, the biggest number on the page, is a REFUNDABLE TAX CREDIT, no different than the tax credit that WAS being offered to film production in NB.

    There is no mention of what most of the other incentives are, but of the explanations given, $4 million is a ‘cash grant’, plus free or subsidized water. That still leaves $70 million in the ‘package’ that is unaccounted for.

    In short, this isn’t structurally any different than the film production tax credit you decried, its just on a larger scale (maybe, I would maybe hazard a guess that there are more than 100 jobs in film production in NB, which is all that this NY deal secured).

    Don’t want to just bellyache about inconsistency though-its worth pointing out that NYPA is a branch of the energy utility that focuses on renewable energy resources, and specifically blocks a percentage of that towards economic development. As David says, that would make sensible policy. In NB, instead of the previous bureaucratic divisions at NB Power, it would make more sense to divide the utility along the lines of how the energy is produced. So the the dirt cheap power from Mactaquac could go for one use, and nuclear/coal to another. The problem in NB is when this goes to forestry companies, who already get dirt cheap wood and basically free transportation costs on the highways.

    Finally, just like to say that as well as tax credits to CIT, I think David has said, or SHOULD say that tax credits as a percentage of payroll tax or labour credits is also a good use of money. The crux is so long as it doesn’t cost MORE to taxpayers than it brings in. So the video game industry all across canada is getting into labour credits, Ontario is even sinking direct investments into it, all to compete with Quebec. So to ‘play the game’, the province simply HAS to make those kinds of investments-or else it loses out.

    Good to see you posting again, btw.

  4. Anon says:

    Just a few issues that quickly come to mind…

    1) We have high power costs because our costs or generating power are high. Are you assuming this is because we do not have enough volume? This assumption would be unwarranted unless we have some deeper understanding of what path expansion would occur and what the incremental costs would be.

    2) Tax incentives are in place. We have “some of the lowest rates in North America” (I think the “some of” was recently dropped). Do our corporate taxes need to be lower?

    3) According to NBPower’s Website… “NB Power’s customers enjoy electricity rates that are among the lowest in Atlantic Canada and north-eastern North America. These low rates are a major cost advantage for industry and business in New Brunswick.”.

    So, are our rates expensive? Do we have the comparative #’s? How much of an impediment to economic growth do they represent? (yes, I think Natural Gas is a problem though… it’s all very new to our region, and we are far from having any regional advantage)
    4) Do we understand the influence that cheap energy and lower taxes will have on relocation? And what clusters are most influenced by these factors? Are these factors influential enough to cause any substantial impact?

    5) If we are to conclude that a “cheap energy strategy” is a good ED strategy, then we shouldn’t we look at policies that create an energy cluster that produces cheap energy? Subsidizing the end output of an inefficient process will not incent that process to become more efficient, and the incentive will therefore be unsustainable.

    6) Under what TRED strategy are we undertaking such subsidization policy – if we so choose? What clusters do we wish to attract? Which clusters have the greatest opportunity to contribute to New Brunswick, long-term? Candy Making? Food Processing? Wood Products, and Oil Refining? My guess is that these wouldn’t be targets :)

    Our NB-ED strategy needs to stop “shooting from the hip”. We employ many of smart people to think about ED; there are also a very competent pool of researchers available to look at ED strategy more deeply – both from academic and private sectors.

    My concern is that we are not fully utilizing our intellectual resources to effectively plan our economic growth strategy. We can’t be lemmings running in one direction, then another. Fundamentally the ED planning system in NB is made less than optimal by the lack of information sharing, analysis, and planning. New Brunswick spends 100’s of millions of dollars in ED each year, but we don’t know where this goes, or under what policies, and strategy this spending supports.

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