(Originally published in the Feb. 2014 issue of the Nova Scotia Business Journal)
By Fred Morley
Nova Scotia’s new provincial government has announced that it is undertaking a review of business incentive programs. New governments often look for a new prescription for economic development early in their mandates. Smart governments take their time, get the best advice and move carefully to new models.
I remember having a hand in the last business investment framework developed for Nova Scotia back in 2000. It recognized that successful business attraction depended on a number of factors including; operating costs for incoming companies, quality and available labour, good infrastructure, suitable buildings and sites, a cooperative community and yes… business incentives.
Back in the day, we came up with a concept called a payroll rebate. It got us in the game with over 1000 different incentive programs available at the time in the US and Canada. It had the benefit of generating a return on investment. Every $1 million in new incremental payroll generated about $120,000 in provincial tax at a cost of an $80,000 payroll rebate for a net gain of $40,000. This didn’t put Nova Scotia into the vanguard of incentive programing, but it was innovative enough to get us in the game and risk neutral enough to sell to a new government.
Investment Attraction is a Competitive Game
Years later, investment attraction is still a pretty competitive game. Three months ago Korea’s Hankook Tire Co. Ltd. benefited from more than $120 million in state, local and county economic development incentives for a tire plant to be built near Clarksville, Tennessee employing 1800 people. That’s $67,000 a job. Despite the perceptions, incentives flow to many sectors in many jurisdictions, not just auto and auto parts plants in the Southern US. Similar incentives deals can be found in almost every corner of the United States. Recently Vertex Pharma signed a deal to locate its global headquarters and lab complex in the Fan Pier project in Boston. The 500 job project was helped along with $12 million from the Boston Redevelopment Authority and $10 million in life science tax incentives along with $50 million in public infrastructure financing from the state.
Louise Story of the New York Times did a very comprehensive piece on business incentives just over a year ago. Local governments in the USA shell out about $80 billion in business incentives every year. That’s just over $9 million an hour in business assistance through 1874 programs. Some states were bigger players than others. The fastest growing US state, Texas, also spends the most on incentives…about $19 billion on average over the last several years. That’s about $760 per person and over 50% of the state budget. Clients in Texas are a who’s who of technology companies…Amazon $277 million, Samsung $232 million, Apple $30 million. The list is very long.
US economic development incentives are pervasive and intensive. Occasionally some fresh new governor, encouraged by left wing or right wing think tanks will ban incentives outright. These states immediately find themselves on corporate do not call lists, a blacklisting that usually lasts until the governor is replaced or the economic development czar is run out of the state. A few provinces like Ontario say they don’t provide incentives…but they do when big opportunities in the auto and tech sector arrive on their doorstep. Quebec takes the opposite approach with incentives more aggressive than many US states, which is pretty aggressive.
So where does Nova Scotia land in the hyper competitive world of business incentives. Investment attraction incentives are never that popular with existing business….even those that qualify for incentives themselves when expansions occur. Small business hates incentives even though tax expenditures through extremely low small business tax represent a significant incentive in that sector. In many high profile cases in Nova Scotia, incentives flow to business in declining sectors which most observers view as a high risk bet. Media outlets often view incentives as a giveaway rather than the investment in the future which they often are. So in an environment where no one seems to like them, why do we still have them?
Time for a New Prescription
Largely this is a leadership issue. Leaders know that the only thing worse than winning a major deal using highly criticized incentives is losing a high profile deal because we are not in the game or even on the radar. What those in the economic development profession can agree on is, like the famous cough medicine…incentives taste awful but they work. Does this mean that we plod along with the same incentives we’ve always used? I don’t think so.
The most progressive jurisdictions find ways to enhance and improve their value propositions and this means updating and enhancing their incentive offerings. Nova Scotia’s last innovation 14 years ago was pretty good….but 14 years is a long time in the hyper-completive field of investment attraction. It’s time for a new prescription. I would bet that whatever we come up with, we probably won’t like how it tastes.
Fred Morley is the executive vice president and chief economist of the Greater Halifax Partnership. He has written over 100 articles on economic growth issues and presented his views to dozens of organizations and governments around the world. You can reach Fred at firstname.lastname@example.org.