Chasing The Jobs

This week’s Nova Scotia Business Inc. (NSBI) announcement of a big payroll rebate agreement with IBM has sparked a renewed debate on the appropriateness of the program.

That announcement increased the number of possible jobs added from 500 to 750 and the average salary from $50,000 to $73,500. The maximum achievable incentive increased by $10.4 million to $22.6 million.

Simply put, the program pays employers a percentage of salary—typically less than 10%—on the net increase in employment. The programs usually run for five years, but some go longer—IBM’s is for eight years. Here are some of the issues:

  1. When in opposition, Stephen McNeil called it “corporate welfare”. It isn’t welfare—it’s a payoff. Not only is there no need to be indigent to qualify, what we really want is very rich and profitable corporations that can fulfill their expressed intentions.
  2. Payroll rebates often produce fewer jobs than advertised; some agreements result in no jobs at all. A recent report in the Herald stated that only one third of the possible jobs were achieved over the last four years.

    One virtue of the payroll rebate system is that the incentives are only provided when the jobs are created.

    Nevertheless, a completion rate of 33% is a poor return on the investment of time and effort in setting up and monitoring the arrangements.

  3. Management has in the past been guilty of overstating its case. At one time, the announcement was of “jobs created” rather than of possibilities. There was poor discipline on selection of clients or on setting realistic ranges for the number of jobs that might be created.

    More recently, the focus has been tightened on better-qualified companies. Management advises that the agreements reached since the beginning of 2014 have produced 53% of the possible jobs and 76% of the expected payroll.

    The language of NSBI press releases is more subdued—just the basic facts without much hype.

  4. Minister of Business Mark Furey, speaking on Thursday in defence of the IBM transaction, claimed that the agreement produces an excellent “return on investment” because the taxes the employees pay will be greater than the amount of the incentive. That is regrettable and highly inaccurate. Realizing a “return on investment” is normally meant to indicate that you end up with more than you started with.

    That might be true of the chronically unemployed who would otherwise be paying no taxes. The IBM announcement is about highly employable people who would be find jobs and pay taxes elsewhere if they did not find them here.

    Being here, they consume public services in education, health, transportation etc. like the rest of us. What happens during the rebate period is that other taxpayers must subsidize the employees whose jobs that are being incented.

  5. When the incentive period ends, the hope is that the employer and the jobs will remain. There has been disappointment with contract call centres like Convergys, which find it all too easy to relocate work to other jurisdictions offering a fresh set of incentives.

    But there are others—such as Admiral Insurance and Citco—that have remained after the incentives end, or sought them to support further growth.

    Ideally, the companies experience a sustainable competitive advantage from being in Nova Scotia. For Admiral, a British insurance company, the advantage is the relatively inexpensive labour and office space costs, and the four-hour time difference with customers in the UK, which makes staff here available when they want to call in the evening.

  6. Opposition Leader Jamie Baillie argues that it would be better and simpler to reduce Nova Scotia’s corporate tax rate from today’s uncompetitive 16%.

    There is much to be said in favour of that. It is simple, equitable, and avoids the substantial cost of running organizations like NSBI.

    At the same time, it is inefficient, equally favouring companies such as large service and hospitality providers who have no choice about being here.

    NSBI advises that it is focusing on the Ocean industries, Information and Communication Technology (ICT), and Agri-food and Seafood, as well as sectors of growth such as financial services, manufacturing, heavy industrial, and other ‘services’ such as energy, clean technology, and life sciences.

    Not a very tight focus, but most of the jobs are relatively high paying, and the companies can benefit from our location, cost equation, and universities.

  7. Baillie is right in principal, but a middling corporate tax rate will not on its own persuade companies to try Nova Scotia’s low-cost and talented workforce.

    Other jurisdictions are tough competitors—or just stupid. The Wall Street Journal recently reported a dismal story about two neighbouring towns competing for a company with 325 employees currently operating in one of them. That town offered $14 million in tax incentives and free land. The other town offered more and “won”. The employer moved—all of two miles.
  8. The government has done well to halt the NDP’s fiesta of large handouts, and to have tightened up the payroll rebate program. It is not perfect, but probably represents a reasonable response to competitive pressures. It’s a good thing that McNeil changed his mind.

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