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Cuomo's Start-Up NY is flawed tax policy, but great electoral politics

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You've probably seen the commercials running: "The new New York, dozens of tax free zones: move here, start here, Start-Up New York."

This is Cuomo's latest scheme to entice businesses to come here (or rather upstate). Apparently, our access to academic and research institutions, market-size, well-educated workforce, proximity to markets, vibrant culture, transportation systems and infrastructure - aren't sufficient lures.

Of Cuomo's tax reform policies, Start-Up New York is the most radical - and yet has gotten little critical analysis.

This is the latest incarnation of a tax program and a development policy that has been in place for a decade. States are so willing to set aside tax revenue from businesses - and in many cases, giving them incentives that the rest of us pay for - to entice them to set up shop. The theory is that they will bring (or merely keep) jobs, and that those workers will pay their income and property taxes and isn't that wonderful.

But think about that for a moment: a corporate enterprise (who now is considered a "person" from the point of view of buying, I mean contributing, to elections) that depends on police and fire protection, that depends on roads and street lighting, that benefits directly from the quality of public schools, gets to shift its burden for those services onto the very workers it hires.

NYS has long been in the contest with other states (though they do it better) offering tax abatements and other goodies to corporations, who pit one state against another and shop the best deal, then rarely fulfill the promises of jobs creation and investment.

It is important to note that Start-Up New York represents one of the most significant expansions in the use of tax credits in the state's history - previously, tax credits were mainly to encourage redevelopment of brownfields (a noble purpose) and the film industry (questionable benefit but makes the politicians look good).

"This is new and unique," said Leslie Whatley, Executive Vice President for the START-UP NY. "Our intention is to create jobs, boost the economy and improve New York's competitive position. We will build on the progress Governor Cuomo has made. We got tired of hearing businesses leaving New York because they are taxed too much and not competitive...So we are creating tax free zones in conjunction with educational institutions. This will reduce firms' structural cost by reducing tax. No tax means no tax. No fine print."

With this mindset, nationally, states and localities have given away to corporations $80 billion worth of tax incentives - New York spent $1.7 billion in business tax incentives in 2013, an amount that has mushroomed since 2005.

And here's the irony: business tax abatements don't actually work.

Even Cuomo's own New York State Tax Reform and Fairness Commission, co-chaired by H. Carl McCall and Peter J. Solomon came to that conclusion in their report, "New York State Business Tax Credits: Analysis and Evaluation."

Noting that NYS provided an estimated $1.7 billion in 50 business tax credits to encourage taxpayers to engage in specific activities, the report states, "There is, however, no conclusive evidence from research studies conducted since the mid-1950s to show that business tax incentives have an impact on net economic gains to the states above and beyond the level that would have been attained absent the incentives. In addition, business tax incentives violate principles of good tax policy and tenets of good budgeting."

What is more, "a 2008 audit by the NYS Comptroller showed that job targets were often not met."

Indeed, many states have been burned by giving away tax incentives to businesses who nonetheless do not produce the promised jobs or revenues, as Louise Story reported in her New York Times series, "As Companies Seek Tax Deals, Governments Pay High Price," (Feb 12, 2012). Or perhaps the politicians were not "burned" at all - they were just returning a favor.

"Under [Governor Rick] Perry, Texas gives out more of the incentives than any other state, around $19 billion a year, an examination by The New York Times has found. ...Yet the raw numbers mask a more complicated reality behind the flood of incentives, the examination shows, and raise questions about who benefits more, the businesses or the people of Texas..

“'While economic development is the mantra of most officials, there’s a question of when does economic development end and corporate welfare begin,' said Dale Craymer, the president of the Texas Taxpayers and Research Association, a group supported by business that favors incentives programs."

Now, encouraging economic development, business and jobs creation, innovation and investment and in the state is certainly laudable. Cuomo has gone further than any previous governor in aggressively pursuing new ventures particularly those that advance renewable energy, medical breakthroughs and such.

But tax "relief" to businesses means higher taxes or lower services to you. The pot isn't magical or unlimited.

This is a Governor who has said that throwing money into the "problem" of education isn't likely to produce improvements. So he has refused to restore $1.3 billion of the $1.9 billion in education funding that was cut during the fiscal "crisis." Also, Cuomo sees no contradiction in "incentivizing" businesses and CEOs, with clawing back pension and health benefits from public workers and retirees to pay for them.

What is more, of the $1.7 billion business giveaway in 2013, only $125 million went toward credits to encourage businesses to support the state’s social, housing, and environmental policies.

But if you believe that government plays a vital role in society, that it collects taxes as the revenue to supply those services, that businesses utilize and benefit from public services, and that their tax burden shouldn't be shifted to their very workers, there is something foul about business tax credits in general, and Start-Up New York in particular.

It's about fairness.

Start-Up New York basically gives corporations a 10-year tax holiday - that's a holiday from all taxes, from state business taxes down to local property taxes); what is more, their employees also get a 10-year holiday from paying state income taxes.

The idea is to bring in new businesses and new workers (mainly upstate).

But if the new workers who come in to the state and the community don't have to pay state income taxes - which theoretically get returned to local communities in terms of state education aid and the like - well then, the rest of us have to compensate for that lost share of the "tax pie."

Employers in that same town whose employees have to pay state income taxes are at a competitive disadvantage to those Start-Up NY enterprises whose employees don't have to pay any taxes and get to take home that much more.

The state justifies this -and the loss of local taxes - by saying that new workers in a community will spend money, adding to sales tax revenues, and will pay property taxes. But if they have families and their children increase the student population, their school districts are not allowed to increase budgets to accommodate those additional students because of Cuomo's property tax cap.

Game-Changing?

Start-Up NY is described by the Governor's office as "the game-changing initiative that, starting today, will create tax-free zones to attract and grow new businesses across the state."

“In a tax free environment, no one can match what New York has to offer," Governor Cuomo said. "Businesses that are looking to startup or expand, and most importantly create jobs, should look no further. We are leveraging our world-class SUNY system and prestigious private universities to partner with new businesses, providing direct access to advanced research, development resources, experts in high-tech and other industries and all with zero taxes for ten whole years. With an opportunity like that, it's no wonder that companies are lining up for the launch of Start-Up NY.”

The program is novel because it links entrepreneurial endeavors with State University of New York campuses and other college communities. All SUNY campuses outside of New York City and designated private colleges north of Westchester will be Tax-Free Communities.

Businesses will partner with the higher education institutions in the SUNY system as well as other universities and be able to access industry experts and advanced research laboratories - paying no rent.

Participating companies in Start-Up NY will not pay any taxes (no income tax; no business or corporate State or local taxes; no sales tax; no property tax; and no franchise fees) for ten years. Employees in participating companies will pay no income taxes for the first five years. For the second five years, employees will pay no taxes on income up to $200,000 of wages for individuals or $300,000 for taxpayers filing a joint return. The number of net new jobs eligible for personal income tax benefits will not exceed 10,000 new jobs per year.

"To be eligible to locate into a Start-Up NY tax-free community, a business needs to be aligned with or further the academic mission of the campus, college or university sponsoring the tax-free community. Businesses participating in the program will need to have positive community and economic benefits. Every business must create and maintain net new jobs in order to participate."

Businesses must be a new start-up company; be from out-of-state that is relocating to New York State or the expansion of an existing NYS company.

New York State start-ups that “hatch” from New York State incubators also will be eligible to enter tax-free communities and be eligible for the benefits under the program.

In New York City, Long Island and Westchester County, though, businesses must be start-ups or high-tech companies.

Statewide, certain types of businesses are excluded from the program, including retail and wholesale businesses; restaurants and hospitality; professional practices like law firms and medical practices; and energy production and distribution companies.

Companies will be eligible to enter into the program until December 31, 2020 and by that time, Empire State Development (ESD) will prepare an evaluation of the effectiveness of the program in order to determine whether eligibility should be extended.

Each university community will develop a plan for the types of businesses it intends to attract and the locations that will be tax-free. Businesses will apply directly to the participating college and, once a business is accepted, ESD will have 60 days to review the application to ensure eligibility.

The program bans competition with existing businesses.

One of the complaints against business incentives is that they are not monitored to fulfill the promises they make. Start-Up NY promises robust protections against fraud. Businesses will have to submit certification to ESD, and falsifying certifications will be a felony. The legislation also includes strict provisions to guard against abuses such as shifting jobs among related entities or “shirtchanging,” when a company simply reincorporates under a new name and claims its existing employees are now new jobs. In addition, Start-Up NY includes measures to prevent self-dealing and conflicts of interest. In cases of fraud, the State will be empowered to claw-back benefits granted to the business.

Companies that do not meet the terms of the program – including meeting their job creation targets – may have their benefits reduced, suspended or terminated. ESD will have the authority to review company data to ensure that jobs have been created and maintained, and to end participation by companies that have not created net new jobs. ESD will be required to publish a comprehensive annual report to enable the public to evaluate the program’s impact.

“Governor Cuomo’s transformative new approach to drawing businesses and jobs to New York, particularly to Upstate, capitalizes on SUNY’s academic strengths and unique position as an economic engine across the state,” said SUNY Chancellor Nancy L. Zimpher. “Enthusiasm at SUNY campuses across New York is high as we anticipate a windfall of innovation-driven public-private partnerships that, because of the Start-Up NY program, will create jobs and amazing new opportunities for students and researchers.”

My point is that the advantages of these close collaborations - not to mention rent-free space and access to the labs and most likely free intern labor - should be incentive enough, without the tax breaks.

And if cost-of-living and tax rates were the major deterrents, why give the tax breaks upstate, where it is already relatively cheap to function, instead of downstate where taxes and cost-of-living are high? In fact, why don't businesses now migrate upstate? This program funnels the tax incentives upstate, where arguably, they do not need such a financial incentive.

During a press availability Ken Adams, who heads ESD said, ""The Governor wanted a Texas-like, better-than Texas, or Florida experience, because we take the corporate income tax out of equation, not just personal taxes." As for the cost to the state, he said it was "theoretical.. we haven't looked at yet."

I asked what prevents Texas and Florida from immediately matching this latest Start-Up New York business giveaway? I mean, they love to give away corporate taxes.

"We have to work hard in first 6-9 months to go after businesses, because I think it will be such a success others will copycat," Whatley responded "But what we have to sell is that New York is very diverse place with a lot of different economies, different schools, different specialties, highly educated workforce that exceeds some of others, even if equal on tax base."

Precisely the point. You don't need to give away taxes - if anything, spreading tax liability around so that businesses pay their fair share lowers taxes for workers and businesses.

And what about after the 10-year tax holiday runs out? "Companies will have made that big investment so better off staying," Whatley said.

The mechanism for deciding who gets the sweetheart deal is a concern to me.

"The legislation specifically says you cannot put a company into the zone and give the tax benefit if there is a competitor in the community offering the same product or service," said Whatley. But there are ways around this, as she points out, because big businesses like Google and Amazon may be competitors on one level, but have other enterprises which are not.

They also acknowledged that some businesses are being courted - and hundreds of companies have expressed interest in applying. And since the program is limited to 10,000 employees a year, that would seem to give the state too much opportunity to choose "winners and losers."

"We would love a gold rush - friendly competition among schools to get into the program quickly, but there is a lot of buzz and excitement by companies already calling us. We would love to have the problem of having applications for 12,000 [workers] and having 2000 roll over to the following year," she said.

We are told that Start-Up NY and all the business tax giveaways are because we compete with other states. Does this mean that New York will have to legalize recreational marijuana, like Colorado and Washington? Cuomo just got authorization for new casinos, but will we now have to offer online casino gaming like New Jersey?

We also compete with other countries, and some economists are saying that the US should have zero corporate taxes in order to compete - even though no American business pays the marginal rate of 35% (and many of the most profitable companies pay no tax at all).

Indeed, Start-Up NY is just one goodie in Cuomo's basket of giveaways to businesses:

Lower Corporate Tax Rates: Cuomo is proposing to merge the bank tax into the corporate franchise tax and lowering the rate to 6.5 percent – the lowest since 1968. "These changes will modernize the corporate tax structure to reflect a 21st Century financial services sector, simplify compliance and eliminate disincentives for financial firms to invest and grow jobs in New York. When fully implemented, the proposal will provide $346 million annually in tax "relief" to New York businesses.

But financial services companies are already notorious for off-shoring their cash to avoid tax.

Real Property Tax Credit for Manufacturers Governor Cuomo proposes that the State create a refundable credit against corporate and personal income taxes that would be equal to 20 percent of a firm’s annual real property taxes. This credit would provide $136 million in tax relief to the manufacturing sector.

Eliminate Corporate Income Tax for Upstate Manufacturers which is worth $25 million in tax relief for upstate businesses,

Over a period of weeks, I posed questions to the Governor's office and to the Empire State Development Agency which is operating the program.

Specifically, I wanted to know what the cost of Start-Up NY program is; how much revenue it is expected to produce for the state; how much money is being spent on the ad campaign and where the campaign is being run (which seems odd that it is running so heavily in downstate, high-cost media markets when the aim is to bring new businesses to NYS). Finally, how does the state make up the revenue lost from taxes?

I have yet to receive an answer.

Cuomo is clearly doing a Christie - running for a landslide reelection to pave the way to a Presidential nomination - by doing the most popular thing a politician can do: cut taxes, and especially upstate where Republicans dominate.

Protest Against Cuomo Tax Plan

Meanwhile, in a demonstration at New York State Office building in Hauppauge, Long Island on February 20, local groups announced their participation in a statewide coalition of labor, faith and community organizations that will push against Governor Cuomo’s planned tax windfall for the banks and wealthiest New Yorkers that was announced in his 2014-15 budget proposal. The groups are mobilizing their members to contact local legislators, urging them to oppose the tax cuts.

Assemblywoman Michaelle Solages along with the groups, including Long Island Progressive Coalition, CSEA, New York State United Teachers, MoveOn.org, 1199 SEIU, Alliance for Quality Education, New Yorkers for Fiscal Fairness, NY Working Families Party, Citizen Action of NY, Labor Religion Coalition, NY For Fiscal Fairness, AFL-CIO, The Human Services Coalition AFSCME and A Strong Economy for All highlighted stories from area residents about how New York’s growing inequality is harming this community.

The groups are opposed to planned tax cuts that disproportionately benefit the rich, including a windfall for wealthy estates, a so-called property tax “freeze,” and tax cuts for banks. All tolled, the tax cuts will cost ordinary New Yorkers some $2 billion.

Karen Rubin, Long Island Populist Examiner
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