Gov. Andrew Cuomo’s proposal to boost the upstate economy by giving qualified companies a 10-year exemption from all taxes has the support of many business leaders and government officials—but some economists are shaking their heads.
Cuomo’s “Tax-Free NY” Initiative would benefit start-ups and expanding firms that locate on upstate SUNY campuses, as well as at some private schools, provided their business plans align with the university’s research. It’s the latest in a series of moves geared toward promoting collaboration between the university system and industry to develop innovative technology businesses and keep them here.
“New York’s reputation as the high-tax state, the tax-capital state, is a killer when it comes to economic development,” the governor said at SUNY New Paltz in May. “Being at the bottom of the barrel hurts. What do we do about the perception? Change the reality.”
New York’s “bottom of the barrel” status was reinforced in the Tax Foundation’s 2013 State Business Tax Climate Index, in which the state was ranked dead last, and the Washington, D.C.-based think tank doesn’t think the governor’s plan will do much to help. Scott Drenkard, a Tax Foundation economist, said the kind of targeted incentives Cuomo is now proposing will only make New York’s tax structure more adverse to business in the end.
“What this plan does is move away from time-honored principles of having neutral rates across the board,” Drenkard said. “It picks and chooses winners and losers, and it’s very hard for governments to decide what’s going to be the next big industry within their state. The much better option is letting the market test determine that.”
Tax Foundation analysts examine each state’s tax code to determine how well it adheres to the principle of neutrality—broad tax bases, low rates and an absence of loopholes or special favors for some businesses at the expense of others. New York already has a narrow tax base and high rates, Drenkard said, and “Tax-Free NY” would only serve to skew it further.
“I think New York is ripe for fundamental tax reform,” he said. “And that means removing distortions, removing credits that go to certain businesses, or preferences generally. You find that incentives are usually very poor in that they don’t generate enough economic growth to justify the tax revenue that they gave away.”
Kenneth Adams, a top Cuomo administration official and the president and CEO of Empire State Development, countered that the decentralized nature of the SUNY system’s 64 campuses would make the new initiative a “game changer” that would be “exponentially more powerful” than other economic development efforts.
“How do you really scale up a program to drive an innovation economy and attract globally competitive companies and investment from around the country and around the world—how do you do that upstate?” Adams said. “What the governor is doing here is saying, the key is SUNY and the real estate that these schools control.”
Adams also disputed the argument that the state would be “picking winners and losers,” saying it makes sense to target technology and innovative-based companies, and that any given company would have to meet strict criteria to qualify.
“If we’re picking winners and losers, what we’re betting on, if you want to put it that way, or what we’re picking, are globally competitive technology-driven companies,” he said. “That is a broad array of companies where, as a sector, that’s a winner.”
Cuomo and his backers hope their offer—businesses would pay no property, sales or corporate taxes for 10 years and workers would shoulder no income tax for five years, nor on the first $200,000 earned after that—will lure companies into the state and keep promising start-ups from leaving for more business-friendly climes.
“We look at this as a ripple effect,” says Brian Sampson, executive director of Unshackle Upstate, a pro-business group in favor of the initiative. “These companies are going to come here. Their management team is probably going to relocate here to New York State. They’re going to start to build roots in their communities.”
But Sampson said there is a need to help existing businesses as well. And the provision for employees working tax-free has his eyebrows raised.
“If that provision went away I don’t think anybody would be overly upset by it,” he said. “Perhaps it’s a gimmick. I don’t think that’s the deciding factor for why a company chooses to come and locate on a SUNY campus.”
Cuomo has stipulated that companies coming from within the state will have to prove they are expanding in order to qualify, and certain industries, including retail, law, accounting and real estate, would be ineligible. He maintains the plan will not be a repeat of the now-defunct Empire Zones program, which was criticized when well-connected businesses secured tax breaks and failed to add jobs as promised.
“I’m not sure the Legislature ever really learns a lesson,” said Sampson, who was formerly the upstate director of business outreach for the Empire State Development Corporation. “But I think in this instance the governor and his staff have had the opportunity to understand what happened with the Empire Zones, and that’s why they’ve laid some of the provisions out early, so they really can’t backtrack from them.”
Adams said that the Empire Zones were too lax in determining which companies could qualify and were also based too heavily on geography, which he argued was part of their downfall.
“Its undoing was companies for which there was really no rationale—law firms, retail—there was no reason they needed to get the benefits or deserved them, but they legally got them,” he said. “We learned a lot of valuable lessons from Empire Zones, chief among them this idea that you need to strictly define eligible companies, not just eligible land.”
Other supporters are cautious in their optimism.
Kevin Schwab of CenterState CEO, a business leadership organization based in Syracuse, said the governor’s proposal was promising, but he wanted to see more details.
“There are competitive concerns that need to be recognized and there need to be safeguards so we don’t run into the same issues of the Empire Zones program,” he said.
John Yinger, a professor of public administration and economics at Syracuse University, was less optimistic. He said economic development is a difficult policy area with no easy answers, and that he has found no evidence to suggest that targeted incentives are a reliable tool for boosting the economy.
“When you have all this land on or near universities, with only some restrictions on what kind of businesses can get it, you open the door to all kinds of similar shenanigans,” Yinger said. “Public officials like to be able to hand things out. They like to have their name on incentives. They like to have businesses thanking them for tax breaks, regardless of whether they help the state or not.”