Should New York re-think its economic development approach?

Governor Andrew M. Cuomo and Mayor Bill de Blasio, joined by John Schoettler, Vice President Global Real Estate and Facilities for Amazon.com, today announced that Amazon will establish a new corporate headquarters in Long Island City, Queens. The decisio
Governor Andrew M. Cuomo and Mayor Bill de Blasio, joined by John Schoettler, Vice President Global Real Estate and Facilities for Amazon.com, today announced that Amazon will establish a new corporate headquarters in Long Island City, Queens. The decisio
Kevin P. Coughlin/Office of Governor Andrew M. Cuomo
Gov. Andrew Cuomo and New York City Mayor Bill de Blasio in happier days announcing the Amazon HQ2 project last November.

Should New York re-think its economic development approach?

Experts offer their input on how to shift course after losing Amazon’s HQ2.
February 26, 2019

After Amazon dropped its plans to build a new headquarters in New York City, Gov. Andrew Cuomo criticized the loss of an estimated 25,000 jobs and $27 billion in tax revenue, calling it “the greatest tragedy that I have seen since I have been in government.”

Not everyone agrees, but the abrupt pull-out after New York initially won Amazon’s “HQ2” contest has raised questions about whether the Cuomo administration is taking the right approach in its efforts to create jobs and spur economic development.

Earlier this week, we asked our readers what they thought. As of Tuesday evening, roughly three out of four voters said that New York’s economic strategy is not working. Asked what the state should do differently, the most common response was to improve the tax and regulatory climate.

We also reached out to the experts to see what they have to say. In our latest “Ask the Experts” feature, we reached out to Donnie Charleston, diirector of state and local fiscal engagement at the Urban Institute; David Friedfel, director of state studies at the Citizens Budget Commission; Bruce Gyory, a senior advisor at Manatt, Phelps & Phillips and a Democratic political consultant; Jim Heaney, the founder, editor and executive director of Investigative Post; and E.J. McMahon, research director at the Empire Center for Public Policy.

Does New York need to overhaul its economic development strategy?

Jim Heaney: Absolutely. The state is investing billions in tax breaks and other subsidies and getting little in return, especially in upstate. We did a story two years ago that found that if upstate was a stand-alone state, job growth during Cuomo's first six years in office would have ranked fourth worst in the nation, below that of Mississippi.

David Friedfel: Yes. The state and local governments allocate almost $10 billion annually to economic development with scant evidence that taxpayers are getting a good return on their investments. Economic development will be best served by a combination of strategic human and capital infrastructure investments that provide the foundation for growth and targeted performance-based incentives that are holistically planned, transparently presented with standardized metrics, and regularly evaluated.

E.J. McMahon: Yes. It needs to focus on producing a much more attractive tax and regulatory climate in general, which would also help promote organic growth, employment and wealth-creation among established businesses of all types and sizes.

Donnie Charleston: New York is often singled out for having higher than average incentive package offerings as compared to other states. However, it’s also cited by many to have higher “costs of doing business” (like regulatory barriers) that aren’t easily quantified in dollar amounts. So, the simplistic conclusion that the state overpays in company recruitment ignores a host of factors that may reveal that it isn’t as far out of line as many allege. But, the reality is – we don’t have enough information to know that for certainty. The question isn’t whether New York needs to overhaul its economic development strategy, but do leaders in New York know enough about the effectiveness of its strategies as compared to other states. In a 2017 report, Pew Research categorized New York as “trailing” other states in its tax incentive evaluation system and protocols. As of 2017, the state had not adopted a plan for regular evaluation of the entire range of its tax incentives. Given that reality, the state should implement a rigorous evaluation system before making any decisions on what changes need to be made.

Bruce Gyory: When it comes to something as fluid as economic development, state government would always be wise to continually adjust its tactics to what works, whether that adjustment is called fine tuning or an overhaul. In my mind, this is not polemical but pragmatic. Find what works and try to build it out to scale and be ready to make ongoing adjustments. Try to stay one step ahead of what other states are doing and work closely with your localities and local community groups. Moreover, given the state’s diversity in terms of regional strengths and challenges, the idea of having regional strategies in place seems to make perfect sense because that gives a region a leg up on readiness when opportunities arise.

What is working? What is not working?

E.J. McMahon: If by “working,” you mean demonstrably delivering a net-plus payback on public money spent or promised – much less even calculating true opportunity costs – the headline programs aren’t really working at all. Company-specific subsidies should be prohibited. And cost-benefit analysis needs to be overhauled, ending the ridiculous zero alternative baselines (i.e. absolutely nothing would have happened in the absence of this project) and the exaggerated cost-benefit ratios (as seen, for example, in every promotional analysis of the film production credit).

Bruce Gyory: There have been long-term successes coming out of biomedical research anchored in the academic health centers from Buffalo on through to Stony Brook in Suffolk. Rochester has also had long-term success in generating growth around laser energetics and optics to compensate for the loss of the large companies. Albany’s nanotechnology has spawned real success and Mayor Bloomberg’s Cornell initiative on Roosevelt Island has created a cluster around high tech engineering. I am not an expert on economic development, but the experts all advocate the clustering phenomena as a model for what works. Namely, when a high-technology field develops a cluster connecting academia to start-up companies and then draws venture capital together with investments form more established companies, that forms a cluster which promotes organic growth which in turn becomes self-sustaining. Job creation is not like pushing a button on an old-fashioned soda machine, instead it requires the nurturing of this cluster effect. Building that cluster effect up to scale within as many regions of the state as you can would seem to be a goal that is at once fair and pragmatic. And in terms of upstate New York, the largest employers have become universities like the University of Rochester and academic health centers like SUNY Upstate in Syracuse. So spreading out from strength buttresses the clustering approach.

Donnie Charleston: New York like other states is being caught up in a sea change of community awareness and mobilization capacity. And the Amazon situation demonstrates how on the ground politics can change with the speed of a screen refresh, and much faster than the traditional 24-hour news cycle. The speed of today's digital grassroots mobilizing often outstrips the traditional analog government responses characterized by scripted public engagement forums, op-eds and focus groups. Opposition to incentive deals increasingly boils down to the public's estimate of the costs relative to the community’s gain. And, in today's hyper-informed world, that cost-benefit analysis has expanded beyond simple job counts and economic ripple effects. Citizens want to know about environmental impacts, social justice implications and gentrification impacts, just to name a few. Leaders would do well to anticipate these concerns and ensure that they are inclusive in their engagement with a wider group of stakeholders while putting together their packages. Moreover, establishing a set of community-informed criteria that all incentive packages must adhere to may be something that leaders should consider.

Jim Heaney: Much of the state's economic development programming is not working. A particular weakness is New York's fixation on mega-deals such as Amazon and SolarCity. Another problem: Cuomo is more interested in funding initiatives that generate positive press coverage than actually creating jobs. There's not a whole lot of follow through after the press conference. There's also the problem of corruption, which remains an issue.

David Friedfel: The Regional Economic Development Councils are a good framework, but the allocations do not always align with regional strategies. The lack of variability in regional allocations calls into question the validity of the evaluation process. Could it really be that in aggregate all 10 regions of the state submitted equally compelling applications, and that is why almost every region has gotten the same amount of funding over the last eight years? Instead, the REDC process should focus continued investments in targeted industries in population centers. This will result in regional disparities in allocations, but will improve the likelihood of success.

The state should not attempt to revive regions by building facilities for specific companies. The Tesla solar roof factory is behind schedule, the Central New York film hub was a failure and has been transferred to Onondaga County, and after Soraa walked away from their $90 million taxpayer-built factory, the state chose to invest another $15 million so another company would utilize the plant. The film tax credit should also be ended – the state allocates $420 million to subsidize this highly profitable industry. Many other states have ended or curtailed their film tax credits; New York should the same.

What should the state do differently to attract companies like Amazon?

Donnie Charleston: There is a growing level of discontent in every state with the role incentives are playing in economic development. The evidence shows that incentives are not the top deciding factor for companies in making location decisions. And, that factors like talent base, business climate and ecosystem, and infrastructure are immensely more important. Given that reality, all states would do well to structure their economic development systems and programs around those realities. Under that scenario, incentives would become a smaller piece of an overall economic development package. New York has a lot of assets and it will likely continue to be a preferred destination for corporations. And, by shoring up the evaluation of its economic development system, focusing on a more inclusive process of recruitment, and concentrating on proven decision factors for corporations (e.g. infrastructure and talent), it can ensure that it will continue to be a global destination for companies.

E.J. McMahon: To promote development of a given prime area or site, get the zoning right ahead of time – the pre-approval approach – and encourage private developers to acquire and do the packaging. Show a capability to deliver beneficial public infrastructure at least somewhere in the neighborhood of on time and near budget. Be willing to entertain public-private higher ed partnerships consistent with institutional mission and broad public priorities. Don’t go overboard with per-job employment incentives. Reduce taxes and have a light regulatory hand in general. In short, be more like Virginia.

David Friedfel: The state should focus on basic infrastructure, a good workforce and as of right, performance-based incentives, which are regularly evaluated for effectiveness and necessity. One thing that frequently gets lost in this conversation is the opportunity costs of allocating almost $10 billion per year towards economic development. By eliminating or reducing ineffective programs, additional resources could be dedicated towards broad-based tax cuts or infrastructure improvements, both of which would encourage private investment in New York and benefit all New Yorkers.

Bruce Gyory: The real lesson of the unfortunate end to the Amazon project is a multi-prong approach is probably required to attract companies large and small to grow and relocate in New York state. First, for a big project, pick carefully the location in terms of receptivity. Had Amazon picked Long Island rather than Queens I think we would be having a different discussion as I think Long Island would have welcomed Amazon on a bipartisan basis. Second, the proponents have to really engage the community. They should not presume that the hard questions will fade away. Citizens and community groups must be heard even where their initial tone is hostile. We are a First Amendment-based society. Third, the proponents of a project must have hard fact-based answers so that misconceptions don’t dig into the public ‘s consciousness. The proponents of a project must bring a campaign war room in place that is long on facts and short on spin to successfully build support for the project and wear down opposition.

Jim Heaney: The state should stop throwing money at the Amazons of the world. The state's economic recovery, at least upstate, requires improving our business climate and making our communities more attractive places to live.

Jon Lentz
is City & State’s editor-in-chief.
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