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Observers question benefits to state from tax break programs for businesses

New York State Gov. Andrew Cuomo gives his

New York State Gov. Andrew Cuomo gives his State of the State speech at the Convention Center at the Empire Plaza in Albany on Jan. 21, 2015. Photo Credit: Newsday / J. Conrad Williams Jr.

ALBANY - More than $700 million in tax breaks and other state resources awarded to developers last month in exchange for promises to create jobs included more than $3 million for a LegoLand theme park in the lower Hudson Valley, $1.5 million for a National Comedy Center in Lucille Ball's hometown of Jamestown and $4.7 million to build a commercial building next to the Wyandanch rail station.

For decades, these tax breaks are primarily how New York and most states have tried to boost ailing economies, including Gov. Andrew M. Cuomo's announcement recently of a plan to revitalize upstate with $1.5 billion in tax breaks and other resources. But now academic studies, fiscal analysts and even a recent study commissioned by Cuomo question whether the incentives are worth the cost to taxpayers. Or if the tax breaks work at all.

"Ultimately, the tax-incentive effort in New York in something less than a decade will be judged objectively to have not succeeded," said Michael J. Hicks, distinguished professor of economics at Ball State University in Indiana and director of its Center for Business and Economic Research. "Certainly Governor Cuomo's incentives are not going to radically change the environment in New York."

Forty years after states began dangling more and bigger tax incentives to lure and keep companies, New York has become the biggest provider of these tax breaks by far, according to research and advocacy groups. Over recent decades, billions in public resources were provided to companies to move into New York or to dissuade companies that threatened to leave.

While politically popular, the targeted tax breaks from state and local governments have now reached about $2 billion annually awarded to just 1 percent of corporate income tax filers. The cost of those avoided taxes or in some cases direct payments issued by the state is picked up by all other residential and commercial taxpayers as part of the state's $137 billion budget. That includes the tax break for film and TV productions recently raised to $420 million a year, even as some other states including Louisiana question the value of subsidizing Hollywood.


New York leads in grants

New York has the most grants to companies of any state, with 71,759 subsidies active in 2013, the most recent year for which statistics were available, according to the Good Jobs First organization, a left-leaning watchdog on corporate giveaways. No. 2 is California with 16,400, and the value of New York's tax breaks is 10 times that of California's. The American Legislative Exchange Council, a group of conservative state legislators and business lobbyists, also ranks New York at the top of states -- by far -- in grants to companies.

Meanwhile, New York has become among the highest-taxed states, has posted slower job growth than most big states, and many of its communities face poor projected economic growth through 2020. Last month, Florida passed New York as the fourth most populous state.

"It's a way to favor a constituency with something without ever having to commit themselves to make the government live on less money," said E.J. McMahon, president of the fiscally conservative Empire Center for Public Policy think tank. "On the right and on the left, I think, there is a sort of broad consensus by folks who focus on tax policy from any political perspective that the goal is to strive for low rates broad-based, and strive for economic neutrality in that you try to treat sectors the same."

Even Cuomo's tax commission, which was created to simplify state tax code, recommended the state end or overhaul tax incentives. Its November 2013 report found "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 incentives."

"If you eliminated those tax credits, you could reduce the corporate tax in the Empire State by 30 percent for all taxpayers. Really! It's there," said Peter J. Solomon, co-chairman of Cuomo's tax and fairness commission and deputy mayor for economic policy and development in New York City from 1978 to 1980.

"So now tell me," Solomon said in an interview, "is the 1 percent who are taking advantage of it better than giving the 100 percent a 30 percent reduction in taxes?"


More transparency sought

The commission called for "additional steps to evaluate the cost-effectiveness of its incentive programs." The commission also called for more transparency in awarding credits and a scaling back of the film and TV tax credit "because it does not appear to pay for itself." Connecticut and other states have already done so.

The Cuomo administration defends the tax incentives, which have become part of an annual tradition. They include $5 million in tax breaks awarded in December to Internet giant, which promised to bring 500 jobs to Manhattan, where the economy is booming. This year, Cuomo's START-Up New York program is beginning to offer the most generous tax incentive yet: 10 years of tax-free life to companies and their employees for moving to or expanding in New York.

Asked if tax breaks can be proved to work for taxpayers, state commissioner of the state Department of Economic Development Kenneth Adams paused.

"The short answer is yes," said Adams, whom Cuomo chose this month to become his commissioner of taxation and finance. "The longer answer is if the tax credit programs are carefully structured and focused on key industries and in competitive sectors in the state's economy, they can be very effective tools."

Cuomo has argued that ending tax credits would mean other states would "eat our lunch." He has suggested that the federal government act to end this competition.

"It's hard to end that habit when every state is doing it . . . despite the mounting evidence that many incentives don't actually pay off," agreed Amy Liu, a senior fellow at the Brookings Institution research center. Brookings helped the Cuomo administration create the regional economic development councils. "Until all 50 states decide to disarm, we will always have tax incentives . . .," it said. "The second point is, can states and regions begin to rely less on subsidies?"

She credits Cuomo for beginning a broader economic development. Liu said his regional councils building on local assets; his START-UP New York program that leverages the expertise of local colleges; his expansion of nanotech clusters through the State University of New York; and his Global NY program help companies tap into international markets and strengthen economic development.

Companies are looking to the value of an area, including the education of its labor force and better infrastructure such as ports and roads, Liu said.


Some states end programs

Other researchers, however, see New York's effort still steeped in targeted tax breaks while a few states are beginning to move faster to other approaches.

In 2011, Michigan ended its flagship "Mega" tax incentive program, which Gov. Rick Snyder said in many cases awarded breaks "because someone had more political power."

In June, Missouri Gov. Jay Nixon vetoed tax credits for several targeted businesses, calling them "sweetheart deals for the well-connected."

And in 2010, Iowa created the Legislative Tax Expenditure Study Committee to revaluate every tax credit and report publicly on the success or failure of commitments in every deal.

Wisconsin, Louisiana and Minnesota have scaled back its programs after evaluations.

Cuomo and the legislature also have lowered some business taxes this fiscal year, eliminated the manufacturing tax, and curbed the estate tax. Those cuts aren't covered by less spending, but by revenue from the extension of a temporary millionaires tax and a utility tax of roughly equal value that Cuomo and the legislature extended twice.

Cuomo has also noted that a deep, broad tax cut for everyone instead of targeted tax breaks isn't practical. He has said a 1 percent cut in the income tax would require a $6 billion cut in state spending.

"It would be desirable if you could do it," Adams said. "No denying it would be good to lower taxes and be as competitive as possible -- but until we can do that, using these targeted tax credits sparingly is a proven strategy.

"When we look at our data we see . . . our tax credit programs pay for themselves in terms of outlay of taxpayers' dollars and induced economic activity that produces more taxes we didn't have before," Adams said. He added there is a "very high multiplier" of spinoff spending in the community. Although researchers question government estimates of that benefit.


NY dropped credits in past

New York has questioned tax credits before. The Cuomo administration ended the Empire Zones program created under Gov. George Pataki. A 2008 audit by the state comptroller found "job targets were often not met." Scandals included "shirt changing," where a politically connected company simply changed its name to continue to receive tax breaks.

Cuomo replaced Empire Zones in 2011 with his own tax credits programs and required promised jobs to be created before benefits are provided, with more monitoring. Adams said much of the criticism of tax breaks don't yet appreciate the Cuomo administration's new system and its safeguards, which began issuing tax breaks in late 2011.

"My sense is in the next few years we are going to see these good results compare very favorably to other states," Adams said.

The administration said jobs are created or retained often for as little as few hundred dollars in tax breaks per job.

Those tax breaks are negotiated privately between the Cuomo administration and the business operators. Some proposals are brought to the state Empire State Development Corp. agency's board of business and state government leaders for review. But much of the process is secret, a requirement of business to protect against competitors' learning their strategies, Adams said.

And Cuomo's program has not been evaluated independently. Past state comptroller's office audits have found rampant problems in local industrial development agencies deals for tax breaks that often didn't result in the promised jobs.

The Empire State Development Corp.'s 2014 report states that all of its projects in the 4-year-old Excelsior tax credit program were in compliance with promises, meaning companies were within 15 percent of their job goals.

Ball State's Hicks, however, said federal statistics show governments often over-count net job growth. "This economic development program is going to offer a lot for business sections of newspapers . . . and something you can tout in the State of the State address, but not a lot of job growth," Hicks said.


Group finds 'mixed' record

The Pew Center for the States, a nonpartisan public research group, gives reason for skepticism. It found New York is among 12 states with a "mixed" record of being able to show credits "deliver a strong return on taxpayer dollars."

Tax break giveaways have always been wrapped in spin and intertwined with politics. December's awarding of grants featured a PowerPoint presentation on a theater stage, lavish introductions and cheers and applause for winners with host Teresa Priolo of Fox News 5.

"There are powerful political constituencies that enjoy the benefits of these programs," said Blair Horner of the New York Public Interest Research Group. "While experts have clearly identified the weaknesses of these credits, there is simply too little political muscle behind calls for reforms. The political intensity of the status quo blocks the broad consensus for reform."

Many members of the 10 regional councils chosen to dole out millions of dollars in grants as well as many of the companies that received grants have legally contributed hundreds of thousands of dollars to Cuomo's campaigns, according to campaign finance filings.

Cuomo spokesmen didn't respond to a request for comment.

State Comptroller Thomas DiNapoli has begun an audit to determine whether the $200 million the Cuomo administration spent on its "Open for Business" television campaign was prudent. DiNapoli acted after requests for records involving the ad campaign by several news organizations, including Newsday, under the state Freedom of Information Law have been denied for months.

In December, the Empire State Development Corp. announced its analysis of the effectiveness of START UP would be delayed another four months. That means the required annual report will come nearly two years into the program.


Incentives have grown

New York's tax incentives to business have increased from $200 million in 1994 to about $2 billion in 2013 -- tripling since 2005, according to Cuomo's tax commission.

"Tax dollars that could otherwise be invested in proven business attraction strategies like rebuilding ailing infrastructure and increasing the skill level of the workforce are being doled out like candy to some of the most profitable businesses in New York State," said Ron Deutsch, executive director of the labor-backed Fiscal Policy Institute.

"Do tax credits work?" asked Solomon, from Cuomo's commission. "The evidence says they do not. . . . But politicians love tax credits, period. End of story."


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