February, 1998

Tax cuts that create jobs: The next steps

Key priorities for 1998

New York's rightful share of the employment growth expected nationwide this year would be 170,000 jobs. We can produce those jobs, if we go further in making our business environment competitive. One essential step is to continue reducing our still-high tax burden. After enacting dramatic reductions in personal income taxes in 1995, and sharp cuts in homeowner property taxes in 1997, state leaders should focus this year on major business tax cuts. Senate Majority Leader Bruno has started the discussion with an across-the-board package of tax reductions that would finally bring New York's corporate income taxes into line with those of our competitors. Governor Pataki has proposed accelerating existing tax cuts, and Assembly Speaker Silver is reportedly considering a package of new tax cuts, as well. The stage is set for considerable further progress, this year.

Key priorities for tax cuts in 1998 should be:

An impressive start

The tax cuts New York State has made in the past four years are nothing short of extraordinary. Revenues to Albany in the fiscal year ending March 31 are some

$6 billion lower than they would have been under the tax structure in effect at this time in 1994.

And there are more tax cuts to come -- another $1.5 billion by the fiscal year starting in 2000, not counting the STAR property-tax reduction program.

Tax collections for the 2000-01 fiscal year are projected at $39.1 billion; in the absence of the tax reductions mentioned above, that total would be $46.6 billion. Thus the tax cuts that have already taken effect and those to come in the next three years represent nearly one in every six tax dollars returned to families, individuals and businesses in New York. No other state comes close to that impressive record.

But we need to do more

Unfortunately, no other state needs to cut taxes nearly as much as New York.

Even after the extraordinary record of the last four years, the taxes New Yorkers pay are still among the very highest in the nation. We've brought our overall tax burden significantly closer to those of other states -- but ours is still roughly 45 percent above the national average, on a per-capita basis.

Our business taxes, in particular, are high. And that's one reason our economy still lags the rest of the country.

In 1997, private-sector employment in New York grew by 1.8 percent. That was our best showing in a decade. And, for the first time in a decade, the key manufacturing sector added jobs -- some 6,400 from December 1996 to December 1997. That was a dramatic turnabout from the record of the late 1980s and early 1990s. During the decade ending in 1995, we lost more than 300,000 manufacturing jobs. That meant an average loss of more than 30,000 a year, in a sector where jobs pay better and offer better benefits, and where a single company or plant often provides the economic bedrock of an entire community.

Still, despite obvious improvement, we're not attracting our rightful share of the nation's job growth. And some upstate regions, in particular, are lagging behind. Statewide, in 1997, our private-sector employment growth rate was about 62 percent of the national average. Again, that represented a significant improvement over recent history -- from 1992 through 1994, for example, we added jobs at less than 20 percent of the national rate. But saying we're doing a lot better now, while important to recognize, doesn't mean we're doing as well as we can.

How high are our business taxes?

By any of several commonly used measures, New York's business taxes are higher than those in key competitor states. Our business tax rate of 9 percent is higher than those in 37 states, as shown in the table on the following page, and 28.7 percent above the median for all states. States such as Illinois, Georgia, Virginia, Indiana and South Carolina have rates far below ours.

Tax rates are not the entire picture, of course. What a company actually pays in corporate income taxes also depends on several other factors, such as the deductions and credits it is allowed to take against its taxable income. And corporate income taxes are not the entire story of business taxes. For instance, all businesses in New York pay substantial state taxes when they pay their energy bills -- whether they use electricity, which is subject to the gross receipts tax; or petroleum-based fuels, which are subject to the petroleum business tax; or both. And thousands of taxpaying businesses do not pay corporate income tax at all. They are Subchapter S corporations, partnerships, limited liability corporations and sole proprietorships whose owners pay tax on their profits through their individual income taxes. Those latter businesses will pay roughly $1.5 billion in personal income taxes in the current fiscal year. All of these taxes that are outside the corporate income tax are higher in New York than in most other states.

Yet, while corporate income tax rates are not the entire story, they are an important part of it. That's because, while there are differences among states in the deductions and credits they allow businesses, there are also great similarities. So a lower tax rate in one state often translates directly into lower tax liability.

And, not incidentally, even for businesses that have various deductions to reduce their tax below the statutory tax rate, the level of the rate is a noticeable indicator of the way state government views business.

Aside from tax rates, one common way to compare taxes among states of different size is to use measurements that adjust for population. Using per-capita corporate income tax collections, New York's business taxes are 7th-highest among the 50 states, and 40 percent higher than the national average.

It's also worth noting that the state can well afford to cut taxes further this year. The Executive Budget projects that tax revenues will increase by $2.3 billion, or 6.3 percent (nearly triple the projected inflation rate) in the coming year. State government doesn't need all that additional revenue. Our people and our private-sector economy can put it to good use.

Top Corporate Tax Rates, 1996






1 Iowa 12.00% 27 Montana 6.75%
2 Connecticut 10.75% 28 Oregon 6.60%
3 North Dakota 10.50% 29 Arkansas 6.50%
4 Pennsylvania 9.99% 30 Hawaii 6.40%
5 Minnesota 9.80% 31 Missouri 6.25%
6 Massachusetts 9.50% 32 Georgia 6.00%
7 Alaska 9.40% 32 Oklahoma 6.00%
8 California 9.30% 32 Tennessee 6.00%
9 Arizona 9.00% 32 Virginia 6.00%
9 New Jersey 9.00% 36 Florida 5.50%
9 NEW YORK 9.00% 37 Alabama 5.00%
9 Rhode Island 9.00% 37 Colorado 5.00%
9 West Virginia 9.00% 37 Mississippi 5.00%
14 Maine 8.93% 37 Utah 5.00%
15 Ohio 8.90% 41 Illinois 4.80%
16 Delaware 8.70% 42 Kansas 4.00%
17 Kentucky 8.25% 43 Indiana 3.40%
17 Vermont 8.25% 44 Michigan 2.30%
19 Idaho 8.00% 45 Nevada 0.00%
19 Louisiana 8.00% 45 South Carolina 0.00%
21 Wisconsin 7.90% 45 South Dakota 0.00%
22 Nebraska 7.81% 45 Texas 0.00%
23 North Carolina 7.75% 45 Washington 0.00%
24 New Mexico 7.60% 45 Wyoming 0.00%
25 Maryland 7.00% Median for all states 7.00%
25 New Hampshire 7.00% N.Y.S. % above median 28.7%

Source: New York State Senate Finance Committee

What's at stake: Thousands of jobs

Improving our economic performance, relative to the rest of the country, has already paid off for New York. In 1997, we added a total of 120,000 private-sector jobs. If our share of the nation's growth rate had been lower -- say, what it was from 1992 through 1994 -- last year's employment growth would have been only 34,000. In other words, the dividend we enjoyed last year, thanks to a much more competitive environment for attracting business growth, was 86,000 jobs.(1)

In 1995, The Public Policy Institute estimated the ambitious reductions in personal income taxes that Governor Pataki and the Legislature enacted that year would result in an additional 200,000 jobs for New Yorkers within a few years after their full implementation (which occurred in 1997). The new jobs New York businesses created last year -- along with increased employment in the previous two years -- put us well on the way toward making that prediction a reality.

As these numbers illustrate, it is possible for New York to increase its share of the nation's job growth -- and even a seemingly small difference in that share can pay off in huge numbers of new jobs. Nationwide, economists say employment will rise by a projected 2.7 million this coming year. Our proportionate share of that growth would be about 170,000 -- thousands of good, new jobs for every region in the state. That would mean a significant economic boost, as the table on the next page shows.

To attract more jobs, we must attract the businesses that will provide them. By far the most important thing Governor Pataki and the Legislature can do this year is to make New York more competitive, as we seek to convince those businesses to locate and grow in the Empire State.

Cut business taxes, across the board

The best way to improve New York's competitiveness is to cut business taxes across the board. Senate Majority Leader Bruno has proposed doing exactly that, reducing our general corporate tax rate from 9.0 to 6.85 percent. The Senate package would similarly reduce taxes for Subchapter S corporations. Thus business taxpayers would be taxed at the same rate as individuals -- a fair and sensible tax policy. (Actually, businesses would still pay a higher effective rate, because New York's personal income tax starts at 4 percent. The top PIT rate of 6.85 percent takes effect only on top of a certain amount -- $40,000, in the case of married couples filing jointly. Corporations pay the same tax rate on all their New York taxable income.)

The Bruno proposal would put New York's business tax rate just below the national median of 7.0 percent. Wouldn't it be refreshing to be able to say, for the first time in decades, that businesses could expect to pay slightly lower taxes in New York than elsewhere?

What would 170,000 new jobs mean?
If each county gained in proportion to existing employment. . .
County New jobs County New jobs County New jobs
Albany 3,200 Herkimer 600 St. Lawrence 1,000
Allegany 500 Jefferson 900 Saratoga 2,000
Broome 1,900 Lewis 200 Schenectady 1,500
Cattaraugus 800 Livingston 700 Schoharie 300
Cayuga 700 Madison 700 Schuyler 200
Chautauqua 1,400 Monroe 7,800 Seneca 300
Chemung 900 Montgomery 500 Steuben 1,000
Chenango 500 Nassau 13,800 Suffolk 14,000
Clinton 800 New York City(2) 61,300 Sullivan 700
Columbia 700 Niagara 2,100 Tioga 500
Cortland 500 Oneida 2,300 Tompkins 1,000
Delaware 400 Onondaga 4,800 Ulster 1,600
Dutchess 2,400 Ontario 1,100 Warren 700
Erie 9,400 Orange 3,100 Washington 600
Essex 400 Orleans 400 Wayne 1,000
Franklin 400 Oswego 600 Westchester 8,900
Fulton 500 Otsego 600 Wyoming 400
Genesee 600 Putnam 1,100 Yates 300
Greene 400 Rensselaer 1,600 Calculations by
The Public Policy Institute
Hamilton 100 Rockland 2,900

In 1995, Governor Pataki, the Senate and the Assembly enacted reductions in the personal income tax, giving the great majority of New Yorkers a 25 percent savings in their state income tax. In 1997, the Governor and the Legislature approved state funding to provide major property tax cuts for homeowners -- 27 percent for the average homeowner, and 45 percent for typical senior citizens.

And New York has become a national leader in relieving lower-income workers of taxes. A recent paper by the Center for the Study of the States pointed out that New York was one of only a handful of states that enacted both property tax and sales tax relief for low-income families in 1997.(3) In addition, our earned income tax credit for low-income working men and women is one of the most generous in the nation.

Cutting business tax rates across the board is a worthy successor to those initiatives. And the "cost" to the state treasury is eminently affordable -- only $475 million, including the reductions in both the general corporate and Subchapter S corporation rates. In a year when the state enjoys a $1.8 billion surplus, that's sensible and appropriate. The Senate plan makes it even more so, phasing in the cost over four years.

One industry we seek: "chip fabs"

In recent months, the Pataki Administration and economic developers around the state have begun a concerted effort to attract an industry that expects huge growth nationally over the next few years: makers of semiconductors, or computer chips. Empire State Development Corp. and the Governor's Office of Regulatory Reform are working to pre-permit a number of sites around the state for chip fabrication plants, or "chip-fabs," as they are sometimes called.

That makes a lot of sense. Computer chip production is growing by leaps and bounds; each new factory is likely to provide 1,000 or more high-paying jobs. And experience elsewhere indicates that after a region attracts one chip production facility, others are likely to follow. Communities across the state have proposed more than 20 separate sites for location of these valuable new employers. Obviously, support is strong, for good reason.

New York has many of the prime attributes semiconductor manufacturers need: a location in the center of a huge market for consumer and business technology, plentiful water for use in the production process, and high-quality schools and universities to provide high-skill workers.

Chip-fab plants also require huge amounts of capital investment -- usually more than $1 billion. And there, too, New York has an edge -- unfortunately, though, one which we're failing to use to full advantage.

Strengthen the ITC: Cut the AMT

Our investment tax credit provides manufacturers with an important financial tool by allowing them to subtract 4 to 5 percent of qualified capital expenditures from their state tax bill. Over the years, it's been an effective tool for manufacturers -- and other businesses such as farmers and certain processing industries -- to use in putting together the capital needed for major new facilities.

Unfortunately, the ITC is sharply limited by the alternative minimum tax. The AMT requires a company to pay at least 3.5 percent of New York taxable income to Albany, no matter how much the employer has invested or how many jobs it's created in the state. Enacted in 1987 as part of a broad restructuring of corporate taxes, the AMT was intended to decline to 3.0 percent, but instead was raised to 5.0 percent in 1989 and 1990 before being cut to the current 3.5 percent in 1994.

Perversely, the AMT was created to reduce the ITC's benefits for the largest, most profitable manufacturers with the greatest capacity to invest either in New York or elsewhere. In other words, it cuts the incentives for the very kinds of manufacturing investments New York should be most anxious to promote. And even for smaller, up-and-coming manufacturers, the AMT can cut the potential first-year return on equity for a new investment by as much as half.(4)

Manufacturers are asking state leaders to reduce the AMT significantly, to boost the financial incentive for major capital investment. Senate Majority Leader Bruno and his conference have included in their package of business tax cuts a reduction in the AMT from 3.5 to 2.5 percent. That's only half a percentage point below the originally intended level of the AMT -- which was enacted at a time when state leaders were not as focused on increasing our competitiveness as they are today.

Cutting the AMT could be particularly valuable in increasing New York's chances of attracting one or more "chip-fabs." While such a change would benefit the entire manufacturing sector -- and is needed, and justifiable, on that basis alone -- it could be explicitly marketed to the semiconductor industry as a change New York State made specifically to attract chip fabrication plants. ESDC could market it as the "chip-fab AMT," for example.

Such an expression of interest in the capital investment and jobs represented by chipmaking facilities would make the semiconductor industry sit up and take notice. And, on a practical level, the reduced AMT would provide hard dollars to reduce the upfront capital needed by any company making one of these huge investments. Together, those two factors would create a powerful new attraction for this very important industry.

The Senate Finance Committee staff estimates such a reform would "cost" Albany $80 million a year in lost tax revenue. But the state and local governments would recoup much, perhaps most, of that revenue through a variety of taxes on new facilities and their workers -- personal income taxes, property taxes, sales taxes, energy taxes, and so on. More important than the impact on the governmental bottom line, such incentives could make the difference in the competition for one or more chip fabrication facilities -- and thus a significant improvement in the lives of working New Yorkers.

Going further to reduce energy costs

Energy costs in New York are the highest in the country, and have been for years. That's hurt us badly. Numerous companies have downsized or closed New York operations -- some with alarmed public notice, some quietly -- in large part because competitive pressures demanded reducing the energy bills that are such a large part of manufacturers' overall costs.

Fortunately, we're making real progress. Working with the Public Service Commission, our investor-owned utilities are reducing rates dramatically, particularly for the large industrial facilities that are so important to our economy and that bear so much of the major fixed costs on most utilities' balance sheets. In addition, Governor Pataki and the Legislature enacted last year the Power For Jobs program, which allows utilities to take a credit against their gross receipts taxes for providing lower-cost power to large industrial users, small businesses and certain nonprofit facilities.

Not least in importance, the Governor and the Legislature also approved last year a 1-percentage point reduction in the GRT. Starting with a small step this October and taking full effect in the year 2000, that will save utility customers roughly $400 million a year.

As with our tax burden, though, our energy costs for businesses are so far out of line -- fully 50 percent higher than the national average, at last count -- that we need to do more.

One step would be to accelerate the GRT reduction enacted last year. Governor Pataki's budget provides $100 million for acceleration of already adopted tax cuts; the pending 1-percent cut in the GRT should be the first target. Then, state leaders should enact further reductions in the GRT.

The Power For Jobs program is proving to be such a good idea that at least one utility, Niagara Mohawk Power Corp., is running out of its allocation of low-cost power. The Governor and the Legislature should act quickly on expanding this highly successful effort to provide lower-cost electricity where it's most needed.

While the GRT receives the most attention, New York imposes several other costly taxes on utilities -- that is, on utility customers, since utility taxes flow directly into our power bills. The petroleum business tax is the most costly of these. Its impact on our energy costs should be eliminated, starting this year with repeal of the PBT on generation of electricity and steam.

Securing New York's securities industry

A key player in New York's original development as the Empire State, the financial sector has been an especially strong part of our economic comeback in recent years.

The securities industry is important for its size alone -- 170,000 jobs, as 1998 began. And perhaps more than any other sector, this industry brings into New York wealth far beyond its employment numbers. Indeed, the budget surpluses now enjoyed by New York State and New York City governments are attributable, in large part, to the financial sector centered around Wall Street.

Like our manufacturing sector, the financial services industry is a huge wealth creator for New York. Investors all around the country -- indeed, all over the world -- rely on New Yorkers to assemble and allocate literally trillions of dollars a year. It's to our advantage to do whatever we can to make sure this key industry stays and grows in the Empire State.

Given the emergence of the middle class as an investing class, growth of the financial services sector seems likely to continue in the foreseeable future, even if there may be an occasional slowdown or retrenchment. The question is whether this state will get its share of future growth. New York's percentage of all securities industry jobs nationwide has dropped by almost a third in the last 25 years. The trend has hit especially hard at back-office jobs that used to be concentrated in Manhattan but now are increasingly in New Jersey or other out-of-state locations.

Extending the investment tax credit from its existing base in manufacturing to another of the state's core industries would give brokerage and other firms a major incentive to locate new computers and telecommunications equipment in New York. Where the hardware is located, the jobs will follow.

No other state allows an ITC for service industries. Shouldn't New York -- the worldwide center of finance -- be the first?

Targeted tax cuts

Like manufacturing and securities, research and development is an especially valuable part of New York's economic strength. R&D jobs are high-paid; more important, they often spin off significant businesses that can become the big job producers of the future.

New York could encourage R&D facilities to locate and expand in the state by excluding such personnel from the numerator of the payroll factor in corporate income tax calculations. At present, the state tax code in effect requires employers to pay more tax to New York if they increase their payroll in the state. Changing the payroll factor calculation would eliminate that disincentive to creating more of these sought-after jobs in the state.

Among the increased and new taxes the previous administration and the Legislature imposed during the early 1990s were a series of transportation taxes. These new and higher taxes drove truckers off New York highways, eliminating New York jobs not only in the trucking industry but in those that serve it as well -- truck stops, for instance. And, perhaps worst of all, they made it significantly more expensive for manufacturers to make products in the Empire State and ship them elsewhere -- in other words, creating another incentive for manufacturing jobs to go elsewhere.

Governor Pataki and the Legislature have already taken steps to reduce truck taxes. The next such step should be to reduce and then eliminate the truck mileage tax, which adds 6.6 cents per mile to the cost of truck transport.

Similarly, hospitals and nursing homes were hit with new taxes, or assessments, several years ago as Albany looked for new revenues. The 1997 tax-reduction package included elimination of those assessments, to take full effect in 2001. That reform should be speeded up, as well.

Finally, another reform enacted last year will require something in the nature of a technical correction. Governor Pataki proposed, and the Legislature approved, elimination of the extra estate tax New York imposes on business and other assets. The state will now match federal exemptions -- but only up to $1 million. Around the time of that change, Congress passed a new, $1.3 million estate-tax exemption for assets in a small business. Thus New York, at the same time it was taking historic action to eliminate disparities with other states, almost immediately fell behind again. Both the Governor and Senator Bruno have proposed matching the federal exemption for small-business assets up to the full $1.3 million.

What the tax supporters say

But wait a minute, the various organizations that supported years of tax increases say -- the state can't possibly afford to cut taxes more.

The answer to that, in truth, is that we can't afford not to cut taxes more. If we leave our taxes far out of line with the competition, it's virtually certain we'll lose thousands of jobs that could be ours.

Even from a fiscal perspective, though, the keep-taxes-high crowd is wrong. First of all, cutting business taxes sharply will not cost that much, in the overall scheme of the state budget. All of the business tax cuts in Senator Bruno's package, for example, would "cost" Albany only about $800 million (including expansion of the JOBS NOW fund for attraction of major new employers). Most of that impact would occur only in the year 2001 and after. Thus Albany, with a surplus this year alone of $1.8 billion, will have plenty of time to build the expectation of any changes in business tax revenue into its fiscal plans.

The tax advocates also warn that three straight years of surpluses may come to an end any day now -- but that refrain is getting tired. The Fiscal Policy Institute, for instance, reports every year that a huge state deficit looms ahead. (Funded primarily by public employee unions, the Fiscal Policy Institute usually blames the state's tax cuts and ignores any fiscal effect from spending increases). Yet for three years now, the state has had large budget surpluses -- with the current year's projected surplus of $1.8 billion the largest on record. And the state's reserve funds are more flush than ever, providing some comfort against the possibility of more moderate economic growth in the future.

An opportunity we can't afford to miss

New York is creating jobs at the best rate in years. Tens of thousands of families and individuals are better off, as a result.

We have a rare opportunity to take the next step -- to make our business environment still more competitive, so we can match and surpass the rest of the nation. If we can make New York more competitive, additional thousands of good jobs await. Let's go get 'em.

1. Nationally, private-sector employment grew by 2.9 percent in 1997. Our growth rate from 1992 to 1994 was 17.6 percent of the national average. Thus, if we had matched our 1992-94 record (compared to the rest of the nation) in 1997, our growth rate would have been only 0.51 of 1 percent -- instead of 1.8 percent. As of December 1996, New York had 6.66 million private-sector jobs.

2. Within New York City, Bronx would gain 8,200; Brooklyn, 17,200; Manhattan, 14,600; Queens, 17,700; and Staten Island, 3,500.

3. State Taxes and the Family -- An Update, Center for the Study of the States, Nelson A. Rockefeller Institute of Government, January 1998.

4. See Credit Where It's Due: New York State's Tax Incentives for Manufacturing, The Public Policy Institute, February 1990.