Testimony to Senate Finance Committee and Assembly Ways and Means Committee FY 2015 Executive Budget/Taxation Issues
Kenneth J. Pokalsky
Vice President, Government Affairs
February 10, 2014
On behalf of The Business Council and its 2,400 employer members, I would like to thank you for this opportunity to address the joint Senate and Assembly hearing on the Executive Budget. While we are interested in many components of the Executive Budget, we will focus our comments today on its business tax reform proposals.
Business Tax Reductions – We strongly support the Governor's business tax reform package.
In mid-January, 2014 we released a study completed by economists at Ernst and Young which illustrates the “opportunity costs” of taxation on private sector employers and, conversely, the economic results of business tax reductions. Income earned by business can be paid out as salaries, paid out to business owners (including institutional owners such as pension funds and mutual funds) through dividends or distributions, or re-invested in the business or saved for future investments. Each of these activities provides economic benefits to the state and generates tax receipts for state and local governments. No doubt, taxes are necessary to support governmental services, but taxes can also reduce business' ability to invest and grow.
Specifically, our project assessed the in-state economic impact of key business tax reductions that we expected to be included in the Executive Budget, including a reduction of the Article 9A ENI rate from 7.1 to 6.5% (and to zero for upstate manufacturers); a modernization and restructuring of the corporate franchise tax, including its merger with the bank tax and other reform and simplification measures; and the adoption of a 20 percent real property tax credit for manufacturers statewide. These measures are projected to provide about $560 million in directly employer tax relief when fully implemented.
Our findings show that these business tax reforms and lower business tax burdens will produce significant job, income and economic benefits for the state.
The analysis, based on the Regional Economic Models, Inc. (or REMI) model of the New York State economy, found that restructuring the tax code and lowering the basic tax rate would produce more than 14,000 new jobs by 2019, and almost 18,000 new jobs by 2024. The new jobs created through tax reform would be across the state's major business and employment sectors. It also shows that in-state personal income will increase by $1.3 billion by 2019, and $2.1 billion by 2024; and that tax reform will incentivize between $500 and $800 million in increased private sector capital investments.
The strong economic impact of this tax reform package is due to tax reductions being targeted in industries with high economic multipliers, such as manufacturing, information, real estate and financial services. These multipliers measure the number of total new jobs that result from an initial new direct job added in each sector. Business tax reductions in these industries have strong spillover effects that increase employment and economic activity throughout the state's economy.
The study also states that increased economic activity and personal income will generate additional state and local income, sales and other taxes, and that even in the short term, may offset a significant share of the initial projected state revenue loss due to proposed tax reductions.
In short, our work illustrates how a modern and simplified tax code for New York employers businesses will produce significant economic benefits for the state. While we are working with the Administration on a number of technical amendments to the bill, we support its major provisions and urge its adoption.
Moreover, the tax reductions included in the Executive Budget are broad based, providing benefits to the majority of corporate franchise tax payers, and their benefits focus on current New York state business employers and taxpayers.
While we are working with the Administration on a number of technical amendments to the bill, we support its major provisions and urge its adoption.
We have included the full report with our testimony today.
The corporate franchise tax reform package included in the Executive Budget reflects many of the proposals set forth in the Tax Reform/Fairness Commission co-chaired by Peter Solomon and Carl McCall, which issued its final report on November 13, 2013, and the Tax Relief Commission, co-chaired by McCall and former Governor George Pataki, whose final report came out in early December, and whose membership included Business Council President Heather Briccetti. The Executive Budget also reflects extensive work done by the Department of Taxation and Finance staff over the past several years in developing specific legislative language; efforts informed by a significant amount of input from the interested public.
Among its key reforms, the Executive Budget:
- adopts a 6.5% business income rate under the corporate franchise tax. This will give New York the lowest ENI-based business tax rate among northeast states, and puts New York in the top third of competitive business tax rates among the fifty states;
- eliminates the alternative minimum tax, which erodes the effectiveness of investment and job creation tax credits;
- replaces the state's complex “inter-corporate transaction” based combined reporting rules with a more common unitary business/stock ownership test; and
- eliminates the state's separate bank tax, bringing New York into line with the federal tax code and the majority of other states that apply a single general business tax.
The Executive Budget also streamlines (and reduces the cost to the state of) several business tax credits, including the investment tax credit and the brownfield redevelopment credit.
These proposals have several important objectives. They will simplify the state's business tax code, with the intent of reducing compliance and audit costs for taxpayers and the state alike. It will provide “horizontal equity,” meaning that it will treat similar taxpayers more uniformly. It will promote economic growth by applying tax reforms - previously adopted within the corporate franchise tax - that eliminate disincentives for having significant in-state employment and capital to current bank tax payers.
Again, we are proposing several technical amendments to the bill; e.g., we believe the proposed limitations on the manufacturing and research and development investment tax credit are too narrow, and would eliminate legitimate industrial and scientific investments from the program. However, we strongly support this business tax modernization and reform package, and urge its adoption.
Manufacturers' Real Property Tax Credit
During the Pataki/McCall Tax Reduction Commission process, The Business Council was a strong proponent of the real property tax payment-based credit for manufacturers that was included in the Executive Budget. Importantly, this credit, as proposed by Governor Cuomo, will apply to all manufacturers operating in New York State, including C-corporations subject to the corporate franchise tax, and manufacturers organized as sub-S corporations, LLCs or partnerships, whose business income is primarily taxed under the personal income tax.
We believe this proposal is a valuable economic development measure for New York State. First, it alleviates the impact of the tax that is most disproportionately burdensome for most New York manufacturers.
Second, by reducing the cost burden of property tax payments, it will improve the cost-competitiveness of manufacturers that continue to be a source of well-paying jobs in New York. Our research shows that, in upstate New York, the average manufacturing job pays about $16,000 more in annual wages alone than the average non-manufacturing private sector job. For legislators concerned with promoting strong, middle class job opportunities, there are few more effective approaches than helping support the state's manufacturing sector.
Third, by basing this tax reduction on real property tax payments, rather than reducing the tax rate, the benefit of this tax cut will flow to employers with significant a capital presence – and jobs – within New York State.
Enhanced 18-A Phase-Out
The Section 18-A assessment is in effect a gross receipts tax on a utility sales, done through the Public Service Law rather than the Tax Law. Since New York's repeal of the utility gross receipts tax in 2000 – which at the time produced annual customer savings of about $150 million – the state has imposed well over $1 billion per year in new energy-based assessments and fees, all through mechanism other than the Tax Law, but all addition to New York's disproportionately high energy costs.
We believe the Governor's proposal for 18-A reductions makes strong sense. Based on EIA and PSC data, 18-A costs the typical small manufacture several thousand per month and costs a large, energy intensive manufacture $10,000 per month or more. Indeed, we have members for which the 18-A surcharge is over $1 million per year. The proposed Section 18-A phase-out would eliminate this surcharge effective 1/1/14 for the state's largest business and institutional energy users – entities experiencing the most significant economic hit from this ill-advised gross receipts assessment. In contrast, again based on federal and state energy use data, 18-A costs the average New York homeowner between $1 and $3 per month. While the budget does not eliminate these costs in 2014, all energy consumers will see an additional reduction in this assessment in 2014, and , in total dollars, the majority of the assessment relief will flow to small, non-energy intensive residential, commercial, industrial and institutional customers. We believe that is a sensible, strategic approach, and we support its adoption.
That concludes our formal testimony today. Obviously, our main focus is on the Executive Budget's business tax reform provisions, but the broad scope of the budget's spending and programmatic initiatives affect many of our members, and I have attached an overview of other significant Executive Budget provisions of concern to The Business Council members.
Thank you again for the opportunity to testify today, and I look forward to any questions or comments you may have.
We support the general parameters of the FY 2015 Executive Budget; as it continues the recent 2% spending cap on state operating funds spending for the new fiscal year and begins implementing a $2 billion tax cut package.
- We support making “design-build” contract authorization permanent; extend its authorized use to local governments on non-Wicks Law projects.
- We support extending local governments' ability to “piggyback” off of other government-entity let contracts for an additional six years.
Staff Contact: Ken Pokalsky
- We support adoption of “Global NY,” a program to promote foreign investment in New York and to promote exports by in-state businesses, including a new international marketing campaign.
- We support an additional $150 million in capital funding and $70 million in Excelsior Job tax credits to be disbursed through the ten regional economic development councils (extending current state support levels.)
- We support funding initiatives including: $180 million for equipment at Nano Utica; $110 million for NYSUNY and CUNY 2020 grants; $105 million to support the NY Genome Center and University of Buffalo; $50 million to continue the NY “Open for Business” marketing campaign; $46 million for ongoing ESDC programs including the Economic Development Fund and M/WBE programs; $31 million for NYSTAR program grants; $30 million for Onondaga Lake regional redevelopment; $24 million for community redevelopment related to closure of an additional four corrections facilities; $12 million to support a Clarkson University/Trudeau Institute partnership; and $5 million for competitive funding for tourism marketing plans.
We support an increase of $807 million in education aid for the 2014-15 school year, $608 of which is provided as formula-based school aid.
- We support the $5 million in support for P-TECH partnerships.
- We support the commitment for $1.5 billion over 5 years for “high quality” universal pre-k; charter schools would be eligible for pre-K funding.
- We support the Enhanced Youth Works Tax Credit, whereby employers will be eligible for an additional $1,000 credit for at-risk youth employed full-time for an additional year ($500 for part-time status), and an increase in the annual credit allocation will increase from $6 million to $10 million.
Election and Campaign Finance Reform
- We oppose a reduction in corporate and LLC contributions to an aggregate total of $1,000 per year.
- We oppose a state-level matching funds system at a $6 to $1 rate, funded by a voluntary taxpayer check-off, from the abandoned property fund, private contributions from individuals and organizations, and transfers from the general fund.
Staff Contact: Darren Suarez
- We support an enhanced phase-out of the additional, temporary Section 18-A assessment.
Staff Contact: Darren Suarez
- We generally support proposed amendments to the brownfield cleanup program, including a ten year extension, retention of as of right tax credits, creation of a no-credit fast track approval program; broader special assessment exemptions for remedial wastes; and expansion of the program to include additional sites. We do not support tax credit criteria as currently proposed.
- We support authorizing the State to issue an additional $100M in bonds to provide funding for the State Superfund Program.
- We support enhance consumer protection through no-fault automobile insurance fraud reform.
Health Care / Health Insurance
Staff Contact: Lev Ginsburg
- We oppose any mandate on insurers to provide out-of-network coverage or any mandated methodology for reimbursement of the same, which would inevitably drive up the cost of health-care and undermine the stability of established health-care networks.
- We support measures to protect consumers from “balance” and “surprise” billing and transparency requirements for health-care providers to provide true service cost estimates prior to treatment
- As part of the extension of HCRA taxes through 2017, we support a detailed review of the extent to which bad debt/charity costs will be reduced through ACA implementation, and a corresponding reduction of HCRA taxes to reflect that outcome.
- We oppose requiring pharmaceutical manufacturers to provide a minimum supplemental rebate for drugs that are eligible for state public health plan reimbursement. These additional taxes on the pharmaceutical industry stymie research, development and production of new therapies in New York.
Taxation / Revenues / Tax Credits
Staff Contact: Ken Pokalsky
- As discussed in our main budget testimony, we generally support the corporate tax modernization and reform package.
- We are supporting an amended version of the Executive Budget's definition of manufacturer and manufacturing activity, and the related amendments to the Article 9A investment tax credit.
- We support the refundable credit under Article 9A and 22 equal to 20% of real property taxes paid by a qualified NY manufacturer.
- We support Estate Tax Reform, including an increase in the Estate Tax exclusion threshold to $5.25 million (and future indexing); phases down the tax rate to 10% by FY 2017; subjects certain gifts to be added back for estate tax purposes.
- We support repeal of the stock transfer tax, which under current law is collected and fully rebated to taxpayers with no net revenues to the state.
- We support allowing self-employed individuals to file MTA mobility tax returns with their personal income tax returns.
Technology / Telecommunications
- We support allowing the PSC to forgo application of certain regulatory provisions to telephone corporations if such provisions are not necessary to ensure just and reasonable rates.
- We support streamlining of the confirmation of cable franchises and renewals by establishing a process that subjects franchises to the PSC's minimum franchising standards, rather than requiring PSC approval.
- We support providing $155 million in new state funding under the New York Works Program to fast track highway and bridge projects; $45 million for essential project engineering and $25 million to enhance transit, rail and aviation programs.
- We support $2.5 million for a feasibility study of the Northern Tier Expressway (Route 98) between Watertown and Plattsburgh.
Travel and Tourism
- We support $5 million for the Market-NY program to provide competitive grants for regional promotion of events and tourism and $1.1 million in funding for Taste-NY to help market NYS food and food products.