Manufacturing: Making a Comeback in New York
A briefing paper prepared for New York State Manufacturing Week, May 8 - 15, 1998
After decades of humiliating decline, New York State's manufacturing sector is at last making its comeback. It's a comeback based on world-class competitiveness and on public policies that are changing for the better.
To keep up the momentum, the manufacturing community proposes a 1998 agenda that will help ensure continued, stronger growth. The agenda focuses on six key issue areas:
- Tax cuts to create jobs.
- Civil justice reform.
- The unemployment compensation system.
- Workers' compensation.
- Energy costs.
- And workforce training.
Tax cuts to create jobs
The Governor and the Legislature have a solid record to build on:
- In the last five years, New York has cut taxes by $7.5 billion. And in that time, we've created over 360,000 net new private-sector jobs.
- Last year, we created 3,900 net new manufacturing
jobs after losing an average
of 25,000 a year over the last forty years.
- Companies such as IBM, Corning, Guardian Glass, Ace Hardware, Mercedes-Benz, Can Fibre, Nine West, Welch-Allyn and many others are investing in New York's future.
Cut corporate tax rates; strengthen incentives for growth
New York's buisness income tax rate of 9% is higher than in 37 other statesand higher than our personal income tax rate. Other states, meanwhile, are competing aggressively for the jobs we need in New York.
A tax-reform package this year will strengthen the incentive for manufacturers to grow in New Yorkand strengthen the business climate in which they operate. We recommend this program:
- Reduce the corporate tax rate to 6.85% matching the top tax rate on personal income.
- Reduce the Alternative Minimum Tax from 3.5% to 2.5%. New York's Investment Tax Credit is a strong incentive for investment by companies in every field from chip fabrication to metal working. It reduces taxes by $1 for every $20 or $25 that a manufacturer invests in New York. But its impact is sharply undercut by the Alternative Minimum Tax.
- Encourage growth in the securities industry by extending the Investment Tax Credit to include purchases of technology equipment by firms in this industry.
- Reduce energy, transportation and communications costs by eliminating the Gross Receipts Tax and the truck mileage tax.
On average, manufacturing wages are 33% higher than in retailing, and 11% higher than in services.
Manufacturing provides 15% of jobs nationwide and 11% of total jobs in New York State.
Upstate, its share of jobs is 16%.
Civil justice reform
The climate of excess litigation and unpredictable damage awards is driving up costs for manufacturers, stifling innovation, and hurting our state's competitiveness.
- The lawsuit industry now costs New Yorkers over $14 billion a yearor almost $800 per person.
- New York's median jury award is $273,000which is five times the national median.
- Fully one-quarter of jury awards in New York exceed $1 million.
- Litigation drives up the cost of goods and servicesand pushes up local taxes.
Set sensible limits on lawsuits and damage awards
More than 20 other states have adopted major tort reform measures in the last five years. The list includes Ohio, Illinois, Florida and New Jersey.
New York should join this movement, by adopting reforms that:
- Repeal "joint and several" liability so that a party found to be 1% responsible for an injury can't be forced to pay 100% of an award.
- Establish a "statute of repose" so that a third-generation owner of a family tool-and-die company isn't sued over something made by her grandfather (even though those machines could have been sold and modified several times over).
- Establish a rational way to compensate injured parties for pain and suffering, while capping non-economic damages.
- Allow contractors and other employers to defend themselves against lawsuits filed by workers whose negligence may have contributed to an injury on a work site.
- Establish guidelines to encourage early settlement of tort suits by limiting contingency fees when reasonable settlement offers are made.
New York State has 40% more lawyers today than it did just 10 years ago. Tort filings in New York have increased 58% in roughly the same period.
Personal injury auto accidents dropped, but the number of auto-accident lawsuits went up.
Although the rate of unemployment in New York has been dropping steadily, many employers are paying significantly more for unemployment compensation insurance than are their competitors in other states. Our tax tables are outdatedand we have inadequate safeguards to ensure the eligibility of claimants:
- New York's UI tax tables have not been adjusted in 20 years.
- "Positive" (stable) employers bear an excess UI tax burden, relative to what they cost the system.
- The average period of time a claimant collects in New York is one of the longest in the country.
Reform the tax tables; strengthen the safeguards
Reform of the system must start with an effort to widen the differential between the highest- and lowest-taxed employers:
- Speed up the downward move in a positive-account employer's tax rate, as the employer's positive balance grows.
- Speed up the upward move in a negative-account employer's tax rate, as the employer's negative balance grows.
- Eliminate the minimum 0.3% tax rate requirement.
- Continue the drop in the experience-rated tax rate for the highly positive account employer.
- Continue the rise in the experience-rated tax rate for the highly negative account employer
In addition, to ensure that benefits are collected only by those eligible, New York should adopt a wage reporting system. We are now one of only two states that do not have some form of wage reporting.
Overall, New York's Unemployment Insurance system costs employers $2.5 billion annually.
Among all the states, New York currently has the smallest differential in UI rates between the highest- and lowest-taxed employers.
Two years ago, the Governor and the Legislature took a solid first step towards reforming New York's excessively burdensome workers' compensation system. Aaverage rates paid by employers have dropped 25 percent. But much remains to be done:
- New York's average rates for manufacturers were 29 percent ahead of the national average last year.
- That put us eighth highest in the nation.
- Competing states are experiencing rate reductions. Average rates for manufacturers across the country dropped 14 percent last yearthe third year in a row that rates had dropped.
Limit scheduled awards; adopt medical guidelines
New York State still has many reasonable opportunities to reduce the cost of workers' comp for employerswithout jeopardizing the benefits workers need. A cost-cutting reform program could include:
- Limit the payment of benefits in permanent partial disability cases.
- Implement objective medical guidelines.
- Limit schedule awards to one-half the claimant's total disability rate, for periods that do not represent actual lost time.
- Require a "preponderance of evidence" to support an award under Sections 21 and 47 of the workers' compensation law.
- Provide for a partial reduction in workers' comp payments when the claimant becomes eligible for full Social Security benefits.
- Prohibit payment of benefits if the employee's injury was sustained during the perpetration of an illegal act.
- Allow the coordination of public benefits and employer-funded benefits payable for the same period of disability.
The manufacturing sector in the United States is more productive overall than in any competing countryincluding Germany and Japan.
And manufacturing productivity in New York, in turn, is 19% above the U.S. average.
Reducing energy costs
New York is making progress in reducing the cost of energy for manufacturerswhich has been, and remains, a significant competitive disadvantage for our state.
- The "Power for Jobs" program enacted last year will provide 400 megawatts of lower-cost power to employers.
- An initial reduction in the Gross Receipts Tax on utility customers was adopted last year.
- And the Public Service Commission has approved "Competitive Opportunity" plans for six electric utilities, to open their markets and reduce rates.
Allocate more power; cut taxes; secure financing
Despite the progress we have made, overall electric rates for industrial users in New York remain more than 50% higher than the national average.
It's time to take the next steps in reducing this cost, and in positioning New York to compete for the manufacturing jobs of the future:
- Accelerate the "Power for Jobs" program.
- Allocate additional power for subsequent years to facilitate the transition to competition.
- Provide utilities with the opportunity to obtain highly secure, low-cost financing for investments in certain non-physical assets (such as independent power contracts, demand-side management programs, and environmental remediation).
- Accelerate the Gross Receipts Tax reduction enacted last year.
- And ultimately, phase out entirely the GRT on electricity, natural gas, steam and telecommunications.
Manufacturing accounts for 31% of total economic activity in the United States.
Every 10 jobs at manufacturing companies generate another 6 jobs in other sectors, such as raw materials and services.
Manufacturers across New York State report that they are having difficulty finding the skilled workers they need. In some regionssuch as Rochesteremployers have had to search out-of-state.
This is a national phenomenon. Other states that are major competitors of New York are meeting this problem head-on. States such as North Carolina, Ohio and Virginia have comprehensive programs to train and upgrade the skills of manufacturing workers.
Yet in New York, there is no program that employers can access that is dedicated to worker training.
Get serious about an employer-oriented job-training effort
To meet the needs of its workers and its employersand to beat the competitionNew York needs to work quickly to develop an employer-oriented job-training program.
New York should create a dedicated program within Empire State Development to train and upgrade worker skills. It should be:
- Locally delivered through networks that business and industry have already createdsuch as chambers of commerce, industrial development agencies, local development corporations, and employer organizations.
Some leaders in the Legislature are already advocating such an approach. Others have proposed a tax credit for small businesses that invest in training. Manufacturers in New York want to work with allies of the business community in the Legislature to develop a comprehensive solution.
60% of manufacturers report that current workers lack basic math skills.
73% of manufacturers say that employees' skill deficiencies are making it harder to improve productivity and/or upgrade technology.