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February 24, 1999

Testimony of
Daniel B. Walsh,President
The Business Council of New York State, Inc. Senate Finance Committee and Assembly Ways and Means Committee

Chairman Stafford, Chairman Farrell, and honorable members of the committees:

As you prepare to enact the budget that will take New York State into the year 2000, the Legislature can point with pride to the state's recent record.

New York's economy is stronger than it's been in years. In 1998, our private-sector job growth totaled 2.1 percent. That rate of growth was the best in more than a decade. It placed us 23rd among the states, also our best showing in many years.

Our economy is stronger because our business climate has been improved. You did that - along with Governor Pataki and his Administration - and we applaud and thank you for it. You reformed our workers' compensation system and our unemployment insurance taxes. You acted to reduce the cost of health care. You created the Power for Jobs program, to provide lower-cost energy for hundreds of employers all across the state.

Most obviously and most dramatically, you have cut taxes. And then you have cut them again.

We are here today to talk about the remaining agenda for tax cuts. But let's recall for a moment the bad old days - the days of tax increases.

Attached to the printed remarks we've delivered to the committee is a list of the tax increases enacted in 1989 through 1993. It's a long list. Some of the longer-tenured members of the committees may recall the phrase "The Big Ugly," one of the major tax bills enacted then.

These were tax increases on our businesses, and that meant taxes on jobs. They were tax increases on working individuals and families, and on the earnings people need to provide for their basic needs.

Over the past five years, you have eliminated most of the damage created during those earlier years, and enacted major new tax cuts that go much further. That list of your recent accomplishments is even more impressive. It includes:

The most important thing you and Governor Pataki have done is to bring a new mindset to Albany's consideration of tax issues. Chairman Farrell, a couple of weeks ago, Speaker Silver and you issued the Ways and Means Committee summary and analysis of the Executive Budget. In that report you said: "The Assembly has two main tax policy goals, which are aimed at reducing tax burdens on the State's middle-class families and creating jobs." We agree strongly with both of those goals.

Chairman Stafford, when you and Senator Bruno announced the Senate Majority tax reduction proposal in December, you said: "Working with Governor Pataki, we have enacted almost $12 billion worth of personal, business and property tax cuts. We've put more money back into the pockets of taxpayers and encouraged businesses to locate and to grow in New York. The proposal we are unveiling today will build on that record of success." We agree with your analysis of the tax cuts already enacted, and strongly support the proposals you have made for further reforms.

We recognize and applaud, also, the tax-reduction proposals issued earlier this year by Minority Leader Faso, Assemblyman Flanagan and their colleagues, as well as those made last year by Senator Connor and the Senate Minority Conference.

Each of the proposals made by the leaders of the Legislature, and those Governor Pataki included in this year's Executive Budget, recognizes an important truth: We must do more. Our taxes were so far out of line with other states, for so many years, that we have to go further if we are to be truly competitive.

Last September, our Board of Directors set our priorities for further tax reductions this year. Those are:

Tax parity for our financial services industries is a matter of fairness. But it's more - it is an economic imperative. New York State is home to some of the most respected insurance companies and banking corporations in the world, and we want those companies to grow here. We applaud the Governor's and the Senate Majority's proposals in this area.

As a result of the electric industry deregulation mandated by the Public Service Commission, New York's investor-owned utilities formed holding companies - and thus will be exposed to taxes that were never intended to affect utilities. Unchecked, these taxes will further escalate New York's above-average power costs and will eliminate much of the savings ratepayers need.

Senator Stafford, your conference's tax proposal addresses both these concerns and the need for further reduction in the GRT. We applaud and strongly support those efforts.

We are also looking at the Governor's proposal to restructure our energy taxes. We strongly support the proposal to reduce the GRT and many other elements of the Executive Budget tax package. We look forward to reviewing the full legislation when it is introduced.

Last year, you acted to reduce the ton-mileage tax portion of the Highway Use Tax after it became clear that this tax drives trucking business and trucking industry jobs out of New York. Even after the achievements of last year, our highway tax is still uncompetitive. We ask that you reduce the ton mileage tax by another 25 percent of its pre-1998 level, and convert the remaining portion into registration fees for trucks subject to the tax.

The petroleum business tax drives up costs for consumers in many ways, and should be reduced for that reason alone. But there is another reason for cutting this costly tax. When it was created a number of years ago, the price per barrel of petroleum was around $30. Thus the PBT of around $3 represented roughly 10 percent of the market price. Today, oil prices on the open market are about $9 a barrel - and the tax is around 30 percent of the price. The tax is such a major factor in the price that utilities now tell us they are forced to pay more for natural gas and coal because marketers of those commodities price their products just below the price of oil. If we cut the PBT and thus reduce the price of oil, consumers will save not only on oil but on other energy sources, as well.

The long-term agenda for tax reform

In the months since our Board set our top priorities for this year, we have examined the state's entire tax code to identify additional, long-term changes needed to eliminate competitive disadvantage in our state tax policy once and for all - indeed, to make that policy an advantage in the competition for jobs. A detailed list of our long-term proposals is attached to my printed testimony. We urge you to consider these proposals as you consider further needed tax reforms for possible action this year and in future sessions.

Ours is an ambitious agenda. We believe the next few years should bring a tax-cutting program every bit as ambitious and successful as the one you have enacted in the past five years. Let me explain, first, why we believe such an undertaking deserves your support.

We've seen clear evidence that tax cuts create more economic activity and jobs. As I mentioned earlier, increased job growth is one result. From 1992 through 1994, our job growth rate was only 17 percent of the nation's growth rate. If we had maintained that low level of growth from 1995 through last year, we would now have 300,000 fewer jobs than we do.(1) The 300,000 New Yorkers who hold those jobs today are among the best evidence that tax cuts work.

And there is much more evidence.

Let me talk briefly about one element that bears most directly on corporate taxes.

One of the most helpful features of our state tax code, from the perspective of employers, is the investment tax credit. It allows manufacturers, farmers, some other businesses - and now securities firms - to subtract from their state tax bill a small portion of eligible investments in new plant and equipment. The credit is 4 or 5 percent, depending on total capital investment. A study by our Public Policy Institute in 1990 and a report by the Department of Taxation and Finance in 1995 both found that the ITC was a valuable incentive for manufacturers considering major capital expenditures in New York.

The value of the ITC is weakened, though, by something called the alternative minimum tax. The AMT now requires employers to pay at least 3.25 percent of their New York State income in tax. From 1989 through 1993, it was set at 5 percent. It is scheduled to drop to 3 percent, thanks to your action last year. (see attached chart)

Because it waters down the benefits of our investment tax credit, the AMT basically is a tax on capital investment in New York. And, not surprisingly, when you look at the numbers you can see that it reduces capital investment in New York.

In 1982, manufacturing capital investments in New York totaled 5.7 percent of those nationwide, at $4.3 billion. In 1987, capital investment here was the same dollar amount, but fell to 5.5 percent of the national total. That year's corporate tax restructuring plan instituted the AMT for the first time, at 3.5 percent. (The original rate was scheduled to drop to 3.0 percent in 1990, but instead was raised to 5.0 percent in 1989, and left at that level for five years, as one of the many tax increases imposed at that time.)

What was the impact? By 1992, manufacturers' capital investment in New York were only 4.1 percent of the national total. In 1993 and 1994, our share fell to 3.5 percent - more than two full percentage points, or a third, below our 5.7 percent share of just a few years earlier.

In 1994, the Legislature decided times had changed. The corporate surcharge was finally scheduled for sunset, and the AMT returned to its previous level of 3.5 percent.

After the AMT was reduced, capital investment increased once again. In 1995 and 1996, manufacturing investment in the Empire State grew to 3.8 percent of the national total. Our two-year total was more than $10 billion. That was an increase of 33 percent over the preceding two years - compared to a national increase of only 24 percent.

Investment means jobs. Sometimes, new jobs created; other times, existing jobs that will stay here for many years to come, because our factories will now be more productive than the competition in other states or overseas.

Again, though, the progress we've made is not enough. We're still not attracting our share of capital investment. We need to make New York an even more attractive place for companies to invest and create jobs.

Last year, you enacted a major enhancement to the investment tax credit by including the securities industry. Wall Street firms and their counterparts elsewhere in the state now have a major tax incentive for the multi-million-dollar investments they make in computers and telecommunications equipment. That means the AMT now acts as a damper not only on manufacturers but on our important securities sector, as well.

Our long-term agenda for tax reform is an effort to help you think ambitiously and creatively about the best way to promote long-term economic growth for New Yorkers. The AMT is one good example. Clearly, our long-term interests are best served by promoting investment in our key manufacturing and securities sectors. Thus we suggest that you consider major, further reductions in the AMT - or, ideally, eliminating the AMT rate altogether in favor of a fixed-dollar minimum. We strongly support Governor Pataki's proposal to enact a further reduction, from 3 percent to 2.5 percent.

Our recommendations for long-term tax reform reflect these principles:

Our tax policy should reward investment in New York. I've already discussed further reduction or elimination of the alternative minimum tax. In addition, we believe adopting a single sales factor for apportionment of corporate income would do much to tilt the balance in favor of new investment and job creation in the Empire State. Related issues include ascribing receipts of securities firms to the address of the customer.

Double-taxation of resources used to create products and services is to be avoided. Reforms that follow from this principle include sales tax exemptions for, among others, commercial and industrial utility bills (residential customers are already exempt); investments in telecommunications infrastructure; and hazardous waste cleanup costs.

We must be competitive with other states in every area, including industries that represent the basic "infrastructure" of our economy. For years, energy and telecommunications companies were considered easy victims for new taxes because they were bound to New York and operated in a climate of limited competition. That's changed; so must our tax policy. Further reductions in the gross receipts tax on both energy and telecommunications utilities, as well as several industry-specific reforms in each area, are needed. In addition, being competitive means enacting reforms where particular regionally based taxes are far out of line; the MTA surcharge is one major example.

We must address the reality that local taxes can be as much a competitive problem as our state taxes. Overall, local taxes are now New York's single biggest competitive disadvantage. Our property taxes per capita were 70 percent higher than the national average in 1995. While certain elements of our tax code reduce property taxes for some businesses - through the involvement of industrial development agencies, for instance - most employers do not benefit from those provisions. Our proposals regarding real property taxes would, we believe, create a more fair and more competitive tax climate at the local level.

Short-term reduction in Albany's tax revenues is well worth the resulting payoff in economic opportunities for New Yorkers. We recognize that these proposals might reduce state revenues in the immediate future. Each of the tax reductions you and the Senate have championed over the past five years, however, is based on the fundamental principle that private-sector job growth is more important than growth in government revenue. Long-term, the only way we will be able to pay for schools, health care and other essential public services is to keep our economy growing.

You and the Governor have done much in recent years to eliminate the taxes imposed in previous years. However, a number of these tax increases still remain on the books, and are still causing economic harm.

For example, one only has to talk to a liquor store owner anywhere near a border crossing or Indian reservation to know that the taxes imposed on distilled spirits continue to encourage customers to purchase products in other jurisdictions. It's time to correct the damage done by this and other taxes as well.

We don't pretend to hold a monopoly on good ideas for reforming our tax policy. The Governor, the Senate Majority and the Assembly Minority have additional proposals on the table, and Speaker Silver has said he expects the Assembly Majority, as they did last year, to have a package this year.

The motivation behind each element of our agenda is a simple one:

We seek to eliminate, everywhere possible, limitations on the ability of New York State businesses to thrive, make a profit, and keep and create jobs for New Yorkers.

In addition, we support additional relief for low-income workers through an expansion of the earned income tax credit. At 20 percent of the federal EITC, New York's credit is an important factor in helping low- and moderate-income working families get by financially. It also represents a significant inducement for low-skilled workers to enter and remain in the workforce, where they are needed. We join with State Communities Aid Association and the United Way of New York State in supporting an increase in the EITC to 30 percent of the federal level.

Non-tax issues

While attracting more jobs must be our top priority, it's also increasingly true that employers find it hard to hire qualified workers. That makes our workforce training system more important than ever. We have pointed out before that the state's confusing assortment of training programs is often ineffective, and requires major reform. Those dollars could be used better and more efficiently, to provide more flexibility and to allow employers to define the types of training needed.

Dr. Ron Williams, president of Herkimer Community College and president of the Association of Presidents of Public Community Colleges, joined me in writing members of the Legislature earlier this month, with detailed recommendations. To summarize, we believe the key components of an effective workforce training system are that it be employer driven, locally delivered, easy to access and well-funded. We suggest $50 million in state assistance, delivered to consortia of employers in a manner reflective of the legislation that you enacted last year.

In addition to cutting taxes and developing our workforce, we believe the top priority issues demanding your attention include relieving local governments and school districts of the costly and inefficient burden of state mandates.

Governor Pataki's Executive Budget includes several very important proposals that we urge you to support. One is major reform of the Wicks Law, which would save taxpayers tens of millions of dollars and speed the construction of badly needed new school facilities. Another is change in the rules affecting binding arbitration, which would make the system more fair and eliminate needless costs on local taxpayers.

Mr. Chairman and members of the committees, thank you for your attention. I welcome any questions you may have.

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1. From January 1995 through December 1998, New York's private-sector job growth was 419,300, or 6.4 percent; that percentage was 60 percent of the national growth rate of 10.6 percent. If New York's growth had remained at 17 percent of the national rate, we would have added only 118,000 jobs.