AN ISSUE BRIEFING PAPER
May 1999

Manufacturing keeps New Yorkers working
An agenda for 1999

Manufacturing Week (May 7-14) provides an opportunity to reflect on how much New York has improved its business climate in the last five years, and how much farther we have to go.

From 1989 to 1994, New York lost an average of 42,000 manufacturing jobs a year. This was during a time when the state's tax and regulatory burdens were at or near the top in virtually every category affecting the cost of doing business.

Then, in 1997, for the first time since 1984, New York gained new production jobs -- nearly 5,000. While these gains my seem meager compared to earlier losses, they represent important evidence that New York's new policies of tax reduction, regulatory improvements, and reforms in workers compensation and unemployment insurance are working. Manufacturing is key to New York's economic comeback -- particularly for upstate.

To continue our progress and reach our potential, manufacturers in New York are working to remind the public and elected officials that while the policies of the last five years are working, we must continue to show improvement -- or else slide back into the economic decline that has already deprived hundreds of thousands of our young people of opportunity to live and work in New York State.

The manufacturing agenda for 1999 focuses on key concerns that are central to our competitiveness: tort reform, workforce policy, continued tax and benefit reform, and reducing energy costs.

Tort reform

The civil justice system is out of balance. As our Public Policy Institute showed in a report last year, the cost of the lawsuit industry is high in New York -- costing well over $14 billion annually. It costs each New Yorker $800 a year. It adds $600 to the cost of having a baby and $400 to the cost of driving a car. And, one out of five motor vehicle accidents results in a lawsuit today.

Change in Manufacturing Employment, 1998
Rank	State	Amt.		Rank	State	Amt.
1	Iowa	2.9%		27	Michigan	-0.3%
2	Montana	2.4%		28	Wisconsin	-0.4%
3	Vermont	2.3%		29	West Virginia	-0.4%
4	Arizona	2.0%		30	Louisiana	-0.5%
5	Kansas	1.5%		31	Ohio	-0.8%
6	Delaware	1.5%		32	Illinois	-0.9%
7	Alaska	1.2%		33	Connecticut	-1.0%
8	South Dakota	1.2%		34	Pennsylvania	-1.0%
9	Georgia	1.2%		35	Maryland	-1.1%
10	Florida	0.9%		36	NEW YORK	-1.2%
11	Indiana	0.9%		37	Washington	-1.4%
12	Mississippi	0.7%		38	Colorado	-1.5%
13	Nevada	0.7%		39	Alabama	-1.7%
14	Idaho	0.7%		40	North Carolina	-1.7%
15	Oklahoma	0.6%		41	Virginia	-1.9%
16	Minnesota	0.5%		42	New Jersey	-2.0%
17	North Dakota	0.4%		43	Tennessee	-2.1%
18	California	0.3%		44	Hawaii	-2.4%
19	South Carolina	0.2%		45	New Hampshire	-2.5%
20	Texas	0.2%		46	Oregon	-2.5%
21	Nebraska	0.1%		47	Rhode Island	-2.5%
22	Kentucky	0.0%		48	Massachusetts	-3.1%
23	Missouri	0.0%		49	Maine	-3.5%
24	Wyoming	0.0%		50	New Mexico	-5.0%
25	Arkansas	-0.0%
26	Utah	-0.2%		U.S. average		-1.2%
Source: U.S. Bureau of Labor Statistics, December 1997-December 1998

Lawsuits are up 58 percent in just 10 years. Why? Not because society is more dangerous -- it's not. It may have more to do with the fact that our civil justice system provides incentives for frivolous suits to be brought against innocent people, businesses, and local government. With the number of lawyers in New York growing 26 times as fast as the state's population, these incentives have a powerful effect.

Furthermore, New York judges and juries are generous to a fault. One out of every four jury awards exceeds $1 million, and the median verdict for tort awards is $273,000 -- five times the national average.

The Business Council believes that when businesses are negligent, they should pay their fair share of damages. But, too often, good companies that make good products are dragged into lawsuits simply because they are perceived to have deep pockets. This is wrong and it has consequences. It drives up product costs for consumers; it stifles innovation; it makes small businesses less productive; and it damages New York's competitive position.

What we support

That is why The Business Council is joining with New Yorkers for Civil Justice Reform to support the Volker-Morelle Civil Justice Reform Act of 1999 (S.2277/A.4509). Some of the provisions of the Act include the following:

. Repeal of joint and several liability. (Currently, businesses found to be 1 percent responsible for an injury can be held responsible for 100 percent of the damages. This provision would prohibit businesses from being held responsible for more than their proportionate share of damages).

. Establishment of a statute of repose. (Currently in New York, a manufacturer can be held liable for the safety and performance of products they manufacturer as long as the product is in use. This provision would establish a time period after which the manufacturer could not be sued for injuries resulting from the use of its products)

. Capping all non economic damage awards at $250,000.

. Adoption of a "loser pays" rule for lawsuit costs.

. Repeal of strict liability for employers and property owners at construction work sites. (If an injury to an employee occurs at a New York construction site the employer and property owner are now automatically deemed to be liable even if the injury occurred as a result of the negligence of the employee. This provision would establish a negligence standard and allow damages to be apportioned based on degree of responsibility)

More than 20 competing states (including, most recently, Ohio and Illinois, with Florida about to follow) have adopted comprehensive civil justice reform in recent years. It is time for New York to join them.

Workforce development

A recent Business Council survey of several hundred New York employers showed that 70 percent of respondents said productivity in their companies has suffered because of the employee skills gap. The need for skills upgrading was greatest for technology skills (84.5%), followed by critical thinking skills (77.7%). And almost half of the respondents said their companies had used community colleges to provide training for upgrading the skills of current workers; almost 70 percent of those companies rated the community college programs they had used as "good" or "excellent."

Employers have identified several problems with the current job training system, including the fact that funds go to providers rather than purchasers of job training (i.e. employers). This process does not give providers the right incentive to meet businesses' needs in today's rapidly changing global economy.

The federal Workforce Investment Act, while trying to establish a stronger role for employers in the reform of the workforce development system, is still almost entirely focused on the unemployed and those with multiple barriers to employment. It does little to address the need employers have to upgrade the skills of their current workforce in order to remain competitive and grow.

Businesses want new models for delivering job training resources to be developed and implemented. Old models of funding provider-driven programs that compete with one another don't work in today's rapidly changing global economy. In short, employers want a program that is employer-driven, locally delivered, easy to access, and well funded.

Types of training employers need can vary widely by industry, region, and current worker skills. Training requirements need to be locally determined through the consortiums. Examples run the gamut of skill levels and include but are not limited to:

• Basic math and reading.
• Technology (from various software programs to programming and repair).
• Technical reading and writing.
• Algebra and other higher level math.
• Critical thinking.
• Problem solving.
• Teamwork.
• Interpersonal skills.

The availability of training for incumbent workers should not be tied to new job creation or the hiring of certain populations of workers. However, by improving the capabilities and productivity of their current workers, employers can often open entry level jobs to new hires.

What we support

The Business Council recommends that training be provided through or referred by consortiums of businesses, business associations, economic development organizations, and educational institutions. In other words, training resources should flow from the state (Empire State Development) to business consortiums that would determine which provider would deliver the training.

Training resources of $50 million should be provided by the state through the Empire State Development Corporation in the form of a matching grant program to self-established consortiums that would determine the training needs of their business and industry members, and which provider could best deliver that training.

There should be no geographic barriers imposed on consortiums receiving training grants. Any local, regional, or statewide association of businesses should be an eligible applicant.

Training should be delivered quickly. Businesses don't want to lose their competitive position waiting for any state agency or any other training provider to approve a curriculum, or otherwise have to unnecessarily wait to bring a training program on-line.

Making taxes and benefits more competitive

The business community has had enormous success in recent years in convincing our elected officials that New York's taxes must be reduced and worker benefit costs must be made more competitive, if we are to create a truly competitive climate for manufacturing. We must make more progress, though. And we are well positioned to do exactly that, this year.

Starting in 1994, our state leaders have enacted a number of major tax cuts that have made New York a better place for manufacturers to generate profits and jobs. The 15 corporate tax surcharge is gone; personal income taxes are down; the gross receipts tax on energy and telecommunications bills is being reduced; New York's added estate tax (which harms family-owned manufacturers and other businesses) is being eliminated; the alternative minimum tax is being reduced. And, every corporation in the state will benefit from last year's major business tax reductions, including a drop in the corporation franchise tax rate from 9.0 to 7.5 percent that will take full effect over the coming three years.

We have succeeded in advancing the cause of further business tax cuts to the point where the Governor and all four legislative leaders have introduced major tax-reform proposals. Clearly, Albany has changed dramatically from just five years ago, when The Business Council spearheaded an ultimately successful drive to eliminate the longstanding, "temporary" corporate tax surcharge.

What we support

Governor Pataki and all four of the legislative leaders have proposed further business tax reductions, for enactment this year, in addition to those already written into law.

Tax cuts of particular interest to manufacturers include:

Further reduction in the alternative minimum tax. New York is one of the very few states that offers an investment tax credit, providing a major incentive for capital investment in the state. Unfortunately, the benefits of the ITC are limited by New York's alternative minimum tax (AMT). It provides that, regardless of the value of credits that companies can claim, they must pay corporate income tax of at least 3.25 percent of their New York State-allocated income. As a result of legislation enacted in 1998, with The Business Council's strong support, the AMT has already dropped from its former level of 3.5 percent and will fall to 3.0 percent after June 30 of this year. Governor Pataki, Senate Majority Leader Bruno and Assembly Minority Leader Faso have proposed cutting the AMT further, to 2.5 percent. We strongly support further reduction in the AMT.

Further reduction in energy taxes. Energy costs in New York are too high, and energy taxes are a major reason. Senator Bruno has proposed cutting another ½ percent from the gross receipts tax on electrical and telecommunications utilities (on top of the ½ percent reduction already underway). Savings to business and other ratepayers would total $225 million. Governor Pataki has proposed a complete restructuring of state taxes on energy utilities, repealing the GRT and moving utilities into the Article 9-A corporate tax structure that covers most other businesses. The Governor's proposal would save taxpayers a net $155 million when fully effective. It is supported by Senate Minority Leader Connor and Assembly Minority Leader Faso, and their conferences.

Reducing the ton-mileage tax. Last year, the Legislature reduced this tax, which is imposed on all companies that ship by truck, by 25 percent. Senator Bruno and the Senate Majority have proposed an additional 25 percent reduction.

In addition, New York needs to make further reforms in workers' compensation costs, particularly in its costly awards for permanent partial disability.

Reducing energy costs

Cutting taxes on energy will contribute to making New York's manufacturing base competitive with other states where energy is more reasonably priced. It is commonly recognized that competitively priced energy is an essential ingredient to New York's continued economic recovery and job creation.

Average Industrial User Cost For Electricity (Cents per Kilowatt/Hour), 1995-96
Rank	State	Amt.		Rank	State	Amt.
1	New Hampshire	9.61		27	Georgia	4.46
2	Connecticut	9.51		28	Delaware	4.44
3	Hawaii	9.18		29	Washington	4.37
4	Massachusetts	8.48		30	Minnesota	4.23
5	New Jersey	8.15		31	South Carolina	4.15
6	Rhode Island	8.06		32	Maryland	4.11
7	NEW YORK	7.63		33	Indiana	4.10
8	Vermont	6.89		34	Montana	4.10
9	Maine	6.43		35	Louisiana	4.05
10	California	6.40		36	Virginia	3.99
11	Arizona	6.16		37	West Virginia	3.99
12	Pennsylvania	5.93		38	Texas	3.93
13	Nevada	5.64		39	Wisconsin	3.87
14	Arkansas	5.31		40	Iowa	3.87
15	Illinois	5.29		41	Alabama	3.87
16	Michigan	5.19		42	Oregon	3.84
17	Ohio	4.84		43	Oklahoma	3.62
18	Kansas	4.77		44	Utah	3.61
19	Florida	4.75		45	Tennessee	3.48
20	New Mexico	4.73		46	Kentucky	3.31
21	Missouri	4.68		47	Wyoming	3.22
22	Mississippi	4.68		48	Idaho	2.69
23	South Dakota	4.66		49	Alaska	NA
24	North Carolina	4.63		50	Nebraska	NA
25	Colorado	4.57		U.S. Average		4.92
26	North Dakota	4.48		N.Y.S. % above avg.		55.1%
Source: Edison Electric Institute

The electricity market is moving swiftly from a highly regulated industry to one where generation and wholesale power is robustly competitive. However, New York's manufacturing sector continues to rank high energy costs at the top of their list of economic burdens to job retention and creation. New York State's taxes on energy are higher than in any other state, representing approximately 20 percent of a customer's bill -- twice the national average. These taxes must now be reduced to foster truly competitive energy markets, protect vital jobs and build a healthy business environment.

The laws which apply these taxes were, in some cases, passed over 100 years ago. Lawmakers 100 years ago did not anticipate the competitive gas and electric markets we are now developing and cultivating. Existing state and local taxes on electricity and gas were designed for a vertically integrated market -- one which no longer exists. The New York State Public Service Commission has compelled electric utilities to end their regulated monopolies and restructure themselves into holding company/subsidiary company models. Under this mandated restructuring our tax laws, if left unchanged, will result in certain unforeseeable tax rate increases on energy which are unfair to producers and consumers alike.

To avoid these unintended tax increases New York should: eliminate the Subsidiary Capital tax on electric and gas utilities; eliminate the Excess Dividends tax on electric and gas utilities; eliminate the Sale for Resale tax that will add a .75% tax each time a commodity changes hands; and repeal the natural gas importation privilege tax.

Other tax cuts on energy that will contribute to a competitive manufacturing environment are the following:

• Accelerated cuts, and eventual elimination, in the Gross Receipts Tax (GRT): The current rate of the GRT is 3.25% with reductions of .75%, approved during the 1997 legislative session, scheduled to take effect January 1, 2000. The GRT is a particularly egregious tax, not permitted by law to be listed on customers' utility bills, that is ultimately passed on to the end user.
• Elimination of the Petroleum Business tax (PBT): The PBT has a detrimental impact on the price of petroleum used for generation fuel, home heating fuel and various other petroleum based products. The PBT also has a direct effect on the price of alternative fuels used by utilities in the generation process. Unfortunately, alternative fuel suppliers can provide natural gas and other fuels at an inflated price that is set just below the cost of the PBT -- regardless of the true market price of alternative fuels. Again, these higher prices are ultimately paid by the customer.
  
  

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