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February 2, 2001

Sen. Skelos introduces sweeping 'single-sales factor' bill

State Sen. Dean Skelos (R-Nassau County) has introduced a bill (S.2064) to adopt the "single-sales factor" method of apportioning corporate income in New York State to determine the corporation's state income taxes.

Adopting the single-sales factor is The Business Council's top tax priority for 2001. The Business Council strongly supports this bill.

"Sen. Skelos has advanced a bold proposal for updating New York's tax code in a way that will significantly enhance New York's future job growth and prosperity," said Daniel B. Walsh, president/CEO of The Business Council.

Governor Pataki has also proposed a single-sales factor bill. The Governor's bill would apply the single-sales factor to manufacturers only; that change would phase in over five years. Sen. Skelos's bill would apply the change to all Article 9-A businesses (i.e., most corporations other than banks, insurers, and telecommunications companies), and would take effect immediately.

How corporate taxes are currently determined: New York State's corporate income taxes are based on three factors: the corporation's instate sales to instate destinations; the percentage of the corporation's worldwide property that is located within the state; and the percentage of the corporation's worldwide payroll that is located within the state. The higher each number, the higher the tax paid.

This apportionment method is problematic because including payroll and property in the equations can effectively encourage companies to put jobs and plants in other states, thereby reducing their New York State taxes.

Recognizing this, New York began double-weighting of sales in 1975. With the sales factor counted twice in the apportionment formula, it determines half of a corporation's taxes, and payroll and property determine a quarter each. However, many other states, also recognizing the shortsightedness of multiple-factor calculations, went one better: They revised their tax codes to base corporate taxes solely on sales within the state.

The job-creation value of the single-sales factor: By basing corporate taxes on just one factor, instate sales, New York can remove this disincentive to locate jobs and plants here, because these factors would no longer inflate a company's income taxes. In addition, the location of jobs in other states would no longer have the effect of reducing a company's New York State taxes.

A new study by The Public Policy Institute of New York State , the research affiliate of The Business Council, found that adoption of the single-sales factor would lead to an additional 133,000 jobs while increasing state revenues. This study, which was released in January, was conducted for The Institute by Professor Austan Goolsbee of the University of Chicago's Graduate School of Business and Professor Edward L. Maydew of the Kenan-Flagler Business School at the University of North Carolina.

"So long as property and payroll are used in an apportionment formula, expanding employment or property in the state will increase the company's tax burden," Professors Goolsbee and Maydew wrote in their report. "This creates a disincentive to locate in the state."

In their study, the economists analyzed job growth in each of the 50 states from 1978 through 1999, along with changes that 27 states made to their corporate income apportionment rules during the period. Their study controlled for other economic variables, such as national employment and unemployment, and federal corporate tax rates.

The study showed that reducing use of property and payroll in a state's corporate tax formula "has significant positive effects on instate employment," the economists said. Changing to a single-sales factor would likely increase the number of jobs in New York by 133,000, including 32,000 manufacturing jobs, they estimated. The additional jobs would occur over three years or more.

The new jobs would produce personal income tax revenues that would more than offset the state's estimated losses of corporate tax revenue-a gain of $184 million to $247 million if New York's corporate tax were changed entirely to single-sales factor, the study found. It did not estimate how much other tax collections, such as sales and property taxes, would increase as a result of the new jobs.