Testimony
of Edward Reinfurt Vice President,
The Business Council of New York State, Inc.
Senate Finance Committee and Assembly Ways and Means Committee
February 13, 2001
Chairman
Stafford, Chairman Farrell, and honorable members of the committees:
Thank you
for the opportunity to speak with you today.
This hearing is mainly about the future – the decisions you and Governor
Pataki will make with regard to taxes and economic development, and how
those decisions can best position New York State in the competitive global
economy.
Before talking
about that, I'd like to direct your attention for a moment to the past.
Ten years ago this week, your committees began hearings on Governor Cuomo's
proposed budget for 1991-92. As many of you recall, it was not a happy
time. The Budget Division estimated that there was a $6 billion gap between
projected spending and revenues. School aid had just been cut in the middle
of the year. Other programs were cut, as well. And taxes were raised by
$1 billion in a package that quickly became known as "the big ugly."
Those tough
budget decisions were made because New York's economy was in the middle
of a profound decline. We watched more than a half-million jobs disappear
– nearly one in every three jobs lost across the entire country during
the recession. It took us more than five years to get all of those jobs
back.
We're doing
much better now. For the past two years, our statewide growth rate has
even beaten the national average. Upstate isn't doing as well as downstate.
But upstate New York did gain 40,000 jobs last year, and that's a huge
improvement over recent history. Employment across upstate is at record
high levels.
Today, some
say the national economy may be entering recession once again. If that's
true, we know one thing: We want to make sure that what happened to New
York during the last recession, does not happen this time.
Fortunately, the policies that we should follow are clear. They are the
same regardless of what is happening with the national economy. Whether
times in general are good or bad, our goal is to make sure that New York
State gets as big a share of the nation's overall growth as possible.
One way to
make that happen is to pave the way for world-class research and development
at our great universities. We have proposed that the state commit $1 billion
over five years to high-tech research universities and government research
laboratories. The goal would be to foster new research partnerships among
those institutions and our high-tech companies, to generate new ideas,
new technologies and new jobs.
We spoke
in some detail about that proposal at your hearing on higher education.
Today, I'd like to focus on another subject that is very important to
us and, I know, to you as well: the next steps in making our tax system
truly competitive.
Chairman
Stafford and Chairman Farrell, you and your colleagues, as well as Leader
Faso, Senator Connor and their colleagues have joined with Governor Pataki
to bring about truly remarkable progress in our corporate tax code.
In the last
seven years, starting with the Bruno-Morelle legislation in 1994, you
have enacted major changes from cutting the corporate tax rate to reducing
the alternative minimum tax. These progressive steps are in addition to
important changes outside the corporate tax, such as cutting personal
income taxes, repealing New York's extra estate tax and reducing the gross
receipts tax on utility bills.
Every one
of those steps has played a part in the improved economic performance
I mentioned earlier. Every time you cut taxes, you increased the incentive
for businesses to locate and grow in the Empire State.
There are
those who say the state cannot afford more tax cuts. But New York never
had it so good, as we have since we've been cutting taxes. You and Governor
Pataki have enacted tens of billions of dollars in tax cuts. Today, we
have billions of dollars in surpluses, billions in reserves, and a dramatically
improved credit rating.
Because you
cut taxes, businesses in New York are creating more jobs. And because
of that growth, the dollars have been available for increases in school
aid, expansion of Medicaid and many other programs.
We'd like
to keep the economic momentum going. This year, we have identified two
major reforms that we strongly believe will further improve the climate
for business investment and job growth in New York. Governor Pataki has
included similar proposals in his Executive Budget, and Chairman Gargano
and Commissioner Roth touched on those proposals in their remarks.
For years,
many of the best tax experts at our leading companies have told us that
New York's existing corporate tax formula acts to discourage investment
and job creation in the state. As you know, the current corporate income
tax is based partly on the sales that a company has in New York, and partly
on its capital plant and payroll in the state. Including plant and payroll
in the formula amounts to a tax on investment, and a tax on jobs, in the
Empire State. If a company has operations both in and outside New York,
placing new capital investment and new jobs here will mean a higher tax
bill. Placing that investment and those jobs outside the state, by contrast,
will mean a lower tax bill from Albany. Why would anyone want to keep
an incentive like that in the tax law?
Including
property and payroll in the apportionment formula, as is done now, costs
New York employers $250 million a year. Of that total, $100 million amounts
to tax reduction for out-of-state employers, compared to what they would
pay under the single-sales factor.
Several months
ago, our Public Policy Institute asked two leading economists to take
a detailed look at changes in apportionment formulas in other states and
their impact on economic growth. From 1978 to 1999, 27 states changed
their formulas to increase the importance of the sales factor. The study
looked at what happened to employment in the state after such changes
were made. It took into account other factors that would affect job creation,
such as national employment trends.
The results
of the study were truly impressive. Click
here for a copy of the study. Based on extensive experience in other
states, it found that adopting single-sales apportionment in New York
would result in an additional 133,000 jobs, including 32,000 in manufacturing.
We know that
as you and Governor Pataki make your decisions on the coming year's budget,
you must keep in mind the effects on the "out years." We commend
you for that responsible approach. With that in mind, our study of the
single-sales factor had one other, very important finding: The additional
jobs that would result from moving to a single-sales apportionment would
generate new personal-income tax revenues for the state that would more
than offset any loss of corporate income tax.
Because of
that, we recommend that changing to single-sales apportionment be accomplished
as quickly as possible, over the next year or two.
We were very
pleased that Senator Skelos announced last week his introduction of legislation
to apply single-sales apportionment throughout the Article 9-A section
of the Tax law. We understand Assemblyman Morelle is considering legislation
that would apply the single-sales factor to manufacturers. We strongly
support both proposals.
I'd like
to take a moment to discuss some claims by those who oppose the single-sales
factor. Three weeks ago, the Fiscal Policy Institute released a briefing
paper on the subject. The paper said, "States that have adopted single-sales
factor so far do not have a great deal to show for it." To make that
case, it looked at employment trends in four specific states: Iowa, Missouri,
Massachusetts and Illinois.
For instance,
the Fiscal Policy Institute cited changes in manufacturing employment
in Iowa and Missouri over the last 20 years. Both states have used single-sales
apportionment over that entire period. The Fiscal Policy Institute suggests
that both states did poorly in terms of manufacturing employment despite
using the single-sales factor. But their report does not include the fact
that, during the same period, New York State lost more than 500,000
manufacturing jobs.
Iowa gained
manufacturing jobs from 1980 to 2000. Missouri lost jobs, but at a much
lower rate than New York. If trends in manufacturing employment had been
the same in New York as in the other two states, today we would have at
least 448,000 additional industrial jobs. The numbers show that single-sales
has been good for those states, after all.
The Fiscal
Policy Institute also looked at what has happened in Massachusetts and
Illinois since they began phasing in the single-sales factor in 1995 and
1998, respectively. Employment trends in both states improved after
the change. We're confident the same would happen in New York.
For more
details on what's happened in those other states, our Public Policy Institute
has prepared a one-page briefing paper headlined "The
single-sales factor works. Here's proof."
The Buffalo
News endorsed the single-sales factor in an editorial last week. Its editorial
said that New York's current apportionment factor "penalizes companies
that choose to locate here." It added: "The important matter
is to put this state on a footing that is at least competitive with its
neighbors."
Our Board
of Directors has identified a change to the single-sales factor, for all
corporate taxpayers, as our top tax priority for this year. As I said
earlier, the result would be a tax policy that rewards companies
for investing and creating jobs in New York.
The same is true of our other top tax priority, repealing the alternative
minimum tax.
Back in
1969, Governor Rockefeller and the Legislature enacted the nation's first
investment tax credit as an incentive for businesses to locate capital
projects in the state. The new ITC also helped offset an increase in the
corporate tax rate the year before, from 5.5 to 7 percent. Since its inception,
the ITC has helped lead to hundreds of millions of dollars of new capital
investment.
Unfortunately,
the alternative minimum tax limits the usefulness of the ITC. The only
way that businesses can use the ITC to drive down their tax bill is to
invest in New York. In other words, the alternative minimum tax only hits
those companies that have made significant capital investments in the
state. You have acted wisely in recent years to reduce the alternative
minimum tax to its current level of 2.5 percent. We strongly support Governor
Pataki's proposal to eliminate the AMT. We believe that such a step will
make a difference in our economy and suggest that full repeal take effect
within two years.
We agree
with the Governor that both the single-sales factor and repeal of the
AMT will boost our manufacturing sector. That's important to upstate,
but not only to upstate. New York City still is home to nearly
a quarter of a million manufacturing jobs, and high-tech manufacturers
are growing on Long Island.
There is
some evidence that the manufacturing sector is in a slowdown nationally.
We've heard of layoffs at some manufacturers around the country and here
in New York. Let's make sure that if there are going to be more layoffs,
we've done everything we can to make sure those do not happen in the Empire
State. When the manufacturing sector is expanding again, let's make sure
that we have done everything possible to get at least our fair share of
the new growth and new jobs.
Other changes
to our tax code are needed as well.
Last year,
you eliminated the gross receipts tax for manufacturers. The same
legislation phases out the GRT for other businesses over five years while
providing residential electrical users a major reduction in the tax. The
cost of electricity remains a major competitive disadvantage for New York,
with commercial rates 54 percent above the national average. With energy
costs rising, GRT receipts are higher than anticipated, meaning we can
afford to speed up reduction and repeal. We urge you to enact Assemblyman
Faso's proposal to repeal the GRT entirely this year.
As I mentioned
earlier, you and Governor Pataki have made truly remarkable progress in
reducing taxes at the state level. At the local level, the property tax
problem is not getting better – it's getting worse. Property taxes
on businesses are now the biggest remaining competitive disadvantage to
doing business in New York State. The STAR program is a substantial help
for homeowners who struggle with high school taxes. But it does not help
businesses. In fact, as the Governor has said, STAR is contributing to
higher school taxes on employers. We urge you to consider a STAR program
for businesses, to reduce the competitive disadvantage that heavy
property taxes impose on New York employers.
We continue to advocate modernization of the tax code as it applies
to the telecommunications industry. Anyone who uses a cell phone or
the World Wide Web – that's most of the people in this room, and
virtually every individual who makes decisions about investment and job
creation – knows how important a 21st Century telecommunications
network is to our future. You and Governor Pataki have made a number of
improvements in the last few years to reflect the changes in this key
industry, including broader sales tax exemptions, reduction of Section
184 taxes, and studying the local taxation of telecommunication carriers
and their services with an eye toward simplification. We urge you to continue
those reforms with legislation to modernize the current sales and use
tax exemption for telecommunications equipment to include ancillary equipment
used in provision of telecommunications services. We also support efforts
to make sure that all areas of the state can share in the economic and
social benefits provided by high-speed telecommunications services.
The way New York applies real property taxes on railroad property
is unfair and archaic. Legislation that would have reduced the unfair
burden of these taxes came close to passage last year but was held up
unexpectedly at the end of session. We urge you to act this year. Competitive
rail service is an essential part of our economic competitiveness.
I've already
discussed the importance of our investment tax credit. Today, increasingly
sophisticated equipment is necessary for insurance corporations to transact
operations competitively. We urge you to apply the ITC to Article 33
insurance taxpayers in a similar manner as it applies to Article 9-A
taxpayers.
The Empire Zone program enacted last year at the initiative of
Speaker Silver, Chairman Farrell and their colleagues has proven to be
a strong and effective economic development tool. As you review the experience
we've had with the program, we urge you to consider adjustments to ensure
that an existing New York taxpayer is treated the same as a newcomer firm
with regard to similar investments in property and jobs in New York.
Governor Pataki has proposed new tax incentives for remediation and redevelopment
of brownfields. A realistic approach to the brownfields issue is
one of the most important things you and the Governor can accomplish for
urban areas from Brooklyn to Buffalo. We support the Governor's incentive
proposals as well as more intelligent cleanup standards and liability
provisions.
As we move
forward on cutting taxes at the state level, it's essential that we bring
down costs for local governments and school districts. As our Public Policy
Institute showed in its 1999 report The
$163 Lightbulb, state mandates drive up local taxes by billions
of dollars a year at the same time they make our public schools and other
vital services less effective. We strongly support Governor Pataki's initiatives
to reform the Wicks Law and rules for binding arbitration.
Congratulations
again on the progress you have made possible in New York State's economy.
We look forward to working with you and Governor Pataki to achieve more
progress in the year ahead.
