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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.