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SENATE FINANCE COMMITTEE AND ASSEMBLY WAYS AND MEANS COMMITTEE

Testimony of
Daniel B. Walsh, President/CEO
The Business Council of New York State, Inc.
February 26, 2002

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

We appreciate the attention that you give to the important topics of economic development and taxes, and welcome the opportunity to share our thoughts with you today.

Over the last four weeks, you have heard dozens of speakers talk about the need for increased spending in areas from local assistance, to human services, to education, health and public protection. In each of these areas, you will have important decisions to make – tough questions to answer about where state funding is most needed, and how it can do the most good.

Today, we talk about a question that may be even more important: How do we generate the economic growth that we need to pay for every one of those programs?

Over the last eight years, you and Governor Pataki have demonstrated that, in New York, we know the answer: Making our business climate more competitive.

You and the Governor cut taxes, reformed workers compensation, and created important new economic development programs such as JOBS NOW, Empire Zones and Power for Jobs. Because you did those things, New York businesses were able to create more jobs and keep more of the jobs we had. In the early 1990s, our job growth ranked near the bottom of all the states. At the end of the decade, we were a national leader.

Strong economic growth produced more tax revenue than anyone thought possible. There was enough money to provide record increases in school aid, to expand the nation's most generous public health programs, and cut taxes at the same time.

But now we're faced with a recession. What should we do? Keep rolling! Keep doing the things that have restored New York's health.

What you've been doing has worked. Just look at the attached graph, which shows how much stronger New York is today, compared to the 1990 recession. And a recession is the perfect time to do more of what has worked so well. With a little judicious action now, we can set the stage for New York to capture its fair share – let's hope, more than our fair share – of the spurt of investment and job growth that will be let loose in this nation as soon as the recession ends.

Trendlines Into Two Recessions

Rebuilding New York City

To get our economy back on the right track, we need to keep rolling with the strategies that made us strong. Back in 1994, as you recall, the Legislature enacted the features first introduced in the famous Bruno-Morelle legislation that finally put an end to the temporary corporate tax surcharge and made other reforms to encourage business investment in New York State. You and Governor Pataki followed with other major tax cuts in each of the next six years.

Our Board of Directors has established, as our highest overall priority for this year, supporting New York City's efforts to recover and rebuild. Our entire state, and the entire nation, must help put lower Manhattan back in business, with a 21st Century infrastructure, a strong financial services community, and vibrant small businesses.

We all agree on the need to make sure that the financial services jobs lost to lower Manhattan on September 11 are not gone permanently. You can send a strong signal that New York is determined to remain the home of this vitally important industry by enacting legislation this year to permanently extend the investment tax credit for securities broker/dealers and qualified banks. As you know, that provision is scheduled to expire after September 30, 2003. We should leave no doubt in the minds of those making investment decisions today that New York will be competitive for those investments, not just this year but for the long run. Making the ITC permanent carries no cost in the coming fiscal year, given that the expiration date is in fiscal 2004. But action now can make an immediate difference in our competitive standing. In addition to extending the life of the ITC for securities broker/dealer activities, the credit should be expanded to include property acquired for use in New York. We also support the ITC technical changes and related proposals in this area advanced by the Securities Industry Association.

Since Speaker Silver initiated creation of what we now call Empire Zones, we have seen the dramatic impact these tax-free locations can have on business location and job creation. These zones are properly seen not as taking money from the public treasury, but as creating economic activity that puts money into the pockets of working New Yorkers. The existing law should be amended to include businesses that were located in lower Manhattan on September 11 and have since relocated in New York State. We also need to refine parts of the formula to see if we can encourage even greater growth. Finally, we support Senator Bruno's proposal to provide parity in the zone program by locating an Empire Zone in every county, as well.

The response to September 11 should also include assurance of full recovery of expenses incurred by PSC-regulated companies in response to the terrorist attacks, including costs related to provision of emergency utility service, site cleanup, personnel expenses and the replacement of buildings, facilities and equipment, as well as costs necessary to enhance the security of utility services. Some of this will require working with our federal partners. Some involves actions the state must take. All of it requires us to work together.

Next steps in making our taxes competitive

We remain convinced that the corporate tax reforms you and the Governor considered last year will give employers significantly stronger incentives to invest and create jobs in New York. Our top tax priorities for 2002 include allowing all employers to move to single sales factor taxation, and repealing the alternative minimum tax.

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. That's an incentive we should remove from the tax code as soon as possible. Only a handful of other states have gone to single sales apportionment, so we have an opportunity to take a real competitive lead in state tax policy.

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.

Based on extensive experience in other states, a study issued last year by two leading economists concluded that adopting single-sales apportionment in New York would result in an additional 133,000 jobs, including 32,000 in manufacturing.

We're well aware that you and the Governor need to balance the budget not only in the coming fiscal year, but in the "out years" as well. The study I mentioned, a copy of which is attached, showed that the single sales factor would more than pay for itself. The additional jobs created 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.

We are pleased by the support Senator Skelos, Assemblyman Morelle and other leading members of the Legislature have given to the idea of moving to the single sales factor.

The alternative minimum tax, as you know, limits the value of the investment tax credit, the most pro-investment element of our state tax code. 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. Eliminating the AMT entirely will help not only manufacturers, but securities firms as well, maintain and increase high-paying jobs in the state.

Other changes to our tax code are needed as well. We are pleased that Governor Pataki, Chairman Stafford, Majority Leader Tokasz and others are supporting reform of the railroad property tax. Our Public Policy Institute made a compelling case for reducing the tax burden on railroads in a report, just issued, called On the Wrong Track. The report points out that property taxes on New York railroads are as high as 26 times those in neighboring states. We have lost more than 11,000 high-paying railroad jobs in the last 20 years, partly because of that heavy tax burden. Chairman Stafford, we look forward to working with you and your colleagues to address this important issue.

An essential part of the rebuilding effort in New York City is expansion of the Certified Capital Company program, or CAPCO, as Speaker Silver has proposed. This new, $50 million program for qualified businesses located in the Liberty Zone in lower Manhattan would help facilitate investment by insurers in smaller companies. We agree with the Speaker that such a step can play an important role in spurring recovery in the area most affected by September 11.

In 1998, you and the Governor enacted legislation to make New York's estate tax competitive with those in other states. Before that, wealthy New Yorkers were commonly advised to move elsewhere to avoid paying a penalty for dying in New York. Now, repeal of the federal estate tax and its associated credit for state-level estate taxes means that New Yorkers will be faced with paying an estate tax of up to 16 percent while the heirs of people who live and die in most other states will pay nothing. This is a significant issue for family business owners. It's also a problem for New York-based nonprofit organizations that do not want their most generous donors given a strong incentive to move elsewhere. We urge you to restore New York's competitive position, and fulfill the intent of the 1998 legislation, as soon as possible.

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. The Legislature is to be applauded for the efforts you have made in this area, but we still have a long way to go. Fully 19 percent of an average customer's bill is related to taxes and surcharges. We urge you to make the necessary changes to the tax code that will enable telecommunications firms to offer bundled services to their customers without creating unnecessary administrative burdens. We also support providing all telecommunications firms with the benefits of section 183-3 of the tax law. Finally, we 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 through the use of improved rights-of-way access and tax credits.

Our other tax priorities include further reduction of the highway use tax (ton mileage tax) and conversion of the remaining tax into a registration fee for trucks now subject to the tax.

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.

Building on our success in R&D

Last year we came before this committee and did something very unusual for The Business Council. We asked you to increase the state's investment in its research universities. We told you that we felt it was critical to the future economic health of New York State.

Today we are here to thank you for the support, encouragement and importance both houses of the legislature and the Governor have given to technology initiatives linked to our research universities.

When we delivered that testimony we stressed the fact that if New York State was to become a much greater player in the fields of research it was targeting – and we are delighted that it has made an affirmative decision to do so – the state must be willing to make a sustained commitment to the effort. It needed to be something more than an initiative built on the surpluses of the good times. We urged a multi-year, multi-hundred-million-dollar program.

We did not foresee the turndown in the economy – much less, of course, the events of September 11th – but we did know that there is an economic cycle. And we knew that commitment to leading-edge research could not be an on-again, off-again effort.

This new budget will test whether or not the state believes that investments in our universities are fundamentally important to our future. That is why we were so pleased to see the Executive Budget include a significant investment in research universities – $250 million for buildings and equipment, and significant increases in the programs administered by NYSTAR.

We are confident that when these committees and the leadership of both houses meet to combine the best of the Senate's GEN*NY*SIS plan with the best of the Assembly's proposals for Centers of Excellence we will wind up with an even stronger plan.

We remind you again that the competition among states is fierce. Last year we mentioned five states that moved aggressively with major technology initiatives tied to their research university. A study for the Biotechnology Industry Organization (BIO) released in September 2001 reported that biotechnology initiatives were underway in 41 states, compared to just "a handful of states" a few years earlier.

We pledge to work with the fiscal committees in crafting the finest technology initiative in the nation. We believe we have the fundamental building blocks in place. NYSTAR's selection of STAR Centers was a great start – competitively reviewed and decided. The Centers of Excellence have identified some of the state's greatest strengths. But there are others which today and in the future will warrant greater investment. We need a fund and a process to allow other scientists and other universities to participate and to leverage available private-sector and federal funds which are earmarked for their areas of interest and expertise.

We recently applauded our Congressional delegation for the bipartisan way in which they worked to secure federal research dollars for institutions throughout the state. That effort will only grow stronger. Similarly, we congratulate your two committees and your leaders for the way you have elevated the importance of technology leadership to the future of this state. We look forward to this effort continuing to grow, and to achieving even more impressive results for New Yorkers.

Other key issues

The Power for Jobs program you and the Governor created has reduced energy costs for businesses that employ thousands of New Yorkers. We support legislation that continues allocation of low cost electricity and insures that providers and distributors are held harmless from any new costs. We have been in touch with the Power Authority and the chairs of the respective energy committees to support the reallocation of the power allocations due to expire this year and in 2003. The Governor has proposed extending all current contacts that expire this year; we strongly support that step as well.

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. The Business Council has given the administration and Legislature suggested amendments to the Executive Budget proposal, and we look forward to working with you on effective economic and environmental incentives for brownfield cleanups and redevelopment. We urge you, however, to reject the Executive Budget's proposed new fees on generators of hazardous waste. This proposal would impose roughly a ten-fold increase in hazardous waste-related fees, paid mostly by manufacturers and utilities.

Finally, let me mention the issue of when this year's budget will be complete. We believe that the substance of the budget is more important than the process that produces it. But I have to tell you that when I and members of our staff meet with business and civic groups around the state, one of the most common questions is always, "How come they can't get the budget done on time?" The people would like to see the budget passed on time. Nothing would do more to strengthen the public's confidence in government in this state.

Thank you again for the opportunity to speak with you. And 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.