Assembly Hearing on the Upstate New York Economy

Testimony of
Daniel B. Walsh
The Business Council of New York State, Inc.
March 6, 2002

Chairman Farrell, Chairman Schimminger, Chairman Morelle, and honorable members of the committees:

Thank you for inviting us to offer comments today. Like you, we want to see a stronger Upstate economy. We join you in believing that there are steps you, your colleagues in the Senate, and Governor Pataki can take to achieve that goal.

I'd like to start with an important point: The Upstate economy is already stronger than it was a few years ago. Labor Department statistics show that Upstate gained 23,000 jobs in the two years ending this past December, despite the nationwide recession and the economic impact of September 11. During the last national recession, a decade earlier, Upstate lost 72,000 jobs in the two years that ended in December 1991. That turnaround represents a better life for families all across Upstate New York.

Even after the recent job losses, in fact, Upstate's total employment is not far off the record levels experienced in 2000.

It's important to recognize the gains we've made because they are clearly related to actions that you and Governor Pataki have taken in recent years. Actions such as cutting taxes, reducing the cost of workers compensation, creating Empire Zones, and starting to bring down our high energy costs.

But we can do better. While overall Upstate employment improved noticeably during the second half of the 1990s, not every community shared in those gains, and the region still lags behind most of the country in keeping and creating jobs. We're more competitive than we were a decade ago, but we need to do more still.

How do we do that? As we've said before: Keep rolling! Keep doing the things that have brought New York's economy back to life.

The central importance of manufacturing

Before touching on our specific recommendations, I'd like to discuss briefly the key role that one sector - manufacturing - continues to play in the economy of Upstate New York.

For all that we hear of the, quote, post-industrial economy, unquote, manufacturing remains important all through the state. But it plays an especially vital role Upstate. North of Westchester and Rockland counties, manufacturing businesses employ 445,000 New Yorkers. That's 14 percent of the total, or roughly one in every seven jobs.

In many parts of Upstate, the picture is even more dramatic. In Rochester and Binghamton, for example, manufacturing jobs represent 19 percent of the total, or nearly one in every five jobs.

More than almost any other sector of our economy, manufacturing brings in wealth from outside the local community, outside the state and from overseas. All over the world, people buy film manufactured in Rochester. Computers made in the Hudson Valley, optical fiber invented and produced in the Southern Tier, medical instruments manufactured in the Finger Lakes region, paper from Adirondack trees, auto parts built in the Buffalo/Niagara area - every one of these products brings wealth from around the world into Upstate New York.

That wealth generates other jobs in supplier companies, and in services, retail and other industries. The experts at Empire State Development have estimated that this spin-off effect multiplies the benefit of each manufacturing job two or three times. Governor Pataki's chief economist, Stephen Kagann, estimates that manufacturing employers, their suppliers, and businesses that rely on economic activity created by those companies represent fully 47 percent of all private-sector jobs Upstate. In the Finger Lakes region, Western New York and the Southern Tier, the figure is well above 50 percent.

Think about the role manufacturing employers play in dozens of smaller Upstate communities. There's Lowville, in Lewis County, where Kraft Foods and Climax Manufacturing provide more than 500 jobs. In the Southern Tier, in my home area of Olean and in Painted Post, Dresser Rand provides more than 2,000 jobs. In Ticonderoga, International Paper has 700 jobs and is making a major capital investment this year that will maintain those jobs well into the 21st century.

In larger cities, major employers in banking, telecommunications and other sectors are making the local economy more diverse. But those large businesses are not likely to locate in Lowville or Painted Post. We need manufacturing to keep our local communities alive for the long run.

What can New York State government do to help our vitally important industrial sector? The first thing is obvious: Do no harm.

Each year the Legislature considers hundreds of bills that relate to health care, the environment, labor costs, energy, transportation, and the responsibilities of local government. We would ask that you analyze every action you take for the impact it may have on the manufacturing jobs in the communities I mentioned. When state government increases the cost of health care, creates costly new regulations or imposes new mandates that drive up local taxes, it makes it harder for plant managers to make the case for new manufacturing investment or to protect existing jobs.

Cutting taxes to strengthen the Upstate economy

In our testimony to the fiscal committees last week, I talked about one of the most important steps you can take to stimulate the manufacturing sector that is so important to the Upstate economy. That is to make our tax code a competitive advantage in the effort to win new capital investment and jobs.

Today, our tax code penalizes manufacturers and other businesses when they add jobs and plants in New York. Moving to the single sales factor will change that equation, eliminating plant and payroll from the income apportionment formula and making the Empire State a better location for investment.

The second major change we have proposed in the corporate tax code is repeal of the alternative minimum tax. The AMT waters down the value of the investment tax credit, which has served for more than 30 years as one of New York's most important incentives for capital investment. The ITC has helped stimulate billions of dollars in investment. During the late 1970s and early 1980s, when the Legislature increased the ITC from 2 percent to 6 percent, our share of the nation's capital investment in manufacturing increased. After Governor Cuomo and the Legislature created the AMT in 1987, the ITC was less valuable than before, and our share of total capital investment went down. Then, after you and Governor Pataki cut the AMT from 5 percent to 3.5 percent in 1995, our share of the nation's capital investment started to go up again.

Clearly, there is a direct connection between the cost of capital investment in New York and the amount of such investment we will receive. That's why repealing the AMT makes sense - especially for Upstate.

The Empire Zones that were created at the initiative of Speaker Silver and the Assembly Majority are tremendously effective additions to our arsenal of economic development programs. We support Senator Bruno's proposal to provide parity in the zone program by locating an Empire Zone in every county. We want to see more job growth in every part of New York State, and the Empire Zones will help achieve that goal.

We also strongly support the proposals that Majority Leader Tokasz, Senator Stafford and the Governor have made to reform the railroad property tax. A new report from our Public Policy Institute, On the Wrong Track, points out that the heavy tax burden on railroads drives up costs and limits transportation options for manufacturers.

For many manufacturers, property taxes are an uncompetitive cost of doing business in New York, compared to other locations. 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, in an effort to restrain the burden of local taxes.

Let's stop wasting precious sites

Upstate cities suffered badly in the 1990s. All were hit hard by the recession in the early part of the decade. Many have experienced shrinking population, a tax base in decline or at best stagnant, and a feeling that the best days were in the past.

One thing the Legislature can do to bring new life to Upstate cities - as well as those in the downstate region - is to enact a realistic approach to the issue of redeveloping brownfields. We urge you to act on this important issue this year.

A realistic approach means one that bases cleanup standards on the intended new use of the property and the potential risks that would be associated with such use. For example, new industrial use would suggest a different standard than if the property were to become a residential neighborhood.

We want developers to seek out opportunities for involvement in brownfield properties. That will not happen unless potential developers have a high degree of certainty regarding cleanup costs, future liability, and the timetable for review of projects.

We have given the administration and Legislature suggested amendments to the Executive Budget proposal regarding brownfields, and we look forward to working with you on effective economic and environmental incentives for brownfield cleanups and redevelopment. We urge you 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.

Building on our success in R&D

More than ever before, manufacturing is a high-tech business. We've seen an incredible burst of research and development in recent years, much of it by manufacturing companies. Advances in R&D are bringing us new businesses and new jobs, in some cases replacing traditional manufacturing jobs that are gone for good. We may never see Bethlehem Steel employing tens of thousands in Lackawanna. But we can take pride in long-established, high-tech companies such as Moog, a world-class manufacturer of precision control systems for aerospace, industrial and military applications, based in East Aurora. One of the company's recent contracts is to refurbish flight control hardware for the Space Shuttle. Employers such as Moog provide the good jobs we want staying and growing in New York.

During our testimony to the fiscal committees last week, we talked about the importance of a multi-year program to invest several hundred million dollars in research and development, to bring still more high-tech growth to New York. We were 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.

As you know, the competition among states for R&D investment is fierce. But your support, and that of the Governor, will position major universities across Upstate New York to help create thousands of high-paying jobs.

Other key issues

The cost of energy remains a key concern for manufacturers and other Upstate employers. As of 1999, New York's average industrial rates for electricity were 40 percent higher than the national average, and average commercial rates were 54 percent higher than average.

We need new generating capacity both to guard against potential shortages of electric power, and to provide the competitive marketplace that will bring reduced costs. A recent report by our Public Policy Institute estimated we will need more than 9,000 megawatts of new generating capacity within the next five years to meet these goals.

We support the proposal by the Independent Power Producers of New York that has been introduced by Assemblyman Tonko and Senator Wright. The bill would reduce the siting timeline from 12 to eight months, with a six-month process for former industrial sites, among other important changes. The bill maintains the continuity needed for project developers in the deregulated market while addressing the problems in the current siting law which expires this year.

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. We have also addressed this important issue in testimony before the Assembly hearing on Power for Jobs and in our comments on the State Energy Plan. The Governor has proposed extending all current contacts that expire this year; we strongly support that step.

We need to help employers reduce the cost of creating and keeping jobs in New York. In workers' compensation, for instance, we have suggested attacking high costs by creating a reasonable cap on benefits for partial disabilities, and adopting objective medical guidelines for assessing specific injuries.

The high cost of health care is another major concern for employers all across Upstate New York. We urge you to act on the sole-proprietor bill sponsored by Chairman Morelle as one important step toward more affordable health-care costs for all employers.

Thank you again for the opportunity to speak with you. We look forward to working with you, Speaker Silver, the Senate and Governor Pataki to build a stronger Upstate economy in the year ahead.