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

Senate Finance Committee and
Assembly Ways and Means Committee
February 26, 2003

Chairman Johnson, Chairman Farrell and distinguished members of the committees, thank you for inviting us to appear before you today.

I want to start by congratulating the Senate and Assembly for the work you have done, for nine straight years now, to improve the lives of New Yorkers by cutting taxes on our businesses and our workers. With the tax cuts scheduled to take effect this year, you will make it 10 years in a row that taxes have been reduced in the Empire State. That's a proud legacy.

You have cut taxes again and again since 1994. As our tax burden became more competitive, so did New York employers. In 1994, our job growth was a fraction of the national average. By the end of the decade, in both 1999 and 2000, we could proudly say that New York State not only had caught up to the rest of the country - we were even growing jobs faster than most other states.

Because cutting taxes has been good for New York, we applaud the insistence by Senator Bruno and the Senate Majority that the scheduled tax cuts go forward.

We agree strongly with the comments about those tax cuts that are contained in the Assembly Majority's "Yellow Book" on the proposed Executive Budget. As you and your staff suggested in that report, Chairman Farrell, reduction of the gross receipts tax on utility

customers, increase in the earned-income tax credit, sales allocation for financial services, and other tax cuts will enhance job creation and improve the lives of working families in New York State.

Assemblyman Barraga, we also applaud the proposals that Leader Nesbitt, you and your colleagues have made to cut taxes and create jobs.

Governor Pataki described the central issue in this year's budget as a choice between taxes and jobs. That has always been the choice for New York, and in recent years you have made the right choice time and time again.

This is no time to change course.

In fact, as the Governor has said, we truly have a opportunity to leap ahead of other states in becoming more business-friendly. Competitor states such as New Jersey and California enacted major tax increases last year or are planning to do so this year. As the national economy recovers, your success in cutting taxes will pay off again in new growth and jobs for New Yorkers.

The need to control spending

Choosing jobs means avoiding new taxes. It also means holding spending to responsible levels so that we can be certain we won't need new taxes next year or the year after.

While the Governor's budget restrains spending and imposes cuts in some areas, it is by no means the scorched-earth plan that some critics want us to believe. Overall spending is essentially unchanged from the current fiscal year. In other words, our spending priorities are changing. As school aid is cut, spending on Medicaid will rise by $1 billion under the Executive Budget.

The main problem facing you, we would argue, is not a revenue problem. Instead, it is a spending problem.

When times were good, you and the Governor were able to provide generous increases for education, health care and other programs. If overall state-funds spending had been held to the inflation rate over the past five years, the state would have saved $7.9 billion in the current fiscal year. Now, the good times are gone. Unfortunately, the time has come to face the new reality that we need to control spending.

Getting spending truly under control means going where the money is. Medicaid, in particular, must be brought under control.

It's time to rationalize Medicaid

You are familiar with many of the statistics showing how much higher Medicaid spending is in New York than in other states. For instance, if we could simply reduce our Medicaid spending per capita to twice the national average, taxpayers would save around $4 billion a year.

We have urged that the state look closely at taking over the entire local share of Medicaid, with an iron-clad requirement that counties and New York City use the savings to reduce local taxes. The state will only be able to do that if we get the cost of Medicaid under control.

Controlling Medicaid costs does not mean shifting more costs to employers who do the right thing and pay for employee health coverage. We have a schizophrenic approach to private health insurance in New York. On the one hand, state government tells employers that we want businesses to provide health insurance. We even provide some state assistance through the Healthy New York program. On the other hand, we have laws that drive up the cost of health insurance. These laws include mandates through which the state forbids employers to provide health coverage unless the plan includes a long list of politically preferred coverages. These laws also include the various Medicaid and HCRA add-ons that shift costs from the state to private employers. Ironically, because health insurance is so expensive, very few employers can afford the Cadillac-level coverage that the state itself provides through Medicaid.

If we can rationalize our public and private health-insurance plans, it will become easier for individuals to move off the public plan and into privately paid coverage.

Raising taxes will hurt our economy and state revenues

Some of the voices you will hear today will urge you to raise taxes on working families and on the businesses that want to create the jobs New Yorkers need.

That would mean reversing the progress you have made. It would mean putting at risk the gains we have made in our competitive position, and the jobs we have created as a result.

One proposal, for instance, would impose an income tax surcharge on families earning more than $100,000 a year. The average public-school teacher in New York earns about $50,000 a year, as does the average construction worker. Thousands of two-income, middle-class families would be among those hit by such a tax increase. All told, more than 630,000 taxpayers would pay more.

Then there are the arguments for higher business taxes. One of those we hear occasionally is that business doesn't pay its "fair share." Some knowledgeable people make this argument but only count the revenue from the corporate franchise tax. They ignore all the other business taxes - the bank tax, the insurance tax, the utility tax, the petroleum business tax, health-insurance taxes, and the parts of the personal income tax, the sales tax and other taxes that businesses pay.

A table below shows the true picture. It includes the more than $2 billion in personal income tax that partnerships, Subchapter S corporations and sole proprietors pay. It includes the share of the sales tax that businesses pay, and the taxes on health insurance that employers purchase. When you add up all the taxes that businesses pay, it amounts to roughly 28 percent of the total - more than one in every four tax dollars. That share, by the way, has been relatively constant over time.

Despite the tax reductions of recent years, business taxes in New York remain far higher than those in many other states. It's true that business tax collections are down in some categories. That's because business profits are down. If you want more tax revenue, we need a stronger, more profitable private sector - not higher tax rates that will only make it harder for employers to create profits and jobs.

Cost-shifting has been built into the Medicaid program for many years. This year's budget includes some proposals that would shift other new costs onto private employers. Examples include the Health Department programs that would be shifted to the Insurance Department, so that costs would be borne by insurance consumers. Utility ratepayers would face new costs for various agencies, under another proposal. Another example is the proposal to force health plans - that is, employers who provide health coverage - to pay the first $5,000 for early-intervention services. Instead of driving up the cost, we should find a way to offer employers and their workers a less expensive health-care option; we have asked the commissioners of health and insurance to work with us in designing a plan that costs at least 10 percent less than currently available plans.

Assemblyman Grannis is among those who have objected to the increase in the insurance tax included in the proposed Executive Budget. We, too, are deeply concerned. We believe the proposal is a mistake and hope it will be rectified as part of the 30-day amendment process. The insurance sector is one of New York's signature industries, employing more than 100,000 men and women directly and supporting tens of thousands of additional jobs. In particular, it is critically important to New York City, and hurting this industry will only make it more difficult for the city to regain its lost economic momentum. This proposal must not stand.

Tax cuts that create jobs

Holding spending to a responsible level is essential not just to close the current budget gap, but so that we can enact the additional tax cuts needed to make New York more competitive for the jobs we need.

The Executive Budget proposes significant changes in the Empire Zone program. We agree that improvements and limitations can and should be made in the program. However, it is important to move carefully because Empire Zones are our most successful development incentive.

Yesterday, we met with the father of the Empire Zone program, Speaker Silver, and we were pleased with what we heard.

Similarly, we were pleased with the proposal that Senator Bruno outlined yesterday stating that Empire Zone benefits should continue to be fully financed through state tax credits. We are concerned that, under mandatory local cost sharing, many municipalities will be reluctant to designate new zone areas, due to the impact on existing property tax revenues. Considering the effectiveness of the EZ incentives in promoting job growth and investments, we should avoid imposing disincentives against its expanded use by municipalities. Likewise, we believe that the state budget should assure that municipalities have adequate resources to implement the zone program.

Looking forward, The Business Council supports efforts to maximize the effectiveness of the Empire Zone program in spurring investments, and creating and retaining jobs. This means: expanding the availability of zone benefits to all counties; reassessing eligibility criteria to assure that zone benefits are supporting real economic growth; giving more flexibility in setting zone boundaries back to municipalities; and making zone benefits available for significant capital investments necessary to retain existing jobs.

Finally, to assure the continuity of the EZ program, we urge the legislature to act this year to extend Empire Zone designations past the current July 31, 2004 sunset date.

We've talked previously about reforming our corporate tax code so that we do not penalize businesses for creating jobs and investing capital in the Empire State. Experience in other states shows that changing to the single-sales factor would increase New York's share of the nation's employment in manufacturing and other key sectors. Respected economists estimate such a change would bring New York an additional 133,000 jobs. Those jobs, in turn, would mean more tax revenue, rather than less. We appreciate the initiatives by Senators Skelos and Alesi, and Assemblymen Morelle and Schimminger, and urge you to consider this reform as a means to bring in more revenue this year and in the future.

We support Governor Pataki's proposal to enhance long-term investment decisions in our important banking sector by making the Bank Tax permanent. We also applaud the Governor's proposal to expand the CAPCO program, which creates additional investment pools for New York entrepreneurs.

On the other hand, we believe the proposal to impose a surcharge on unemployment insurance does not make sense at this time - it would drive up the cost of each job at a time when we need more jobs. In addition, legislation proposed with the Executive Budget would redirect the remaining General Fund portion of the Article 9, Section 183 and 184 taxes to the Dedicated Highway and Bridge Trust Fund starting in fiscal 2004-05. The telecommunications industry opposes this measure. They believe it would limit the ability to obtain future tax relief for their customers should monies associated with this section of the tax law be locked in to supporting transportation infrastructure.

In tough times such as these, it's more important than ever that we focus on our real priorities. One key area where we have worked together in recent years is working to build research connections between our top-flight universities and world-class corporations. The Governor's budget continues that effort. We believe that is a smart approach. Building stronger connections between university and business researchers is already creating good new jobs in Albany and throughout the state. If we keep the focus on these initiatives, we will continue to see important new discoveries, exciting new products and high-paying new jobs.

K-12 education is always a priority for the Legislature. As you develop your response to the governor's proposals, we urge you to target education spending to those areas where it is most needed. We strongly support the drive for higher standards in our schools and are happy to see those efforts paying off.

In these last few weeks, you have heard from hundreds of New Yorkers about the need to restore or increase spending on various programs. Clearly, the dollars are simply not available for you to respond positively to every request. And our property taxes are already among the highest in the nation - businesses and homeowners can't afford to pay more.

But you can free up hundreds of millions, even billions of dollars, for the state itself and for localities, by enacting the mandate-relief proposals the Governor included in the Executive Budget.

We strongly support those proposals. Reforming our prevailing-wage laws and repealing the Wicks Law could save more than $1 billion in public construction costs statewide. Why not enact those reforms, and put those dollars to use where they are most needed?

Lawsuits against New York City and other municipalities drain hundreds of millions of taxpayer dollars a year. We support the Governor's proposal to give municipalities the same sensible legal structure the state has given itself in the Court of Claims. We also applaud Senator Bruno's proposals to go further with tort reform. Those changes would create even more savings for the state and local governments, while making it easier for businesses to create jobs in New York.

The proposed budget includes program changes that we believe are good for the state's economy. We support the Governor's proposal to fully fund the Power for Jobs program through the New York Power Authority. Another example is the increase in divisible-load permits. Such reform will not only bring new economic activity and jobs to the state, it will also create new revenue. A pretty good bargain.

There may be opportunities to target spending in ways that increase economic activity in the state, and thus generate new tax revenue. The nature of tourism travel has changed significantly for the state and nation in the last 18 months. We have a chance to gain tax revenues for the state if we make a greater commitment to tourism promotion. But, like research and development, it takes an investment. The good news is that we can expect to see a return on investment in the very fiscal year the state needs it. Properly designed tourism response driven ads will produce revenues for the state and benefit every region of the state.

A realistic approach to the Superfund/brownfields issue is one of the most important things you and the Governor can accomplish for urban areas from Brooklyn to Buffalo. The proposal in the Executive Budget to impose heavy new fees will hurt manufacturers. That means it will be especially costly to the upstate economy. Let's be clear: This is not an issue of "making the polluter pay." Existing businesses would be taxed to clean up problems left by others. We look forward to working with you on effective economic and environmental incentives for brownfield cleanups and redevelopment. We need to go further to enact sensible liability reforms and set use-based standards to end the frustrating stalemate over redeveloping valuable properties all over the state.

The experience of the last quarter-century - in good times and in bad - has proven that New York moves ahead when we work to improve the business climate. We falter when we fail to do so. Let's choose jobs. That will help New Yorkers directly. And it's the only way we will ever generate the new revenue we want to support our schools and other vital services.

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.

What Does Business Pay?
Share of New York State Tax Revenues

 
Projected Revenues,
FY 2003-04
(Dollars in millions)
 
Business
share
Total
From Business
Taxpayers
Personal income tax
10%
$23,054
$2,305
Sales and use tax
25%
9,413
2,353
Motor fuel tax
30%
538
161
Cigarette/ tobacco tax
0%
446
0
Motor vehicle fees
40%
651
260
Alcoholic beverage
10%
180
18
Highway use
100%
149
149
ABC License
100%
42
42
Auto rental
50%
44
0
Corporation franchise tax
100%
1,796
1,796
Corporation and utilities tax
100%
993
993
Insurance tax
100%
903
903
Bank tax
100%
543
543
Petroleum business tax
100%
1,001
1,001
Estate tax
0%
736
0
Real estate transfer tax
40%
404
162
Pari-mutuel tax
0%
32
0
Health insurance taxes
65%
1,300
845
Total taxes
$40,928
$11,532
Percent of total paid by business
28.20%
Figures for total revenues: New York State Executive Budget, 2003-04
Calculations of business share: The Public Policy Institute