Business Council's 2004 budget testimony

Testimony of
Edward Reinfurt
Vice President, The Business Council of New York State, Inc.
Senate Finance Committee
and Assembly Ways and Means Committee

February 10, 2004


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

I'll start my remarks by saying that so far the Legislature is on the right track. You've moved up the schedule for reviewing and acting on the budget, and that's a good thing. A speedy budget is not the only important thing - the fiscal policies you and the Governor set are most important. But a budget that can be adopted in August can probably be adopted in May, or even by April 1.

As always, the Legislature will ask one question before all others in writing the coming year's budget: How much money do we have? The answer to that depends on one other question: How is our economy doing?

I don't need to tell you the answer: Right now, we're not doing very well. For the 12 months ending in December 2003, our total private-sector employment was almost unchanged, down by about 3,800 jobs in a total of more than 7 million. Statewide, we basically reflected the national trend in private-sector employment. But employment was down in New York City, and in our Upstate metro regions. Our manufacturing employment fell at a faster rate than the nation's - 4.4 percent, compared to 3.4 percent nationwide. And while nationwide employment in the key securities sector grew slightly in 2003, we lost nearly 3,000 high-paying jobs.

There are clear signs that the national economy is getting stronger. If that trend continues, we can expect that New York will gain jobs. Unfortunately, we have reason to fear that we will not gain our fair share of the nation's job growth. The cost of doing business in New York remains too high.

You know the specifics. We have the heaviest tax burden in the nation. Health-care costs in New York are high. So are the costs of energy, workers' compensation, and regulation.

Many business owners fear that these concerns may be forgotten in Albany. The Legislature raised taxes sharply last year. Health-care costs continue to go up, partly because of taxes and coverage mandates imposed by the state. Administrative decisions by the Department of Environmental Conservation and the Public Service Commission are increasing the cost of electricity, despite official state policy that calls for reducing power costs. As state spending continues to rise, the threat of still more tax increases - if not in this election year, then later - rises as well. And we are very aware that many interest groups are asking you to make it even more expensive to keep and create jobs in New York State.

We ask you to reject the idea that increasing the cost of doing business is good for working New Yorkers. We ask you to return to the vision that prevailed in Albany for eight years in a row - the understanding that cutting taxes and making our business climate competitive will give more New Yorkers the jobs they need.

Two percent here, three percent there adds up

One of our member companies is Harden Furniture, in McConnellsville, a few miles outside of Rome. Greg Harden, the CEO, tells us that Harden Furniture, like many other American manufacturers, faces increasingly tough competition from China. The new problem is that Chinese manufacturers not only have cost advantages but are now catching up to American quality. Harden Furniture, which employs nearly 500 New Yorkers, is competing with China on the cost of its products. It can continue to compete, but only if it does not face new costs, including those from government, that do not add value to its products.

Harden Furniture pays good wages and provides good benefits, and those together add up to 30 percent or so of the price of a dining room table or bedroom set. In China, employee costs are roughly 3 percent, rather than 30 percent. But, Greg Harden tells us, furniture from China sold here in the states includes transportation costs that add up to roughly 30 percent. The bottom line is that Harden quality remains world-class, and it can at least come close to competing on cost. Thus costs that add 2 percent here, and 3 percent there, can make the entire difference when consumers decide whether to buy Harden furniture produced in McConnellsville, or the competition's furniture made in China.

We ask you to keep those few percentage points in mind when you think about taxes, when you think about the cost of Medicaid, workers' compensation, energy, and other costs on New York employers.

Make New York more competitive, rather than less

We believe there are steps you can take, within the confines of a responsible budget, to increase economic opportunity for New Yorkers.

First, we should recognize that actions you've taken in previous years continue to bring new benefits. I refer to the law you enacted in 2000 to phase out the natural gas import tax and to reduce the gross receipts tax on electricity. We thank you for those positive steps.

This year's Executive Budget includes a corporate tax proposal that will make our tax code significantly more competitive for manufacturers. The Governor proposes to phase in single-sales factor taxation for manufacturers over five years.

We supported a similar proposal when the Governor advanced it in 2001. And we strongly support the efforts Senator Skelos, Senator Alesi, Assemblyman Morelle, Assemblyman Schimminger, Leader Nesbitt and his colleagues have made in the Legislature to enact single-sales taxation.

New York was once a national leader in pro-business tax policy. In 1976, we were the first state to switch to a double weighted sales allocation. This reform reduced the tax burden on corporations whose percentage of in-state jobs and facilities was greater than their percentage of in-state sales. In doing so, the Legislature created a tax advantage for in-state corporations, and moved ahead of competing states in terms of a pro-growth corporate tax policy.

Now, at least 35 states, including most of our chief competitors, have adopted double-weighted sales. More important, a number of states now exceed New York's benchmark for a more competitive corporate tax policy. Eleven states, including key competitors such as Illinois, Massachusetts, Connecticut, and Texas, have already adopted single-sales factor apportionment. A number of other states, including Pennsylvania, Maine, Oregon, and Wisconsin, are considering such legislation. Failure to act will result in our companies paying additional taxes to other states. Our failure to respond is analogous to letting competitor states hit us in the chin and not swinging back. We must get in the fight for jobs.

Adopting single-sales factor in New York will benefit both small and large manufacturers that locate a significant share of their facilities and employees in New York. Smaller firms with out-of-state sales will see larger percentage benefits. On the other hand, there will be no change in tax liability for firms with all their employees, property, and sales within New York.

Importantly, this allocation change can also benefit Subchapter S corporations, which pay tax not through the corporate franchise tax but through the personal income tax. Typically, Sub-S taxation is based on the location of the shareholder receiving the income. However, as a matter of New York State tax law, a business that files its federal taxes as a Sub-S corporation can elect to file state taxes on either a Sub-S or Article 9-A basis, allowing a benefit from the conversion to a single sales factor allocation under state law.

The Business Council applauds the Governor's proposal, and has offered recommendations for a broader definition of manufacturing and a quicker phase-in period.

Specifically, we recommend that you adopt the definition of manufacturing included in S.4604-A/A.8500, carried by Senator Skelos and Assemblyman Morelle. This definition has evolved over the past several sessions, and includes key sectors including software development, publishing and nanotechnology businesses.

We also recommend a phase-in period of no longer than two years. The budget projects a net reduction in tax revenues of $40 million once fully effective in FY 2009. However, research indicates that the stimulus effect of adopting a single sales factor allocation methodology will result in increases in both in-state employment and state corporate tax revenues. A quicker phase-in will allow New York to more fully participate in the national economic recovery, and its stimulus effect will help make a faster phase-in affordable.

Research done for our Public Policy Institute in 2000 indicates that a single sales factor allocation methodology would have a long term impact of increasing manufacturing jobs by 32,000, with a multiplier impact of an additional 101,000 private sector jobs. These jobs would produce between $180 million and $247 million in increased annual personal income tax revenues. This study was based on a statistical examination of the experience of states that had modified their apportionment formula in the preceeding two decades. This report is available on our Public Policy Institute web site, and we would be happy to forward copies to you.

Finally, while we strongly support the single-sales factor approach - to reward job creation and capital investment in New York State - we know that it will increase tax liability for certain businesses and/or industry sectors whose physical presence within the state is not in proportion to their market involvement in New York. The Business Council proposed legislation two years ago that would hold manufacturers harmless by allowing for a taxpayer election between the single sales factor and the existing double-weighted sales allocations, for companies that have a significant physical presence in New York. We believe this protection should be considered as part of the single sales factor legislation.

Empire Zones

Empire Zones are New York's most valuable economic development tool. There is much in the Governor's Empire Zone reform proposal that we support.

We strongly support the concept of different categories of zones focusing respectively on development in severely distressed areas, county-level development objectives, and state-wide attraction of major new investments. Each of these objectives is important to the state's overall economic vitality, and can be pursued simultaneously through a restructured Empire Zone program.

The proposal to reconfigure zones reflects a fair balance between meeting the need for investment in our most economically distressed areas, and providing local development officials with flexibility in applying zone benefits to meet local development opportunities.

One of our top priorities for 2004 is to use the Empire Zone program more effectively in retaining our existing manufacturing base. This should be a top priority of the Legislature as well.

Why? Let me start with one number: $11,407.

That is the bonus each manufacturing job bring to Upstate New York. It represents how much more, on average, an upstate manufacturing job paid compared to the average non-manufacturing private sector job in 2001, according to the state Labor Department. For the 53 upstate counties, the average manufacturing wage was $44,633. For private-sector jobs outside manufacturing, the average wage was $33,226.

Looking at our core economic areas upstate, the numbers are even more dramatic.

In Erie County, the average manufacturing job paid $45,515. That was $17,170, or 61 percent, more than the average private sector job in other industries.

In Niagara County, the difference was $28,810, or 123 percent. In Monroe County, it was $19,766, or61 percent. And in Onondaga County, $16,060, or 51 percent. Again, in each case the dollar figures represent the bonus - the additional pay - produced by each manufacturing job, compared to all other private-sector jobs. That does not include benefits, which on average are much better with manufacturing jobs than elsewhere.

These are high-paying jobs, and New York State should fight like hell to keep every one here.

Let me mention one other number - 100. Over the last five years, we have lost an average of 100 good manufacturing jobs in New York State every single day. That's the equivalent of a significant factory closing every single week.

Whether you look at New York State or the U.S. at large, it is essential for manufacturers to become more productive, to continuously invest in modern machinery and control equipment, in order to maintain a competitive edge in an increasingly cost-competitive world. As a matter of policy, we cannot continue to measure manufacturers' commitment to New York State, and award manufacturing investment incentives, based on employment count alone.

To address this concern, we propose extension of Empire Zone-type benefits to manufacturers that make significant capital investments in New York State, and either increase employment or retain a high percentage of existing employment in the state.

We are encouraged by a provision in the Governor's Empire Zone reform package that leans in this direction. However, we believe it should go further.

The Executive Budget proposes new criteria for calculating QEZE real property tax benefits based on a "qualified empire zone investment." Specific criteria on what qualifies as a significant in-zone investment would be established in Empire State Development regulations. However, this benefit would only be allowed for such investments in severely depressed census tracts (based on criteria set forth in Section 958(a) of the General Municipal law, which includes 20 percent poverty levels and unemployment levels at or above 125 percent of the state average).

Given that manufacturing is such a vital component of the state's economy, especially in upstate regions, and that manufacturing continues to struggle statewide, we believe that investment and job retention-based QEZE benefits should also extend statewide. We believe such a program can be developed with bright-line qualifications for both investment levels and employment retention criteria. For example, investment levels could be set at both a fixed dollar amount and as a percentage of existing capital assets, in a way that establishes appropriate criteria for small and large manufacturers alike.

We look forward to discussing specific legislative options with the Legislature and the Governor. But we can think of no more important economic development policy for 2004 than to focus on retaining good manufacturing jobs.

We also believe the Governor's reform plan should be modified to take advantage of other opportunities to make the Empire Zone program a more effective pro-manufacturing tool. Specifically, reform legislation should include capital investment/job retention criteria in the proposals for awarding state-wide Flex Zone acreage, and in designating county-level discretionary zone acreage.

Power for Jobs

The Business Council supports the Governor's proposal to extend Power for Jobs contracts for businesses whose allocations will expire in 2004.

The same factors that justified the original Power for Jobs statute - energy cost and generating capacity - still exist today.

Costs - The average industrial power price of 5.4 cents per kilowatt hour in New York is slightly above the national average. But that figure reflects the beneficial impact of NYPA hydro power going to major industrial users. Without NYPA hydro power, the average industrial rate in New York rises to nearly 8 cents/kwh, roughly 60 percent above the national average. Average rates for commercial users are even higher - at 11.5 cents/kwh, more than 50 percent above the national average for commercial power rates.

Some of New York's power cost problem is due to factors beyond our direct control. But much of the cost problem is self-inflicted, driven by legislative and administrative policies that add to the cost of generation and distribution. The high cost of local property taxes is a prime example.

Moreover, recent regulatory initiatives in New York are also adding to the electric prices paid by in-state businesses. These include:

Capacity — Based on projected demand growth and the need for surplus generating capacity to support system reliability and price competition, The Business Council estimates a need for at least 7,000 MW of additional generating capacity by 2008. Since 2002 - the date of the last Power For Jobs extension bill - only 1,100 MW of additional capacity has come on line, and only about 2,500 MW of generation is under construction. About 1,000 MW of generation under construction is scheduled to be in service in the near future. The lack of additional capacity is attributed to a number of factors, including financial problems in the power industry, the national economic downturn from which we are still emerging, and a very uncertain regulatory environment in New York for the construction and operation of power plants.

Given these ongoing factors of electricity prices and generating capacity, The Business Council supports a continuation of the Power for Jobs program to help energy intensive and at-risk companies remain competitive, and help them retain and add to their in-state employment. Since current Power for Jobs allocations will begin to expire later this month, timely legislative action is essential.

Repeal the "cleanup tax"

We have several recommendations in the area of environmental conservation. First and foremost, we urge the Legislature and the Governor to repeal the "site cleanup tax" of 2003.

Last year's Superfund/brownfield bill imposed significant new surcharges on generators of hazardous wastes. Compounding the problem, when negotiators finished working on the 107 page bill, they left out an important exemption for hazardous wastes generated through state and/or federally approved site cleanup projects.

I would like to remind you of The Business Council's strong opposition to the overall hazardous waste surcharge. Hardly a "polluter pay" approach, as some advocates of the surcharge would say, this is a near $20 million hit that targeted the state's manufacturing sector. Last November, some 700 manufacturers statewide were hit with a five- to 10-fold increase in hazardous waste program fees. The grace period for payment has already expired. Small businesses which simply could not afford to pay this unexpected fee are now subject to interest payments, and will soon be at risk of state-imposed penalties. The Legislature should provide some relief from this significant fee on manufacturers.

Starting at 15 tons of wastes generated, these surcharges would come into play with the removal of about ten cubic yards, or an average sized dump truck, full of contaminated soils. This could add up to $400 per ton, a surcharge that in many instances will exceed actual treatment/disposal costs. For the small brownfield site, this surcharge starts at $4,000 for that first truckload of wastes.

This inadvertent measure will needlessly add to the cost of brownfield, superfund and RCRA cleanups in New York State. Not only that, it will actually impose a financial disincentive for complete cleanups by making removal actions that much more expensive.

Finally, it is our understanding that the $18 million in projected surcharge revenues, imposed as part of the state superfund refinancing mechanism, did not include surcharge revenues from remedial wastes. Therefore, adoption of this exemption will not impair the state's superfund refinancing plan.

Therefore, we urge you to repeal the cleanup tax as part of the budget agreement for FY 2005.

The Administration's previous two Executive Budget proposals included an explicit surcharge exemption for cleanup wastes, as did the brownfield legislation approved by the Senate last March.

Specifically, we urge you to support the surcharge exemption language included in last year's budget bill, S.1409/A.2109, as well as in S.2935, with the addition of specific exemptions for wastes generated under the newly created brownfield program and the Clean Water Clean Air bond act municipal site restoration program.

Environmental Justice - The Executive Budget includes a proposed $50,000 state-funded grants program for groups that bring "environmental justice" claims against certain environmental permit applications.

While we have general concerns about the public funding of project opposition groups, our most serious concerns apply to other aspects of the Budget proposal. If any such grants program is to be adopted, it is crucial to have reasonable criteria and limits on such programs.

We believe the Executive Budget proposal fails this test on several counts.

Among other things, the proposed Uniform Procedures Act amendments would impose "environmental justice" considerations in all permit reviews subject to UPA, but provide no definition of what "environmental justice" is, or in what way (or to what end) such considerations would be applied. Inevitably, some groups will make "environmental justice" just another tool in their arsenal to oppose projects and permits.

We have conveyed detailed comments on the cleanup tax and the "environmental justice" issues to staff of the Senate and Assembly environmental committees.

We can't wait till next year

I don't need to tell you the daunting nature of the challenge facing you. Not only will this year's budget decisions be difficult. There is every indication that, without major fiscal restructuring, the budget gaps in 2005 and 2006 will be nearly as bad as this year's.

To us, that raises the specter of more tax increases being put on the table in years to come. We expect that the temporary tax increases you enacted last year are just that - temporary. The pledge from Senator Bruno and Speaker Silver of no new taxes, which we applaud heartily, must be more than a one-year pledge.

We have some thoughts on the various ideas for tax increases that are in the air and that you may hear about today.

I'll start with a truly big, and truly bad, idea - bringing back the stock transfer tax. All of us are very glad to hear the recent reports of rising profits on Wall Street. They are the brightest silver lining in the thunderclouds of this year's fiscal picture. The Wall Street Journal reported last week: "As financial companies start to pay out big bonuses for 2003, lavish spending by Wall Streeters is showing signs of a comeback." Some people used to call this trickle-down economics, but the fact is that big spending on Wall Street creates jobs for thousands of working New Yorkers - to say nothing of the millions in tax revenues it generates for New York State and for New York City.

Governor Carey and the Legislature acted to eliminate the stock transfer tax in 1977, despite the budget crisis they faced that year, because they knew it hurt New York's ability to compete for securities-industry activity. Today, New York's stock exchanges face far tougher competition than they did 25 years ago.

In 1998, you and Governor Pataki made our investment tax credit available for technological investments by securities brokers and dealers. That action reflected a recognition that New York has been losing market share in this key industry to other states. The New York City Independent Budget Office estimates that a city-level stock transfer tax would drive nearly 60,000 private-sector jobs out of the city. Given the enormous economic losses such a tax would create, the Independent Budget Office questioned whether the proposed stock transfer tax would generate any net new revenue at all.

Then there's the punitive health-care tax that Local 1199 promises will be the subject of a "massive" lobbying campaign directed at you and your colleagues. Mr. Rivera argues that business owners who already pay for health insurance will support his idea. He brought to his press conference several people whose businesses have Local 1199 and various hospitals as customers. But as far as the mainstream business community is concerned, he could not be more wrong.

If Mr. Rivera wants to start a debate with business executives about higher health-care taxes, we can only quote two of our most respected national leaders: Bring it on. Businessmen and women know that taxes in New York are already far too high, and that the taxes that go directly to hospitals and to Local 1199 members are part of the problem.

Adding a tax of $3,000 to the most marginal and vulnerable businesses is akin to telling recipients of the earned income tax credit that they must now pay income tax. If you don't have the money, you simply cannot pay.

On the other hand, we agree strongly with Senator Seward and Assemblyman Morelle that a tax credit for small business health insurance is a very good idea. We are more than willing to work with Mr. Rivera to support enactment of the Seward-Morelle bill into law.

There are various other ideas for raising corporate taxes. The Fiscal Policy Institute has a plan that could add up to $1 billion, or a 50 percent increase in the corporate income tax. We think of such ideas, collectively, as the New Jersey plan. Without going into detail as to why each is a bad idea, we would remind you of two key points:

Three tough budget years are ahead

It seems safe to bet today that the budget you and Governor Pataki enact this year will reduce spending in some areas. There will simply not be enough dollars to pay for all the programs that seem to deserve support from the taxpayers.

If that is the case, it only makes sense to give close attention to the biggest single cost item in the budget. Medicaid provides vitally important services to many New Yorkers. But it also absorbs a rapidly growing share of the dollars you appropriate each year. Besides the nation's heaviest tax burden, the Medicaid program has given New York a continuing legacy of shifting costs from publicly funded health coverage to private health plans.

The Senate Task Force on Medicaid Reform and Governor Pataki's Medicaid Task Force have both made proposals that we believe make sense.

County executives from around the state have asked you to relieve the local share of Medicaid costs, for the sake of property taxpayers. We support a state takeover of local Medicaid costs as long as there is an ironclad requirement that those savings flow to the taxpayers. We also support Chemung County Executive Tom Santulli's proposal that counties be allowed to seek waivers from state-level mandates on Medicaid services. Local officials and local medical professionals are in a better position than state government to determine the best way to deliver health care services to families and individuals in a given county.

Failure to resolve the problem of high Medicaid costs means more than failure to address state government's fiscal problems. For years New York's Medicaid policy has shifted costs from the public sector to privately financed health insurance, particularly employer coverage. The $1.3 billion that employers pay in health-care taxes each year are one example.

If we're truly concerned about the uninsured, why do we keep making private health insurance more expensive by shifting costs from Medicaid?

We believe real Medicaid reform means making its benefits more comparable to those benefits taxpayers purchase for themselves through their employment. It means using technology to improve the efficiency and quality of medical care. It means attacking high-cost cases such as asthma, diabetes and coronary heart disease where we often do a poor job that hurts the individual and drives unnecessary spending. Effective management of these high-cost cases means providing individuals with access to the most effective treatment available, including tried and true medications, to treat these illnesses.

New York State must also promote the public dissemination of usable data on the state's health-care system. There continue to be wide variations in the cost of Medicaid from county to county. More widespread use of data can help us better understand these differences and help policymakers develop interventions that can make the system more efficient, with more effective outcomes.

We do not believe the Executive Budget proposals to raise taxes on hospitals and nursing homes are Medicaid reform, and we oppose those proposals.

One major reason for the continuing focus on Medicaid is its impact on local property taxes. While fundamental reform of Medicaid may not be possible immediately, there is one important step you can take this year to make our property-tax system more expeditious and less costly. That is to replicate, in the property-tax area, the approach the Legislature took in creating the Tax Tribunal for controversies involving taxpayers and their state taxes.

Senator Bonacic has proposed legislation to transfer jurisdiction for review of assessment challenges involving commercial property with a value of $1 million or more from the Supreme Court to the Tax Appeals Division. The transfer would reduce the burden on our Supreme Courts while establishing a core of expertise in the tribunal handling such cases. It would lessen the uncertainties faced by both local governments and taxpayers. It would reduce judicial challenges, which now take years to reach final determination. Localities would see litigation costs go down, and property tax assessment decisions would become more consistent over time.

Technology and our future

One of the most significant steps taken by the Legislature and the Governor in the past few years is the bold and sound action you took to create Centers of Excellence throughout the state. This program was announced when fiscal times were good. These centers have positioned us to leverage our academic strengths with our business strengths in areas of science which portend to be on the cutting edge of what will drive our economy in this century. The fact that the substantial commitments made by the state at that time were sustained during difficult fiscal times is a testament to how important you believe this program is to the long-term prosperity of the state. We agree.

A number of other technology investments and programs have been made in recent years. This year it is proposed to broaden the state's support of university leadership efforts by creating a new higher education capital investment matching grants program open to all colleges and universities, public and private. The matching requirement gives accountability and leverage to the efforts taking place at campuses throughout the state to upgrade facilities and programs that are deemed by each institution to be critical to its future. This program will focus efforts on campuses in every part of the state to identify initiatives which will identify their areas of academic excellence and pursue a course which will prepare their students and rally the support of their alumni. We hope to see this program bring the type of partnerships and synergies we have seen with the Centers of Excellence program. We support this effort and urge its passage.

We also support the Executive Budget proposal that "qualified biotechnology companies" be allowed to sell their unusable net operating loss carry forwards to other business income taxpayers (Articles 9, 9-A, 32 and 33). Under this proposal, qualified firms must have their principal operations in the state and have fewer than 225 employees, with at least 75 percent of them in-state.

This is an excellent experiment in using saleable tax credits as a mechanism to bring private-sector seed money into emerging biotech businesses in New York State. We urge you to adopt this proposal this year and watch its impact closely, as it seems like a good model for broader initiatives to support our emerging, high-tech industries.

Thank you for your attention.