New York’s long history of high taxes chased jobs out of the state by the hundreds of thousands. But the state has cut taxes by more than $8 billion since 1995, and now our economy is growing. In fact, the tax cuts produced so much economic growth that government revenues have grown faster, rather than slower, since the tax cuts.

But this does not mean our taxes are low enough. Our state and local tax burden per capita is still more than 50 percent higher than the national average — still higher than any other state’s. Our state taxes per capita are still the nation’s 10th highest. Tax cuts may have reduced the gap between New York and the nation’s mainstream. But the burden here remains, undeniably, a heavy one.

Local property taxes are especially high. Even as we enacted historic cuts in state taxes, property taxes statewide have continued to climb. Today, these taxes are 62 percent above the national average and are among the nation’s highest local property taxes. This raises the cost of living here, and hurts our efforts to compete with other states for new plants and jobs.

Governor Pataki’s STAR program has given some property-tax relief to homeowners. But the burden on business has been increasing.

Tax cuts have enhanced the prosperity of all New Yorkers. Let’s cut taxes more and produce even more economic benefits.

One of the state’s next big tax-cut targets should be local property taxes.

New York has already given some relief to homeowners through the STAR program. The Business Council thinks business should get the same kind of help. One idea is to earmark $500 million (a fraction of the projected surplus) for credits against corporate taxes to offset local property taxes. In addition, the state should reform its mandates that drive up the cost of local government — including prevailing wage laws and the Wicks law.

The state should also enact more cuts in state taxes. For example, if New York adopts the “single-sales factor” to calculate corporate taxes, it can enact a modest tax decrease while rewarding the location of jobs here.

Today, New York effectively penalizes companies that put plants and jobs here. That’s because it bases corporate taxes on three factors: in-state payroll, instate property value, and instate sales to instate destinations. If a company sells its products here and has a plant here, it pays more than it would if that plant were in another state. A more far-sighted tax policy would allocate corporate income taxes solely on the basis of instate sales, and thus encourage companies to put their plants and jobs within the state.

Studies suggest that states that make this change are likely to gain jobs — while states that do not are likely to lose them.

Albany should also consider:

• Updating state taxes on the telecommunications industry.
• Accelerating repeal of the gross receipts tax.
• Modifying the investment tax credit to include a deduction
  for leased equipment.
• Providing tax credits to encourage small businesses to buy health insurance for workers. ? And reforming taxes on railroad property.
  

Our progress in reducing our tax burden must not obscure the opportunity — and the need — to do more.

High costs, tight supply

New York has worked hard to reduce its energy costs. It has deregulated energy utilities, which will reduce prices in the long run as free energy markets gradually phase in. And the state has approved a phased-in repeal of the gross receipts tax on energy for businesses.

These are important steps, but energy costs in New York remain high. Both industrial and commercial users pay electricity costs that are far above the national average; only about half a dozen states have higher costs. Despite positive steps that may help narrow this gap over time, New York’s energy costs will remain a significant competitive disadvantage in the competition for jobs and growth.

And it’s important to remember that economic growth depends more than ever on energy. Upstate still depends heavily on energy-intensive manufacturing. And increasing reliance on computers and other new technologies in all sectors means that even a publishing house or a brokerage firm is now an energy-intensive enterprise.

As the economy grows, satisfying energy demand will become even more challenging. New York’s maximum electricity capacity is 35,636 megawatts a day. On high-demand days, the state comes perilously close to that maximum, some days taxing the system for more than 90 percent of its capacity. Despite this growing demand, the last power plant sited in New York (by the New York Power Authority) was in 1994, and the last plant sited by a utility in New York was in 1984.

Reduce energy taxes, site more generating capacity

Repeal of the gross receipts tax (GRT) will help in the long run, but other energy taxes still inflate energy costs. One hidden energy tax, the “systems benefit charge,” was supposed to expire in June, but many in government want to extend and increase it. The state should reconsider this charge.

Albany should also consider accelerating the repeal of the GRT. For commercial businesses, it won’t fully expire until 2005. The faster the tax goes away, the faster the benefits for job growth will kick in.

The state also needs to make it faster and easier to site new power plants. The current siting process is complicated, including a “pre-application” phase, the application process, and hearings, all before a final decision.

The original goal of this process was to get a decision no more than 14 months after the application is filed. But the siting board that manages this process consists of the heads of five different state agencies. Because these agencies have different processes and priorities, the process tends to slow down, and there are applications that have been pending for more than two years.

There is considerable interest in building new power plants; in fact, there are 20 proposals for new plants already in the siting process. The state should streamline this process so that plant-siting decisions are made more quickly. Imposing tight timelines on each step in the process, and on the whole process, would be an important first step.

The state has already proven it can accelerate permitting processes through its efforts
to “pre-permit” sites for possible chip fabrication plants. The same commitment to a speedy process can ensure that New York has enough energy to power its future growth.

Financing — and encouraging — cleanups

New Yorkers want a safe environment — which means, in part, that we must invest in cleaning previously developed properties that were contaminated decades ago. Since redeveloping these sites will foster growth in urban areas, New Yorkers should be concerned about cost and liability issues associated with these “brownfields.”

State policies affect both public and private cleanups of these contaminated sites. The state itself must finance the cleaning of some contaminated sites, including municipal landfills and abandoned industries properties. At other places, its policies could encourage private investments to clean and redevelop brownfields.

In 2001, the state’s environmental Superfund, which funds public cleanups, will likely spend the last of $1.2 billion in cleanup funds from the 1986 Environmental Quality Bond Act. The state must find a fair and appropriate way to refinance it. Moreover, it should reconsider policies that discourage private cleanups — a major reason why most New York brownfields remain ignored for new industry or other economic development.

Many brownfields have advantages over undeveloped sites. They often offer an existing plant with water and other utilities in place, and they are near roads and rail. But redevelopers reject them because they must pay the full costs of removing contamination which they had no role in creating. Moreover, cleanup requirements are often unclear, and redevelopers may be required to restore sites to near-pristine conditions. Even then, there is little protection from liability if any party sues in connection with any hazardous wastes found at redeveloped sites.

Fairer financing, more cleanup incentives

The Business Council believes that Superfund refinancing and brownfield reform should be addressed in one comprehensive reform package.

The state’s Superfund should be permanently refinanced by all taxpayers, including business, through the state’s general fund. Because cleaning environmental contamination is a benefit to all of society, all of society should share the costs. That means no new taxes or fees should be imposed solely on business to provide the funds for Superfund. If parties responsible for the contamination cannot be identified, are no longer in business, or cannot bear cleanup costs, there is no basis for charging business alone for the cleanup.

The reform package should also modify cleanup standards so they reflect actual risks posed at a site. For brownfields and Superfund sites, cleanup standards should reflect the intended use of the site. If a site is to be refurbished solely for industry, it is needlessly — and often prohibitively — expensive to restore it to a level of purity appropriate for, say, housing.

There should be protection from litigation for parties that choose to clean and redevelop sites that have contamination these parties did not cause. And parties that complete approved cleanups should then receive releases from liability associated with the original contamination, with strict limitations on when and how such cases can be reopened.

Nearly 20 states have enacted similar reforms, and they have seen a renewed interest in investing in old industrial sites. With similar reforms, New York can ensure a safe environment for New Yorkers in a manner that will foster economic growth.

Education at all levels is critical to New York’s future

New York’s growth has always been driven by people and ideas. Today as always, New York finds this fuel for growth in the same places: our elementary and secondary schools, and our colleges and universities.

Our schools educate today’s students to become tomorrow’s business leaders, teachers, workers, doctors, managers, and entrepreneurs. Our unsurpassed universities and colleges provide advanced instruction for our best and brightest. They also generate innovations and insights, as well as the entrepreneurial spirit, which ignite wealth creation.

Over many years, however, New York’s public schools have faltered. Recent generations of high-school graduates have included too many students with weak communication and math skills. Surveys of employers have shown widespread dissatisfaction with these students’ preparedness for the challenges and rigors of work. This decline came even though New York has been pumping tax money into our school systems in historic amounts.

And although our state’s public and independent universities and colleges remain among the nation’s best, New York may be missing an opportunity to tap them for new ideas that could drive tomorrow’s growth.

Other states are systematically investing hundreds of millions of dollars in their universities’ efforts in areas of science and technology that have the potential for the greatest societal and economic benefit. New York has not made such a concerted commitment of resources to these fields, which clearly will drive growth in jobs and prosperity in the decades ahead. Since companies in all high-tech fields often locate their plants and jobs near top research institutions in their discipline, New York’s future growth is clearly at stake.

Commit to excellence in all schools

Today, thankfully, New York has begun to accelerate the improvement of its public schools. It has done this by demanding performance and accountability from schools, teachers, and students.

Now, annual school report cards tell administrators, teachers, parents, kids, and the public how their schools stack up. They let schools measure their performance against similar schools and against their own achievement the previous year. In addition, tough new academic standards, and tests based on them, are finally making teachers and students accountable for what is actually learned.

But these standards are new and not fully phased in. It will be years before they are fully rooted in our culture. Until then, there will be strong, misguided pressure to relax them, or to slow their implementation. Already some advocates have tried to turn back the clock on accountability, despite surveys that show that parents, businesses, and teachers alike strongly support standards. This well-intentioned but misguided pressure is likely to continue.

To ensure its future growth, New York must sustain and expand its new commitment to excellence in schools. Specifically, that means resisting pressure to ease academic standards. It means expecting all schools to show an unwavering commitment to educating all students. It means promoting our successful schools as exemplars. And it means holding failing schools accountable. New York must also compete vigorously with other states for the coming growth in industries that will build their prosperity on university research. A recent survey of New York employers showed strong support for keeping New York’s universities and research institutions among the global leaders in technology. New York must invest in the source of ideas and people who will create tomorrow’s growth.

Those hidden costs

Before a business locates a new plant in New York, it studies how its costs will go up or down if it creates that new site elsewhere. In recent decades, that comparison all too often resulted in new plants — and the jobs they represented — going to states other than New York. That’s at least partly because some hidden “costs of growth” have been historically high in New York.

In recent years, we have succeeded in reducing some of these costs but, overall, they remain higher in New York than in other states. In addition to taxes, energy and other costs already discussed in this presentation, we are concerned about:

Workers’ compensation costs: For many years, New York’s workers’ compensation costs were far above the national average. Workers’ comp reforms in 1996 reduced premiums and brought New York’s costs closer to the national average. But as premiums have declined in recent years, “assessments” (a surcharge on premiums that all employers pay) have increased.

Health-care costs: Health-care costs in New York are far above the national average.
This drives up the cost employers must incur to give workers a health insurance benefit. Most employers are forced to pass on a greater fraction of these costs to workers, and an increasing number of employers, especially small businesses, are unable to offer any health insurance benefit at all.

Litigation costs: All businesses and individuals in New York pay a hidden “tort tax” — the costs of litigation for which New Yorkers pay an estimated $14 billion each year, almost $800 per person. The “tort tax” also adds hundreds of millions of dollars a year to property taxes, because municipalities must pay higher liability costs.

How key reforms can fuel growth

State policies play a key role in driving these costs — and policy changes can help bring them under control and spur new growth.

Workers’ compensation reform: The increase in workers’ compensation assessments is driven largely by growing use of the “second-injury fund.” After World War II, this fund was designed to encourage employers to hire veterans injured in the war. It has outlived that purpose, and some employers, frustrated by New York’s high costs of permanent partial disability cases, shift some of their costs in these cases to this fund. This has the effect of forcing employers with good safety records to pay benefits for other employers’ injured workers.

New York should eliminate this fund, as other states have. And two other key reforms already adopted by most other states — cap on payments in cases of partial disability, and use of objective medical guidelines to determine the degree of disability in those cases — should also be enacted.

Health-care parity: The Health Care Reform Act (HCRA) of 2000, which increased health-care costs for all businesses, gave some businesses access to reduced-rate health insurance programs. Unfortunately, that benefit was provided only to small businesses that weren’t previously offering health insurance. The retail store owner who has struggled for years to provide health insurance for her workers suddenly finds the state of New York subsidizing health insurance for a competitor who has never provided it. To add insult to injury, the employer who already provides health coverage isn’t eligible for the subsidy, yet must help pay for the subsidy to her competitor through a surcharge on her company’s insurance bill.

“Health-care parity” would give all small businesses access to the same reduced-rate insurance programs that the state now gives some businesses under HCRA. This would not ease the full burden of New York’s far-above-average health-care costs.
But it would eliminate an unintended competitive disadvantage given to businesses that provide health insurance to their employees through local and regional chambers of commerce or other employer groups.

Tort reform: Several key reforms designed to give juries clear, common-sense guidelines in tort cases would restore the focus of the system on victims as opposed to their attorneys. These reforms include: fundamental product liability reforms; repeal of joint and several liability; and a cap on contingency fees.

Indian land claims: The state should resolve Indian land claims in a manner that understands the full economic, political, and regulatory consequences those resolutions will have for large areas of the state.

The temptation to revert

New York has made great progress generating economic growth since the mid-1990s.
It has done so by reducing taxes, creating a better regulatory environment, reducing the cost of employee benefits, and other steps to improve New York’s business climate.

This didn’t happen overnight. It took years to convince Albany that many of its policies were driving jobs and prosperity out of the state. The turnaround began after The Business Council’s research affiliate, The Public Policy Institute, published its landmark book, The Comeback State, in 1994. Governor Pataki took office the next year, and he and the legislative leaders listened to business.

The Comeback State made the case for restoring growth by focusing New York’s agenda on jobs and kids. Specifically, it urged Albany to consider policies that reduced taxes, cut costs of employee benefit programs (such as unemployment insurance and workers’ compensation), improved schools and made them more accountable, and encouraged a government that was friendlier to its business community.

New York did change — and it has begun to make its comeback. But the relatively good economic times that New York has enjoyed in recent years have led some to think that this state can relax its guard, and revert to the kind of short-sighted, big-government policies that got us in trouble in the first place.

Some advocates, for example, urge government to mandate more kinds of coverage under employers’ health insurance policies without realizing that such mandates would make health insurance less accessible for all. Others want the state to ease or relax its new education standards. Proposals to re-regulate energy markets also emerge regularly, as do a variety of ill-advised proposals designed to create even more opportunities for litigation.

Don’t mess with success!

New York has begun to reverse its job losses, slowly but surely, by repudiating growth-stifling policies and replacing them with sensible alternatives that meet society’s needs without undermining growth.

This approach has worked. Let’s not mess with success by undoing the decisions that made our recent growth possible, or by embracing new policies that would effectively restore the growth-deterring business climate New York endured until the mid-1990s.

Here are a few specific examples of the kinds of temptations we think must be resisted.

Health-care mandates: It would be a mistake to add new requirements forcing employers’ health-insurance policies to include coverage for visits to specific types of practitioners or treatments for specific conditions such as infertility. Such health-care mandates drive up the cost of health benefits — and make it less likely that employers will be able to provide any health-insurance benefit. One alternative is to test all proposed health-care mandates by imposing them first on the state’s own workforce to see what the actual effect on costs will be.

Education standards: We oppose any and all efforts to ease or relax New York’s tough new education standards.

Energy: New York should not reverse ground on energy policy by re-regulating energy markets. The current deregulation has not fully unfolded and there is every evidence that it will ultimately reduce prices.

Growth: There is no need to enact strong new state restrictions on commercial, residential, or industrial growth — nor to usurp the authority of local governments to manage growth. The oft-heard spin is that such proposals will yield “smart growth.”
But New York is just getting a taste of growth again, after years of decline. It would not be smart to jeopardize that, nor to second-guess local governments’ ability to deal with it.

Tort reform: And it is important to resist the annual flood of trial lawyer-driven proposals to permit new lawsuits and new bonanzas in legal fees. There is no evidence, for example, that interjecting lawyers into the determination of health-insurance policies will improve health care.