Testimony to
Senate Finance Committee and Senate Investigations and Government Operations Committee
Tax Reform: Reducing Tax Burdens and Promoting Economic Growth

Presented by
Ken Pokalsky
Vice President of Government Affairs

Wednesday, September 4, 2013

On behalf of the Business Council, we appreciate your long-standing leadership on taxation, budget and business climate issues affecting New York State, and appreciate the opportunity to discuss tax reduction and reform priorities with you today.

State business climates matter, and while they are influenced by many factors, taxes are a factor in defining a state’s business climate, so taxes do matter to business and they impact a state’s overall economic performance.

While NY’s recent experience with limited-growth budgets, reforms in the state’s major spending programs, and limited revenue actions are positive steps which we applauded, New York still has significant tax – and economic growth - issues.

The Tax Foundation reports that New York’s combined state and local tax burden, at 12.8% of personal income, is the highest of any state in the nation, and has been the top state every year from 1987 to 2010.

The Division of Budget in effect agrees with this assessment. In its FY 2014 “Economic and Revenue Outlook,” the Division reports that New York combined state and local taxes were second highest of any state, behind only Alaska – whose figures are skewed by significant tax revenues from extractive industries.

These tax burdens have a definite impact on business. According to a study completed by our Public Policy Institute, business pays about 25 percent of all state-imposed taxes, about 40 percent of local-imposed taxes (primarily real property and sales taxes), for a combined share of 34 percent.

Based again on Division of Budget data and projections, over the ten years from FY 2004 to FY 2014, total state revenues from the state’s four primary business taxes – the corporate franchise tax, bank tax, corporation tax and insurance tax – will have increased by nearly 90 percent – a higher growth rate than either the personal income tax (72 percent) or the state sales and use tax (26 percent.)

While many factors impact a state’s economic performance, these tax burdens, together with other business cost factors, have contributed to slow economic growth in New York, especially upstate.

Based on data from the state Department of Labor’s “current employment estimates” series, from the end of 2008 through June 2013, New York State has added 241,000 private sector jobs, and is 140,000 jobs above its pre-recession peak. However, despite this recent positive performance downstate, since 1990 job creation in New York has been one third the national rate (7.2 versus 22.2 percent). Keeping up with national job creation trends since 1990 would have produced another 1.2 million jobs for New Yorkers.

Moreover, since 2008, all of New York’s net new jobs were created downstate (defined as Putnam Westchester and Rockland counties, NYC and Long Island). As of June 2013, total private sector jobs in the 52 upstate counties – at 2.498 million – remained 7,000 below its 2008 levels.

We believe that promoting renewed economic growth must remain the state’s top policy objective. We believe that broad-based economic climate improvements, including improvements in the state’s tax climate, are essential steps toward achieving that goal. In the meantime, we do see an ongoing role for targeted, “pay for performance” tax incentives that help promote investment, job growth and job retention in key business sectors.

The following provides our initial recommendations, focusing on the state’s business taxes, tax administration and the personal income tax. As your hearing schedule goes forward, we will be providing you additional input in several other categories, including personal income tax impacts on business income, and on additional sales tax reform issues.

Business Tax Reform

The Business Council supports broad based business tax reforms that improve the state’s economic climate. We support many elements of the business tax modernization bill drafted by the Department of Taxation and Finance in 2011, after substantial input from the business community. While not perfect, that proposal included a number of amendments that would improve the state’s business tax climate. They include, but are not limited to:

We would address several adverse provisions in that legislation that would have adverse (and we believe unintended) impacts on business taxpayers, such as provisions that would subject some sectors and their business income to double taxation under New York’s corporate franchise tax law and the tax laws of other states. The bill should also create a workable default value for expense attribution related to excluded income (i.e., a percentage add-back for expenses related to excluded investment income), an issue that under current law is one of the most significant basis for conflicts on audit. Likewise, we would also add the ability for taxpayer to take multi-year elections to use the federal combined group at the state level and/or to include non-unitary businesses within their New York combined group. I will provide the Committees with details on these and related provisions in Article 9-A reform.

Turning our focus to the manufacturing sector, we applaud this year’s corporate franchise tax reductions for “qualified NY manufacturer,” With regard to the entire net income basis tax rate, there is a phased-in reductions to 5.9% in 2014, 5.7% in 2015, 5.5% in 2016-18 and 4.875% in 2019 and subsequent tax years. The bill included comparable reductions for Article 9A’s capital base, alternative minimum tax and fixed dollar minimum calculations as well.

We have several additional recommendations with regard to these manufacturers:

We also recommend an expedited phase out of the Section 18-A “Temporary State Energy and Utility Service Conservation Assessment,” a “temporary” 2 percent PSC assessment on electric, gas, steam and water utilities adopted in 2009 and initially set to expire March 31, 2014.

In this year’s budget, the assessment was extended for, in effect, for 3 and one half years, with a 2 percent assessment in FY 2015, 1.75 percent assessment in FY 2016, a 1.5 percent assessment in FY 2017 and an extra payment of one half of the FY 2017 assessment due by the end of March 2017.

Our projected impact of this extension is about $1 billion in aggregate, with more than half born by industrial and commercial entities. While market forces have produced reductions in energy commodity costs for energy intensive businesses, New York has offset these savings with more than $1 billion in various energy-based assessments and surcharges. Eliminating the 18-A assessment once and for all would be a welcome, broad based tax relief measure.

Administrative reforms

Tax reform should also consider improvements in the way that taxes are administered, including administrative reforms that do not directly impact state or local tax revenues, but result in a reduction in business and government tax administration costs. Important administrative reforms include, but are not limited to:

Tax credits

We see an important role, especially in the short term, for targeted, “pay for performance” tax incentives that help promote investment, job growth and job retention in key business sectors. Key issues include the following:

Personal Income Tax

For purposes of today’s hearing, I would like to provide some initial observations and recommendations regarding the state’s personal income tax.

On the tax equity issue, we agree that the personal income tax should be progressive, and we stress that, despite arguments to the contrary, New York’s personal income tax is progressive, and was so even prior to the adoption and extension of the so-called “millionaire’s tax.” The lowest 40 percent of taxpayers, as measured by New York adjusted gross income, pay no state income tax at all, and in fact receive more than $800 million in state tax refunds under the Earned Income Tax Credit – a provision that has been supported by The Business Council.

When you look at New York’s effective tax rate – the actual percentage of income paid in income taxes - the data clearly shows that the state’s PIT is progressive in application. Again, using pre-millionaires tax data, the effective tax rate on taxpayers with incomes over $200,000, at 6.66 percent was 94% higher – nearly double – the effective tax rate on taxpayers in the $40,000 to $50,000 AGI range (3.43 percent), despite at the time “being taxed at the same rate.” Overall, the effective tax rate on New Yorkers increases significantly as you move from the lowest income earners to the highest, as shown in the attached chart.

In short, taxpayers with progressively higher rates of income pay a progressively higher share of their income in state personal income taxes, i.e., a progressive income tax. Likewise, high income earners pay a significantly higher share of their income in state income taxes than does the middle class. We would also cite the Institute of Taxation and Economic Policy – an organization with a strong emphasis on progressive tax policy – which includes New York, along with California and New Jersey, as being a state, and I quote, “with particularly progressive income taxes.”

In addition to issues related to tax “equity” perspective and impacts on family’s cost of living, the personal income tax raises business climate issues as well. The personal income tax has a direct impact on businesses organized as subchapter S corporations, partnerships and limited liability corporations. Department of Tax and Finance data shows that, for the 2005 tax year, 357,000 S corporation tax returns were filed in New York, 95 percent of which had three or fewer shareholders. In 2006 tax year, 62,000 returns with corporation net income had federal adjusted gross income over $250,000 and 14,500 had AGI over $1 million. These categories of mostly small businesses saw a sharp increase in their income tax liability under the so-called “millionaire’s” tax.

As mentioned, we will be providing the Committees with additional recommendation regarding business issues under the state’s personal income tax.

Real Property Tax Administration

For many businesses, real property taxes are the largest tax paid in New York. The cap on RPT increases, coupled with local government mandate reform, will provide property tax relief over time, and we urge the state to move forward aggressively with additional mandate relief.

Meanwhile, Council members have supported reforms in the administration of the state’s real property tax system. Key reform issues include: incentives to move to county level assessments; adoption of fixed reassessment cycles; mandate for uniform, full market value assessments for all property classes; and reforming the assessment challenge process.

In a related issue, concerns have been raised that an unintended consequence of the 2 percent real property tax cap will discourage municipalities from authorizing PILOT agreements to support economic development projects. Under the cap statute, the assessed values of real property improvements associated with a PILOT agreement is ignored for purpose of calculating the cap’s “tax base growth factor,” which will result in lower maximum local revenues that if the PILOT did not exist – despite the impact of economic growth. While the legislature may be reluctant to “re-open” the tax cap law, the state needs to fix this unintended adverse impact on capital investment proposals.

Again, I appreciate this opportunity to share these suggestions and concerns with members of the Senate Finance and Senate Investigations Committees. I look forward to working with the Committees in developing and adopting tax reforms and incentive programs that will help restore New York State’s economic competitiveness.

As mentioned, considering the importance of this topic, its broad scope, our diverse membership, and the limited time available to us today, we also look forward to providing the Committees with additional comments over the next several weeks.

I welcome any questions or comments you have for us today.

Thank you.

Ken Pokalsky
Vice President of Government Affairs