ALBANYNew York's businesses continue to shoulder a heavy tax burden, both in real numbers and as a percentage of all taxes paidso lawmakers should enact a state budget that holds spending to responsible levels, preserves enacted tax cuts, and avoids new taxes, Business Council President Daniel B. Walsh said in testimony today.
"New York moves ahead when we work to improve the business climate. We falter when we fail to do so," Walsh said in testimony before the Senate Finance Committee and the Assembly Ways and Means Committee. "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."
Until New York began cutting taxes in 1994, the state's job growth was a fraction of the nation's. By 1999 and 2000, New York had caught the rest of the country and was even adding jobs faster than most states, he said.
Walsh rebutted arguments by some labor-movement advocates that corporations pay a shrinking share of taxes. Their figures ignore the bank tax, the insurance tax, the utility tax, the petroleum business tax, and the parts of the personal income tax, the sales tax and other taxes that businesses pay, he said. For example, small businesses that are partnerships, Subchapter S corporations, and sole proprietors pay more than $2 billion through the personal income tax. (See calculations in the table, below.)
"Despite the tax reductions of recent years, business taxes in New York remain far higher than those in many other states," Walsh said. "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 sectornot higher tax rates that will only make it harder for employers to create profits and jobs."
The state's current fiscal challenge is rooted in spending, Walsh said. "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," he said. "The time has come to face the new reality that we need to control spending."
Although the Governor's Executive 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," Walsh said. He recommended several policy steps to address the fiscal challenge:
Rationalize Medicaid. The state should eventually take over the entire local Medicaid share"with an iron-clad requirement that counties and New York City use the savings to reduce local taxes," Walsh said. He noted that taxpayers could save around $4 billion if New York cut Medicaid spending enough to make it merely twice the national average per capita.
Reduce health-care cost-shifting to employers. The state wants employers to offer health insurance, but it drives those costs up through health insurance mandates and various costly add-ons under Medicaid and the Health Care Reform Act of 2000.
"Ironically, because health insurance is so expensive, very few employers can afford the Cadillac-level coverage that the state itself provides through Medicaid," Walsh said. "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."
Reject higher taxes. Tax increases would imperil recent gains in competitiveness and job growth, Walsh said. A labor-backed proposal to increase income taxes for higher-income earners would affect more than 1 million New Yorkers and would be especially devastating to small businesses, many of which pay business taxes through the personal income tax.
Reject new cost-shifting initiatives. Legislators should reject new cost-shifts to employers, such as the proposal to move some Health Department programs to the Insurance Department. This would impose those program costs on insurance consumers.
Reject any insurance tax increases. The Governor's proposed change in how the insurance industry is taxed would significantly increase taxes for that industry, which employs more than 100,000 persons and supports tens of thousands of additional jobs, especially in New York City.
Expand the Empire Zone program. The state's successful Empire Zone program, under which the state reimburses localities for job-creation incentives, should be preserved and expanded, with new acreage to be distributed statewide at the discretion of Empire State Development (ESD). Given the program's effectiveness in promoting job growth and investment, "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."
To maximize the effectiveness of the program, the state should take a number of steps, including expanding the availability of zone benefits to all counties and reassessing eligibility criteria to assure that zone benefits support 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.
Adopt the single-sales factor for corporate taxes. New York should adopt the single-sales factor, under which corporate income would be apportioned based solely on in-state sales. Corporate taxes now reflect three factors: in-state sales, payroll, and property. This effectively creates a disincentive to put jobs and plants in New York because doing so drives up state taxes. Other states' experience suggests that the single-sales factor in New York would create jobs in manufacturing and other key sectors, Walsh said. He cited one economist's estimate that the reform would bring New York an additional 133,000 jobs and would ultimately increase state revenues.
Continue investing in high-tech R&D. Strong links between university and business researchers is already adding jobs in Albany and throughout the state, Walsh noted. "If we keep the focus on these initiatives, we will continue to see important new discoveries, exciting new products and high-paying new jobs," he added.
Reform mandates to ease property taxes. State mandate reform could free hundreds of millions of dollars to ease New York's property taxes, which remain among the nation's highest per capita, Walsh said. For example, reform of prevailing-wage laws and repeal of the Wicks Law could save more than $1 billion in public construction costs statewide.
Enact tort reform. The Council supports the Governor's proposal to move claims against municipalities to the state Court of Claims, where there is virtually none of the lawsuit abuse that drives up tort costs elsewhere in New York's civil-justice system. Walsh also praised Senator Bruno's recent call for sweeping tort reform to help ease state and local budget woes.
Enact Superfund and brownfield reforms. The Council opposes the Governor's proposal to refinance Superfund through stiff new fees on industry, which would be especially harmful to manufacturers, Walsh testified. A better approach would emphasize sensible liability reforms and adoption of use-based cleanup standards.
Invest in tourism. Tourism travel has changed significantly for the state and nation in the last 18 months, Walsh noted. "We have a chance to gain tax revenues for the state if we make a greater commitment to tourism promotion," Walsh said. "Properly designed tourism response driven ads will produce revenues for the state and benefit every region of the state."
What Does Business Pay?
Share of New York State Tax Revenues
(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