Economic Development Issues, State Economic Climate, and Business Competitiveness
February 3, 2009
I am Kenneth Adams, president & CEO of The Business Council of New York State, Inc. We are a statewide organization representing employers of every size in all of the state's economic sectors.
This year's budget will affect New York's economy, its businesses, and its residents for years to come.
We already know that New York has been losing its competitiveness to other states, and to foreign competition.
Our job growth has lagged behind national trends for the past two decades (New York grew at about half the national rate during the 1990's, about 60 percent of the national rate in the 2000's); New Yorkers, especially the young and well educated, continue to leave for better job opportunities in other states; New York's high cost-of-doing business –taxes, especially real property tax; energy costs, health care costs and others — discourage new investments by existing business, and smother entrepreneurs and the creation of new businesses and new jobs in emerging technology sectors.
Because of our weak competitive position, New York has lagged significantly behind national trends in recovering from the last two recessions.
We need to become more competitive, not less, in order to fully participate in the next national economic recovery.
Unfortunately, we see the Executive Budget proposal as a missed opportunity, taking us in the opposite direction.
In the face of falling consumer spending and falling business revenues, it imposes more than $4 billion in new taxes, fees and assessments on the state's economy.
At a time when many businesses are struggling to earn a profit, and in some cases resorting to layoffs in response to the national economic downturn, we are imposing new business taxes, stripping away tax incentives from companies, and dramatically downsizing our economic development agencies and programs.
Our members tell us that the employer-provided health care and energy are among their most significant cost-of-doing business issues in New York. Instead of acting to reduce these costs, the Executive Budget would impose $800 million in new health care taxes, and $650 million in new energy assessments, driving those costs even higher.
In short, we have built up an unsustainably high level of government spending in New York.
On both the spending and revenue side, this budget proposal is out of step with our economic capabilities and economic needs.
While we appreciate that the Executive Budget holds overall state-funded spending level, year to year, we believe far more needs to be done to bring down the size and cost of state government.
Excess Growth in State Spending
Since Fiscal 2000, New York's state-funded spending has increased at more than double the inflation rate, increasing our overall spending to unsustainable levels. Even so, the Executive Budget contains too few major reforms and modest overall spending constraint, while the state's massive Medicaid budget grows by another 4.5 percent.
Rapid growth in the state's budget has resulted in an unsustainably high level of state spending. While the current economic downturn has certainly exacerbated the state's budget gap, it is not its root cause.
Consider the evidence. From Fiscal 2000 to the end of Fiscal 2008, the state funds-supported budget grew by 62 percent, from $50.6 billion to $81.7 billion -- nearly 2.5 times the inflation rate (about 24 percent) over the same time.
If the budget had grown at the annual rate of inflation (compounded) over this same time period, the FY 2008 budget would have been nearly $20 billion less!
If that sounds like an unreasonably low growth rate, consider this - if the state funds budget had grown at merely double the inflation rate over that period, the FY 2008 budget would have been $4 billion less, $77.7 billion, versus $81.7 billion. New York would have entered the current fiscal year facing a manageable downturn in revenues, not a massive, $15 billion, two year gap between our rapidly increasing spending trend line and declining revenues.
Not only that, even with the significant revenue increases in the proposed Executive Budget, the state's five year financial plan still shows more than $11 billion in unfunded, cumulative budget gaps.
These numbers clearly illustrate the need to reduce the size of the state budget, not just reduce or limit the rate of growth.
Future Financial “risks” to NYS budget
The challenge of New York State's financial recovery will be as daunting as its economic recovery. Wall Street profits, and bonuses, helped fuel New York's spending spree, pumping $1 billion or more in extra revenues into the state budget, and supporting growth rates of 9.1 percent in Fiscal 2004, 9.1 percent in Fiscal 2006, and 10.5 percent in Fiscal 2007, about three times the inflation rates in those years.
Those Wall Street revenues are gone for now, perhaps gone for good, with the evaporation of the state's investment banking sector, and massive job reductions among the state's financial service giants — as stated in the Executive Budget's revenue projections, the “large investment bank business model no longer exists.” The Division of Budget is projecting a 50 percent reduction in financial services and insurance sector bonuses from their 2008 peak, a loss of some $19 billion in taxable wages.
As result, we will likely see a permanent downward shift in the state's personal income tax revenues. State spending policy needs to reflect that fiscal reality.
Role of Potential Fed Stimulus
Many are looking to the federal government to bail us out of our current and future budget messes.
While federal assistance is welcome, it has to be used in the right way.
To quote Governor Paterson, “We have got to learn that our spending cannot exceed our revenues. Even with the addition of resources from the federal government, what we are going to have to do is change the culture of spending in the state.”
We applaud Governor Paterson's argument that, should New York receive a significant cash infusion from the federal government for Fiscal 2010, the state should use those revenues to cut back on significant proposed tax and fee hikes, rather than restore or increase governmental spending.
Regardless of the final shape or size of federal stimulus legislation, unless New York puts its fiscal house in order, increased federal assistance will only mask our current structural problems, not provide a permanent fix. In some instances, the federal stimulus plan could make our financial problems worse, by providing temporary financial support for permanent increases in our base-line health care and education spending, that eventually will need new, state-level sources of revenues to support.
The Business Council believes that New York should commit to a series of structural and financial reforms, in addition to any federal stimulus funds available to us, in order to shape a new way forward for state government.
Fiscal Reform Priorities
The Business Council's Board of Directors has identified a series of fundamental reforms that we believe would result in significant improvements in the state's financial condition, and ultimately in the competitiveness of its economic climate. These include:
- adoption of a state spending cap, limiting the growth of the state funded budget to the growth of the state's economy;
- adoption of a real property tax cap, as advocated by Governor Paterson, coupled with significant mandate reform and local government consolidations - actions that would reduce the enormous size and cost of local government, and the state's crippling real property tax burden.
- Pension reform. While are encouraged by Governor Paterson's proposal for a new Tier V, we believe the state needs to go further in reigning in benefit costs, and rethink the continuation of defined benefit plans for new employees. Public employee benefit costs in New York are incredibly out of line with those in the private sector, and impose enormous pressure on state and local government budgets.
- Performance-based budget, including a hard look at the core mission of each agency, and the degree to which programs and spending support achievement of that core mission, in order to achieve greater efficiencies and cost savings.
Opportunities for Further Spending Restraint
The Business Council believes there are real opportunities for significant further cuts in state spending. These cuts will not be easy, and will not be painless, but we see further, permanent reductions in our base level spending as essential for the long term stability of state finances, and a prerequisite for achieving a more competitive economy.
Cost cutting opportunities include:
- $2.4 billion to $3.6 billion by cutting state-funded expenditures by at least 2 to 3 percent across the board, through hiring freezes, facility efficiencies -- and layoffs, if necessary.
- $2 billion by freezing school aid and promoting consolidations of school districts. Under the current spending formula, school aid is to rise by $2 billion in the new budget. An across the board freeze will result in a substantial savings. The Lundine commission report estimated that consolidation of small school districts to result in a savings of $160 million.
- $1.7 billion by freezing overall Medicaid spending. Medicaid is projected to increase another $1.7 billion, or 4.5 percent, in Fiscal 2010 fiscal year. We need to look at the models of less expensive states and find long term fixes. Mandatory managed care and elimination of categories of expenditures should be evaluated for improved health management and potential savings.
- $1 billion from a phase-out of STAR. A multi year phase-out, combined with property tax caps, a moratorium on the creation of new taxing entities, and real mandate relief would produce real reductions in the state's crushing real property tax burden, including tax relief for the commercial and industrial sector.
- $400 million by offsetting employee benefit accrued liability reserves. An audit by the State Comptroller earlier this year revealed that school districts had over-accrued liability reserves for employee benefits to the tune of $400 million. The over-reserved amount should be deducted from the aid that those school districts receive in the new budget.
Our bottom line — we need to focus on additional spending controls, not new revenue sources, in order to bring our state budget into long-term balance.
As mentioned above, even with the $4 billion in new revenues in the Executive Budget, this budget proposal still fails to bring the state's spending into line with its projecting five year revenues.
The Executive Budget contains more than $4 billion in new revenues through new, increased and expanded taxes, fees and other assessments, including more than $3 billion in permanent revenue increases. Generally speaking, we question the imposition of significant, permanent revenue raisers during a period of economic recession, when the economy can least afford it, and when economic recovery is expected to restore some of our current revenue shortfalls.
The Executive Budget states that it includes $640 million in new or increased direct taxes on business. As discussed below, this figure dramatically underestimates the impact of the proposed revenue package on the private sector employers and the state's economic climate.
The following provides a summary of what we see as the most damaging of the Governor's revenue proposals.
Health Care Taxes/Assessments
The rising cost of health care is our members' most significant cost of doing business concern. Yet when we look at the Executive Budget, we see that he as included over $800 million in new taxes and assessments on health care and health insurance, including $590 million within the Deficit Reduction Plan for the current fiscal year.
These increased insurance and health-related assessments and surcharges (we call them TAXES) will ultimately be passed through to businesses and consumers in the form of higher health and other insurance premiums.
The Business Council opposes these taxes. At a time when health care costs continue to skyrocket, employers, especially small business, will be hit hard by increased taxes on health insurance and health care services. These taxes hit the people who pay the premiums, in most cases employers and their employees. Health care and health insurance costs in New York are already sky-high.
New Yorkers - both individuals and businesses — that purchase health insurance currently pay more than $3.1 billion in health taxes. It is estimated that the current health tax burden already adds between 3 and 7 percent to the cost of health coverage.
The Deficit Reduction Plan and Executive Budget would impose:
- $226 million increase in the Insurance Department Section 332 assessments to pay for public health programs, Timothy's law mandate, tobacco prevention, early intervention program (60 percent of the overall $382 million to be generated from the assessments imposed by the Insurance Department on all domestic insurers comes from health insurers). This represents a huge shift of program costs from the General Fund and HCRA to the Department of Insurance assessments.
- $240 million increase in the Covered Lives Assessment, raising this assessment to $1.19 billion.
- $62 million increase by raising the Article 32 premium tax on insurance companies from 1.75 percent to 2 percent.
- $126 million by increasing the HCRA hospital services surcharge from 8.95 percent to 9.63 percent
- $50 million from expanding the 9.63 percent hospital services surcharge to other services provided in other health-care settings
- $63 million from establishing a health claims processing tax on third party administrators.
If approved, the health taxes in the Deficit Reduction Plan and Executive Budget will drive up the cost of health insurance for all Business Council member employers that purchase health coverage — from sole proprietors and small businesses to the largest self-insured companies — yet will provide no additional covered benefits or have any effect on addressing the rising cost of health
Rather, by pushing premiums higher, these taxes will force more business owners particularly small business owners - to reduce or eliminate coverage for their workers, thereby driving up the ranks of the state's uninsured, or shift more of the cost to their employees.
For these reasons, The Business Council strongly urges you to reject these new and increased taxes.
With industrial and commercial electric power costs about 40 percent above national averages, energy costs are the second most significant cost-competitiveness factor cited by our members. In part, New York's high energy costs are driven by a growing array of state-imposed assessments — the System Benefit Charge, the Renewable Portfolio charge, and new costs related to the purchase of CO2 emission allowances — which together add nearly 10 percent to the cost of electric power.
The Executive Budget is proposing a massive $651 million increase in the state's “Section 18-A” assessments on utilities (increasing the assessment rate from .3 percent of revenues to 2 percent), a significant share of which will hit electric and gas utilities, with a direct pass through to their business customers.
This proposal also affects telecommunication providers like Verizon and AT&T. As a result, the proposal further exacerbates the already unlevel playing field between Verizon and non-utility providers who now compete for telephone, broadband and video customers. This disparity alone puts Verizon at a $52 million competitive disadvantage. In such a diverse and competitive marketplace, it makes little sense to force one provider in the market to pay to do business in New York, while new providers are not subjected to these tax proposals. In addition, this proposal conflicts with the stated goals of many lawmakers who have expressed interest in seeing greater investment in broadband by private industry.
New York's already high energy costs are having an adverse impact on energy-depended business sectors. Recent initiatives, such as the Regional Greenhouse Gas Initiative, could add $250 million or more to annual energy costs. The Business Council opposes this significant new utility assessment.
The Executive Budget would also expand a bad policy initiative adopted in last year's budget, by subjecting electric generators to a $10 million cap on tax liability under the Article 9-A corporate franchise tax, if the company pays its tax on basis of its in-state capital. This proposal hit the financial sector hard last, when the capital base cap was increased from $1 million to $10 million for non-manufactures and non-energy utilities. This proposal will subject generators to a projected $17 million increase in corporate franchise taxes in a tax year when they have little or no operating profits. We opposed this increased capital base cap last year, and we continue to do so.
Several of the proposals we mention above in context of health care insurance costs, affect the full range of insurance sectors operating in New York State. Overall, the increases in the Section 332 Insurance Department assessment will cost the insurance industry $382 million per year, adding to the cost of almost all insurance lines offered to business and individual customers. This proposal is particularly offensive to the domestic life insurers that have maintained a century-long commitment to doing business in New York, employing upwards of 30,000 direct jobs in this state. Life insurers still maintain a strong domestic presence and commitment to the economy of the State, with companies headquartered in New York City, Binghamton, Syracuse and Albany. Likewise, the property and casualty insurance industry, like any other business, will have to eventually pass on at least a portion of its increased costs to its customers. This will have the unfortunate effect of harming New York policyholders by saddling them with higher insurance premiums.
Taxes on Business and Consumer Products and Services
In general, business pays about forty percent of all sales tax levies in the state, and the Executive Budget proposes a number of sales tax changes that will impact both the providers of these services, as well and business and residential customers of those services. Of particular concern are:
- While not listed in the Executive Budget's revenue summaries, it proposes to allow municipalities to extend their utility gross receipts taxes to wireless telecommunication carriers. The added impact is another $12.5 million per year on business and residential wireless bills.
- Much attention has given to the so-called “obesity tax,” an estimated $400 million per year assessment targeting a small segment of the state's business community, that will ultimately be borne by consumers as a de facto sales tax. The Business Council represents some of the nation's leading beverage companies, who would be significantly impacted by this proposal. Regardless of the policy arguments that have been offered in support of this tax, in our view, it is really just another symptom of the state's excessive spending, and its insatiable appetite for new revenues. We oppose its adoption. We note that, in addition to this tax, the Executive Budget would also subject the beverage industry to an expansion of the “bottle bill” to non-carbonated beverages, and a recapture of $110 million or more annual in unclaimed deposits which have been used to defray compliance costs.
- An extension of the sales tax to cable and satellite television services, a proposal that could add an additional $550 million onto the residential and business customers' bills in state and local taxes, and have a chilling effect on additional industry capital investments, which have totaled in the billions over the last 3 years in New York State.
- An extension of the state and local sales and use tax to purchases of prewritten software, digital audio and other “digital downloads,” another $15 to $20 impact from state sales taxes along. Overall, the budget imposes over one half billion dollars in new taxes and assessments on information services.
- In a proposal that would significantly affect urban redevelopment efforts, reinvestment proposals, and other site reuse projects, the Executive Budget would eliminate more than $120 million in sale tax exemptions for improvements that “substantially adds value to property or prolongs its useful life,” but do not constitute construction of a new structure or an addition to an existing structure. Basically, this proposal imposes the state sales tax to major real estate rehabilitation projects, including the rehab of commercial space, hotels and other projects featured in urban reinvestments.
Economic Development Programs
While we are a strong advocate for spending constraint, we note with concern that while most major spending categories are subject to limited spending reductions, the Executive Budget proposes a significant contraction in the state's economic development resources. While we are not opposing some major proposals, such as the elimination of some $375 million in prior year commitments for economic development initiatives, we do have major concerns with some aspects of the Executive Budget.
In merging Economic Development and NYSTAR into ESDC, the budget would eliminate about forty percent of these agencies current combined staffing, and reduce their operating budgets by about $11 million cuts whose magnitude are not found in any other major state spending program affected by this budget.
It is unclear to us whether or how the newly structured ESDC can continue to perform its core economic development missions, including NYSTAR's special focus on fostering development in emerging technology sectors. In addition, the proposed budget would reduce “high tech funding,” for programs including university based initiatives and university-business collaborations, by more than $10 million per year.
As stated above, we support review of agency programs, and realignment of resources to assure efficient achievement of core missions. We believe the proposed reductions and restructuring of economic development programs are excessive, and come before any critical review of the affected programs.
The Empire Zones program has been the basis for some of the largest capital investments in New York State in recent years. In many cases, its tax credits were necessary to offset uncompetitive high business costs in New York (taxes, particularly real property taxes; energy costs; and others) that otherwise discourage new in-state investments.
Governor Paterson's Executive Budget would require businesses currently receiving Empire Zone benefits to submit to a re-certification review. If the company could not demonstrate a 20 to 1 ratio of in-zone wages, benefits and capital investments over tax credits used, they would lose future Empire Zone credits, and forfeit any zone credits carried forward from previous tax years.
This proposal would adversely affect many zone participants, including some that have made multi-million dollar investments based on zone incentives.
Moreover, we believe this proposal would cause tremendous harm to the state's future economic development efforts, by calling into question the state's willingness to honor commitments. Council members have told us that ex post facto criteria for already-awarded investment incentives would make it less likely that they would make significant new investments in the state.
We agree that the state needs to rethink its economic development efforts, and assure that development incentives are cost-effective and are focused on strategic develop objectives.
We believe that the most effective economic development program would be a more competitive business climate. As we have already discussed, New York needs to address its business tax burden, especially real property taxes; reduce energy costs, especially electric costs; health care costs; and others.
Unfortunately, the Executive Budget would take the state in the wrong direction, adding significantly to a wide range of business costs.
Recognizing that major business climate improvements will take time, we also believe the state needs to continue to offer economic incentive programs. Going forward, the state should consider multiple programs, each designed to address specific development objectives, including:
- Re-investment in existing business, to help retain valuable employers and high paying jobs. This could include QEZE-type benefits based on significant capital investment and job retention; enhanced investment tax credits; and/or by exempting investment-based credits from the state's alternative minimum tax.
- Redevelopment of distressed urban areas (the original focus of the empire zone program).
- Job creation at new and existing business; these could include new employee-based tax credits, and credits based on a percentage of state personal income tax revenues derived from new employees.
- Support of emerging technology sectors, with support for business growth, R&D, and commercialization of new products. This could include: expansion and extension of the Qualified Emerging Technology Company credit; pilot implementation of the ‘regional partnership” program adopted in 2005; a new capital grants program for emerging high tech companies (as proposed in the 2010 Executive Budget).
- IDA civic facility re-authorization which would generate about $60 million in additional revenue and fees. It would put people to work on the projects already in the pipeline and build more than $2 billion in worthwhile projects around the state.
While we strongly oppose the Empire Zone recertification proposed in the Executive Budget, we look forward to working with the legislature and administration on new approaches to economic development in New York State.
On an issue directly related to the state's strategy of promoting growth in growing technology sectors, including life sciences, The Business Council continues to oppose the proposed pharma marketing restrictions included in the Executive Budget, which would adversely impact on the research-based bio-pharmaceutical sector's ability to do business in New York State. The marketing provisions (which have no associated state cost savings) are the very same proposals the Business Council and many other organizations opposed last year. Pharmaceutical products and technological innovation play important roles in the advancement of medicine in the United States, leading to improvements in public health and extended lives for our citizens. We believe this legislation will impair effective communication between the pharma industry and doctors, and discourage industry investment in New York State.
Wine In Grocery Stores
A major, pro-business proposal in the Executive Budget would stimulate economic activity grow state revenues, and benefit New York State consumers. The Business Council supports the Governor's proposal to allow the sale of wine in grocery stores, as good for the state's economy, good for the state's budget, and good for New York consumers. The Executive Budget would allow grocery and convenience stores that already sell beer to add wine sales in exchange for a paying a franchise fee as part of his Executive Budget. It projects up to $150 million in new revenues to the state in Fiscal 2010.
Allowing supermarkets and grocery stores to sell wine will create new markets for upstate and Long Island wineries, helping support the states agribusiness, and promoting new jobs and investments in that sector.
Thirty-five states already allow wine sales in grocery stores. New York is out of the mainstream under its current law which restricts wine sales to the state's 2,600 liquor stores compared to 19,000 grocery and convenience stores.
Personal Income Tax
Various organizations are arguing for increased personal income tax levies on upper income New Yorkers. Sometimes referred to as the “millionaires tax,” these proposals would affect a wide range of New Yorkers, including small business owners, so-called sub-S corporations (small businesses paying business taxes under the state's personal income tax law), and other highly productive taxpayers.
The Business Council opposes any permanent increase in any of the state's broad-based taxes during an economic recession because it is bad economic policy, and a bad message to send to current business and investors considering projects in New York State.
Any revenue adjustments should be targeted to address cyclical downturns in income, rather than impose a permanent increased in the state's tax burden.
Further, we strongly oppose any temporary increase in, or surcharge on, any of our broad based taxes without a prior commitment to significant spending restraint and other fiscal reforms to provide long term stability, and affordability, to the state's budget.
Again, as stress above, New York's spending has increased to unsustainable levels; dealing with our current and future budget gaps requires significant adjustments on the spending side before we commit to new, burdensome taxes and fees.
MTA “Mobility Tax”
While not a budget issue, per se, we feel compelled to comment on the Ravitch Commission's recommendation for a payroll tax on employers in the twelve county MTA commuter district. This proposal, an assessment of $.30 per $100 of payroll, would impose $1.5 billion in costs on the region's employers.
We are very concerned about the impact that this “tax on jobs” will have on the region's economic recovery. We are particularly concerned that the adoption of this assessment, without prior adoption of the other elements of the Ravitch Commission report a 23 percent fare increase and new tolls on the East and Harlem River bridges will provide an opportunity for an even higher jobs tax. Even with these over revenue options, we have little doubt that future MTA budget discussions will focus on an increase in any such mobility tax.”
Likewise, as discussed above, we are disappointed that the Ravitch Commission did not provide significant, specific cost containment recommendations. Wed cannot support any new broad-based MTA taxes without a commitment to spending constraint, public benefit reforms, and other efficiency and core mission” assessments that we have already recommended for the overall state budget process.
As we said at the outset, this year's budget decisions will have long term ramifications for the state, as we work toward state and national economic recovery. I greatly appreciate the opportunity to share viewpoints and concerns of importance to The Business Council and our members. I look forward to any opportunity to follow up with you on any issue addressed in our testimony today.