Tax Reform: Reducing Tax Burdens and Promoting Economic Growth
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:
- modernization of the state’s main business taxes, including integration and reform of Article 9A (corporate franchise tax)/Article 32 (bank tax) integration;
- a reduction in the entire net income (ENI)-based tax rate from 7.1% to 6.5%, with further reductions with an ultimate target rate in the 4% range;
- simplified compliance by requiring a single return for business currently subject to both Article 9A and Article 32;
- simplified rules for combined reports based on majority stock ownership and unitary business;
- a continuation of single sales factor apportionment of business income, a provision that gives more competitive tax treatment to businesses with significant employment and capital in New York State;
- and elimination of the 1.5% alternative minimum tax, which erodes the value of investment and jobs credits; among others.
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:
- a quicker and further phase-down and phase out of Article 9-A tax liability for qualifying manufactures;
- an additional modification of the Article 9-A definition of manufacturer, to include a taxpayer or combined group with significant in-state manufacturing employment and capital, rather than more than 50% of its New York taxable income from manufacturing activity – a change will maintain eligibility for manufacturing tax rates, the cap on capital base franchise tax liability, and the manufacturer’s ITC; and
- the adoption of corresponding reduction for manufacturing-related business income taxable under the personal income tax for sub-S corps, partnerships and/or LLCs.
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.
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:
- New York’s corporate franchise tax law mandates first quarter estimated payments based on 40% of the previously tax year’s liability. This requirement adversely impacts business’ cash flow position when there were significant non-recurring events such as a substantial gain on the sale of a business unit which causes income in the current year to be significantly greater than expected income in subsequent year, all other things remaining equal. A better alternative would be to require the estimated payment to be based on the taxpayer’s estimate tax liability rather than a specified percentage of prior year tax.
- Cities and villages are authorized under state law to impose GRTs on utilities, with each of 61 cities and 365 villages administering their own GRTs, with no central administration, no central filing of tax returns, no standardized forms, no specific audit guidelines nor an administrative appeals process. The result is a cumbersome and complex compliance burdens on utilities. These taxes should be centralized at the DT&F, similar to how the state and local sales tax is administered.
- We recommend the repeal of the 2010 legislative changes that for the first time applied New York’s “false claims act,” to the tax law, but only for entities whose net income or sales exceeded $1 million per year. As is our concern with most private right of action measures, we believe that the state’s enforcement agency, the Department of Taxation and Finance, has both the necessary tax expertise and sufficient staff resources to properly enforce the state’s tax law. The opportunity for adverse outcomes in such legislation is evident; as example, in the 2013 session, we had to push back on a proposal that would have further expanded qui tam claims to tax-related activities that “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay” state or a local government – a broad provisions that could have applied the “false claims” provisions to virtually any tax issue on appeal.
- We also recommend that the position of Taxpayer Advocate within the Department of Taxation and Finance be codified in statute, and specifically funded in the state budget. This position has been invaluable to many small – and not so small – businesses, helping with compliance, audit and other issues with the Department. This position assists with business –specific problems, and helps identify systemic issues within the tax code and tax administration, especially those that adversely impact small business. It has been a valuable program that should be made permanent.
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:
- Investment Tax Credit – New York’s manufacturing base has been eroding, both in real terms and relative to the nation as a whole, for the past two generations Between 1990 and 2012, manufacturing employment in New York has declined by more than half, with a loss of 524,000 high paying jobs (on average, in upstate New York, the average manufacturing job pays $16,000 in wages more than the average, non-manufacturing private sector job). New York’s industrial job loss over this period is nearly double the national rate. While the tax code has several manufacturing preferences (e.g., a lower ENI franchise tax rate), their impact has been overwhelmed by other factors, including high energy assessments, high property taxes, increasing workers’ compensation costs, and others. New York should aggressively promote capital reinvestment in its manufacturing sector, with an aim toward modernizing its capital plan, and retaining and creating good paying middle class jobs. Steps include elimination of the alternative minimum tax (as mentioned above) which erodes the value of credits such at the ITC, and allow for at least a partially refundable ITC for existing New York State business (under current law, the existing Article 9-A ITC is refundable for new businesses only.
- R&D Credit – With all ten Regional Economic Development Council’s emphasizing the importance of “advanced manufacturing” and the development of new, emerging technologies, the state needs to do more to actively promote new research and development investments. We are recommending adopting of an enhanced R&D investment credit, based on the existing R&D component of the Article 9A ITC, with a higher percentage credit and a full refundability of unusable credits in the year they are earned.
- Brownfield credits – Under current law, a participant in the brownfield program would have to receive their certificate of completion from DEC by March 31, 2015 to be eligible for tax credits under the program. Since CoC issuance is beyond the control of the participant, as this deadline nears, it will become more difficult to complete a project in time to qualify for both remediation and redevelopment credits. We believe that – in sharp contrast to the recent Comptroller’s report –the brownfield program has been both effective and cost-efficient, returning significant economic returns on the state’s tax credits. We recommend making the program permanent, broadening eligibility by allowing current State superfund and RCRA sites in the program if owned and controlled by volunteers, and allowing an exceedance of a federal or state environmental or health based standard as criteria for determining program eligibility. We believe these changes will create a less subjective determination of eligibility, thereby giving greater certainty to program applicants.
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.
Vice President of Government Affairs