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Monday, March 3, 2014

“Incentivized” or “Marginalized”?

Have you ever been the victim of a Pick-Pocket? 

Before you say “no”, let me point out the equivalent invasion of our pockets when earmarks are added to legislation in the Congress; or, when a corporation like GE pays no taxes for a year; or, when a contractor finds something that needs repair after starting a job that is under a contract, and it costs as much or more than the original contract; or when a retailer jacks a price on certain items and then puts those items “on sale”, bringing then back to the original price.  I could go on, of course, but THE POINT HAS BEEN MADE:  every day, in many different ways, individuals, small businesses, corporations, and governments are reaching into our pockets and picking money right out of our wallets. Now, that isn’t to say that some of these schemes aren’t temptingly helpful to some.  They are, in the sense that a few will surely benefit, but not necessarily a large percentage of the citizenry.  With those thoughts in mind, let us turn our attention to what is happening in the State of New York.

The Empire State, under the leadership of Governor Andrew Cuomo, has embarked upon some innovative schemes which may seem quite beneficial to a good number of citizens or a few corporations, but outcomes may prove limited and limiting for others.  To set the stage, let me quote a description of the situation provided by goodjobsfirst.org.

    “New York is the tale of two economies, upstate and New York City, but both are characterized by a subsidy system run by the state’s dysfunctional network of Industrial Development Agencies (IDAs) with their powers to bundle large state and local tax breaks, and a centralized quasi-public agency, the Empire State Development Corporation, which awards lavish subsidies with little accountability.  The Fiscal Policy Institute estimates that combined state and local business tax expenditures in New York total about $8 billion annually.”

The following summary of what IDAs are meant to do is from the NYS Economic Development Council which has organizational oversight and responsibility for these entities.

Industrial Development Agencies
The purposes of Industrial Development Agencies (IDAs) are to promote, develop, encourage and assist in the acquiring, constructing, reconstructing, improving, maintaining, equipping and furnishing industrial, manufacturing, (civic facilities), warehousing, commercial, research and recreation facilities including industrial pollution control facilities, educational or cultural facilities, railroad facilities, horse racing facilities ... and continuing care retirement communities, and thereby advance the job opportunities, health, general prosperity and economic welfare of the people of the state of New York and to improve their recreation opportunities, prosperity and standard of living.

It is important to understand that the Council and the IDAs themselves are private entities with State involvement mostly through cooperation and consultation, although there is legislation that gives them decision-making power in terms of economic development in certain municipalities.  The Empire State Development Corporation is a quasi-state office which defines its mission in a similar vein to the IDA structure:  "Empire State Development (ESD) is New York’s chief economic development agency. The mission of Empire State Development is to promote a vigorous and growing economy, encourage the creation of new job and economic opportunities, increase revenues to the State and its municipalities, and achieve stable and diversified local economies. Through the use of loans, grants, tax credits and other forms of financial assistance, Empire State Development strives to enhance private business investment and growth to spur job creation and support prosperous communities across New York State."

IDAs can assist economic development projects by:
Issuing tax exempt and taxable bonds for qualifying projects
Conveying real property tax abatements, typically through a PILOT or straight lease transaction 
Abating sales taxes for construction materials and equipment
Abating mortgage recording taxes
Eminent domain (Except NYC IDA)

The types of projects that IDAs can assist include:
Industrial
Commercial
Retail under very limited circumstances
Industrial Parks
Horse racing facilities
Railroad facilities
Life care communities
Waste disposal facilities
Low-income rental housing units
Not-for-profits (Private 501(c)(3) entities: For example, YMCAs, CP Centers, private secondary schools, habilitation centers, and museums, College dormitories, Senior living facilities, and Hospital projects involving the delivery of medical services

An example of IDA benefits
Project "X" builds 50,000 sq. ft. building for $5,000,000, and has $4,000,000 mortgage. Tax benefits would include:
Mortgage recording tax savings (1% of mortgage) = $40,000.
Real Property Tax abatement = $275,000 over 10 years (average annual savings of 27.5%.)
Sales tax savings on construction materials and non-manufacturing equipment = $120,000 + $54,000 = $174,000
Total savings over 10 years = $489,000.

New York State has endured considerable criticism, including from the State Comptroller, in connection with its major subsidy programs, for overly-generous tax benefits, lax eligibility, poor performance standards and a lack of recipient transparency; some companies have even walked out on their deals with the state and left local communities devastated.

Advanced Micro Devices was given a $1.2 billion package to build a semiconductor fabrication plant north of Albany in Malta.  Three years after the deal was sealed, the company finally broke ground but wanted additional subsidies of $1 billion as the cost of the building had risen to $4.2 billion.  When ownership resisted a unionized workforce, Gov. David Paterson pressured them to accept unionized labor and it came out sometime later that another $15 million had led to the union labor contract.  In October of 2011, the Albany Times-Union reported the results of an investigation that the expanded company had been reimbursed by the state for one-half billion dollars for expenses, some of which were not related to chip production.  The Pataki administration also arranged for IBM to receive a subsidy package worth $660 million for a $2.5 billion computer chip plant in Dutchess County.  The rest of the deal came from local taxes.  A few years later, IBM got another subsidy deal worth $140 million toward a $1.5 billion project which was expected to bring 325 jobs to the chip plant.  With the announcement a month later of a 10% pay reduction for workers in order to be “competitive,” IBM failed to receive another $475 million because its overall workforce in the state declined. 

Downstate has had its own “fun and games.”  According to one report (Accountable USA), NYC has for decades been hit-up by high-profile companies of one kind or another for certain "retention deals" , essentially engaging in "job blackmail" by threatening to move their headquarters to New Jersey or Connecticut.  Although less severe under Mayor Bloomberg, some companies have continued this tactic.  In 2005, Goldman Sachs got $1.7 billion in Liberty Bond financing and other subsidies for a new headquarters building near Ground Zero (those "other subsidies" consisted of a $25 million Community Development Block Grant and up to $150 million in new city and state tax credits).  In recent years, the New York Yankees and the NY Mets have together totaled $1.7 billion in similar subsidies for new ballparks in Queens and the Bronx.  On the other hand, the NY Nets have not done as well since their "request" for subsidizing a new arena has gone nowhere in the midst of a weakened economy.

No matter how you look at it, this use of tax breaks, subsidies, bonds, or tax credits has become something of a standard business practice throughout the United States.  For example, Pennsylvania utilized tax incentive zones as a lure trying to convince Shell Oil Company to locate a petrochemical plant there. Pennsylvania was competing with West Virginia and Ohio for the plant, which extracts ethane from the Shale gas. Ethane is one of the key building blocks needed to make plastics and other synthetics.

Gov. Jay Nixon (D) of Missouri called a special legislative session back in November of 2013 to ask legislators to approve a $150 million incentive package that included extensions of several existing economic development programs with the hope that the package would attract the thousands of jobs attached to Boeing's 777X program, newly up for grabs after a Machinists union in Washington State rejected Boeing's long-term contract proposal.  California, South Carolina and Utah, all home to major Boeing outposts, were in the running, and Alabama, Arizona, Pennsylvania and Texas, were probably also in the running because Boeing had over 2,000 employees there. Washington state was not out of the picture either.  Before the union turned down the contract extension, the Washington legislature passed a package of incentives that included the largest tax breaks any state had ever offered to a corporation!  In the shadow of the Oscar awards, let us not forget the sunny state of California since they are somewhat unique in their jealous guardianship of the film industry.  In that state, there is even a film industry tax credit which, under current extension, is good until the end of 2014.

So there you have it.  New York State is not alone in the use of tax incentives.  Around the country, "states use their tax codes to incentivize certain behaviors or industries in order to achieve a desired result. Colloquially referred to as "tax breaks," these incentives use taxpayer funds to subsidize businesses and corporations with the intent of generating long-term benefits, usually higher tax income in the future" (Reason Foundation, January 30, 2013)

There are basically, three types of Tax incentives – tax credits, deductions, and reduction or forgiveness.  These incentives are used by communities, states, or the federal government to obtain desirable economic, aesthetic, and social ends. They can help convince developers to build affordable housing or restore historic buildings for new uses, persuade corporations to move operations into depressed areas, or encourage businesses and individuals to conserve energy and protect the environment.  Let's take a brief look at each of these incentives (based on the helpful summary from Community Tool Box, University of Kansas):

 What are tax incentives?
Tax incentives are ways of reducing taxes for businesses and individuals in exchange for specific desirable actions or investments on their parts.

Perhaps the most familiar tax incentive to tax-paying Americans is the deduction for charitable contributions: the deduction exists to help persuade people to contribute to charity.  Tax incentives can be offered by any level of government that levies taxes: federal, state or province, county, or municipality. They can be aimed at businesses, organizations, individuals – any entity that pays taxes. In general, they take one of three forms:

Tax deductions.  Tax deductions allow you to subtract some or all of your expenses for certain things from your taxable income (the amount that you pay taxes on). Your taxes are lower because you’re taxed on a smaller amount.

Your business had income of $200,000.00 last year. You spent $20,000.00 on equipment to clean the industrial waste from your operation. Since your state offers a 100% tax deduction to businesses on spending for environmental improvements, you can deduct that $20,000.00 from your income when you figure your taxes. Thus, you’ll only pay taxes on $180,000.00. In practice, that would save you up to about $8,000.00.

Tax credits.  A tax credit allows you to subtract some or all of your expenses for certain things from the amount of taxes you have to pay. Your taxes are lower because you’re actually paying less, even though you’re taxed on the full amount of your income.

Your business has spent $20,000.00 on anti-pollution equipment. The state allows you a 100% tax credit on spending for environmental improvement. As a result, you can subtract $20,000.00 from your total tax bill.  Business tax rates vary, depending on the nature of the business and its amount of income. The highest rate approaches 40%. Therefore, a tax credit of more than 40% of the amount you spend will usually be more valuable than a tax deduction.

Tax reduction or forgiveness.  In return for particular actions or investments, you don’t have to pay part or all of your taxes – usually for a given amount of time. Your taxes are lower because they simply don’t have to be paid. The example below concerns state business taxes, but municipalities might also forgive property taxes (which, for an industrial facility, can represent a great deal of money) on a similar schedule for similar reasons.

You build a factory in a designated enterprise zone (low-income area marked for economic development), and provide 75 jobs for area residents. As a result, the state forgives your state taxes for the first three years of operation, and then taxes you at 33.33% for the next three years, 66.66% for the next four, and only then – after ten years – at 100%. An arrangement like this usually holds only if you continue to operate in the same place and maintain the number of jobs for area residents for those first ten years.

Utica is, some say, the recipient of some very important economic boosts coming into this area.  First, there is the North-South Arterial infrastructure project with a potential of creating 600 jobs over the fiscal years of 2012-2014.  Second, we are about to be part of what some call a "regional re-vitalization, " with a Nano-tech "revolution" as its centerpiece, but which also includes specialized training programs and assistance for other existing industries.  A third element of the re-vitalization could be a test center for the innovative use of drone aircraft.  Many believe these incentivized enterprises will be of inestimable value to this region, and they speculate that we will see a resurgence of Utica and environs because of them.  It is difficult to argue against perceived progress on this scale, and it is not my purpose to do so.  But can we truly say, without equivocation, that all this is to the good of this community and area? 

Say what you will, there may very well be some missing elements that raise certain questions:  who are the main recipients, what are they getting, and what is the community getting (or not getting) in return?  These are questions related to transparency, accountability and benefits.  Let me outline for you the main ingredients of this inquiry, which we shall approach in future postings.

1)    Who are they?  What is their track record in other states?  How community-minded have they been?  How transparent have they been with other communities?  Do they have any secrets that might become a problem for this area?  What residential areas can we expect to grow?  What satellite industries and services might appear?

2)    What are they getting?  what are the incentives?  How much taxpayer money is going to them?  What will a ten-year tax forgiveness mean to your area? What do NYS and municipalities expect in return for the incentives?   Who will be evaluating and auditing the books and the records of these companies to see what they do with what they receive?  In other words, to whom are these groups accountable, and can they be held accountable to the people of this area?

3)    What is the community getting in return for its largesse?  What benefits can we expect?  How open are these companies to suggestions from the community for certain projects like greening of the environment or subsidizing of educational and extra-educational programming, or taking leadership to produce specialized training programs?  Will these companies care at all about Utica?  Do they think their mere presence is sufficient, or will they invest some of their tax incentives and profits back into the community?  Do they plan on being "good neighbors" or is that concept foreign to their mode of operation?

  Stay tuned....