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STUDY: New York ranks highest in U.S. for ‘tax incentives’ handed out

New York spends more than any other state in the U.S. to attract businesses.

The findings come from a report by the Citizen’s Budget Commission, and calls for a moratorium on new economic development spending until the State increases transparency, establishes performance criteria to measure impacts of those deals, and enforces agreements to hold beneficiaries accountable.

State and local governments in New York State spend $8.6 billion annually, including direct spending and tax expenditures in the name of economic development.

Gov. Andrew Cuomo’s Fiscal Year 2018 Executive Budget adds $644 million in economic development spending in fiscal year 2018 and $1.5 billion in cumulative future tax credits.

A budget that still has not passed.

The CBC developed a plan to address the growing problem:

— Establish a unified economic development budget that captures state and local costs;

— Use a standardized metric across all economic development initiatives;

— Publish a database of all deals to shine a light on recipients of incentives;

— Improve program design to follow best practices and to reward actual performance;

— Make administrative reforms to procurement and oversight rules.

In February Timothy Bartik, a senior economist at the independent, nonpartisan W.E. Upjohn Institute for Employment Research, released a report, “A New Panel Database on Business Incentives for Economic Development Offered by State and Local Governments in the United States,” in which he analyzes the growth of economic development tax incentives over the past 25 years.

To study how the use of incentives has changed over time, Bartik compiled a database of tax expenditures in 32 states (including 47 cities within those states) and the District of Columbia.

The data is drawn from tax expenditure reports published by state and local officials and was cross-checked with previous studies on the use of economic development incentives. Extrapolating his analysis to the entire country, Bartik estimates that state and local economic development tax incentives cost taxpayers $45 billion in 2015 – triple the amount foregone in 1990.

According to Bartik’s analysis, New York’s economic development programs are the most expensive in the country. He found New York awarded $8.25 billion in incentives in 2015; when compared to the 10 largest states by population, economic development incentives cost New York as much as the next 3 states combined.

Bartik develops two metrics that allow him to compare the use of incentives across states and over time: the value of incentives as a percentage of the estimated gross taxes paid by businesses and as a percentage of industry-level value-added.

New York’s incentives rank as the costliest as a percentage of gross taxes and second, behind only New Mexico, as a percentage of value-added. By both measures, the state’s incentive use is 2.5 times higher than the national average and is the highest among the 10 largest states by population, plus neighboring New Jersey and Connecticut.

Bartik also analyzes the growth of incentives as a percentage of value-added dating back to 1990. Data from five points in time between 1990 and 2015 show New York has consistently awarded incentives at a higher rate than the national average. The state’s incentive use spiked in 2001 after the legislature expanded the scope of the Empire Zone program.

Tax expenditures fell after the state reformed it in 2008, but New York’s incentive use remains well above its 2000 level. This fits the pattern Bartik has observed in states and cities across the country. Once states extend incentives to one industry or geographic area, other industry groups and communities demand similar benefits for their constituencies. As a result, economic development programs are more likely to grow rather than shrink over time.

Despite their growing popularity, economic development tax incentives often prove costly to taxpayers. Bartik notes that “the majority of studies [published to date] suggest incentives are not cost-effective, with either no statistically significant effects or large costs per job created.

The high costs of economic development programs “lead to concerns that many of these incentives are ineffective or have negative effects,” such as distorting business investment decisions or unduly enriching companies that would have made investments without need of incentives.

Bartik’s initial findings add to the growing body of evidence that there is little proof that incentives achieve their goals: he found no correlation between the use of incentives and changes in wages, unemployment rates, or economic growth in the places he studied.

The high cost of New York’s job creation tax credit programs relative to the rest of the country, coupled with the growing evidence that incentives are not cost-effective, underscore the need for reforms to rein in costs and to promote transparency and accountability. CBC has highlighted consistently the excessive cost of many of the state’s job creation programs.

While New York has taken steps to reform some of its costliest incentives, the State continues to offer generous subsidies through incentives like the film tax credit, as well as discretionary subsidies to companies like Solar City/Tesla at great cost to taxpayers.

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