“Move here, expand here or start a new business here and pay no taxes for 10 years.”
If something seems too good to be true, then it probably is – and that goes for Governor Cuomo’s tax carve-out program, START-UP NY. New York State Comptroller Thomas DiNapoli recently revealed that START-UP NY spent $45 million to advertise the program, but created only 76 jobs. The ALEC Center for State Fiscal Reform’s study on tax cronyism, The Unseen Costs of Tax Cronyism: Favoritism and Forgone Growth demonstrates that tax-carve outs are not a viable economic development strategy.
When it comes to economic development, there are typically two main approaches: growth through central planning (such as START-UP NY) and growth through markets. The central planning approach relies on targeted tax carve-outs to encourage specific businesses to invest, while the growth through markets approach uses broad-based competitive tax reform to level the playing field for all businesses. START UP-NY is a great example of central planning.
In order to qualify for START-UP NY, applicants must belong to specific industries. Furthermore, applicants must be “located 100 percent in a tax free area” by State University of New York campuses. Eligible companies are promised they will not have to pay business, corporate, sales or property taxes, as well as no franchise fees for the first 10 years. Additionally, qualifying employees of these eligible companies are promised that they will pay no state or local income taxes for the first five years.
A recent audit of New York Empire State Development agency (which oversees START-UP NY), revealed just how flawed growth through central planning is. From October 2013 to October 2014, Empire State Development (ESD) spent $45 million to advertise START-UP NY. During this time period, ESD received only 18,023 applications, 10 percent of which actually met START-UP NY’s confusing eligibility requirements. Currently, 30 companies are actively participating in START-UP NY, creating a grand total of 76 jobs in the state. Out of this number, just four companies came from out of state. In fact, one of the participating companies moved their office one mile to qualify for the program. Thus far, for each job created, ESD has spent a staggering $697,368.
While ESD officials consider their advertising efforts a success, the audit notes that “they were unable to provide any analysis to support their conclusion.” As a result, the Office of the Comptroller is considering a separate audit into START-UP NY. Comptroller DiNapoli declared, “It is time for us to look at the return for tax dollars going in. We need be asking, ‘What are your goals and how are you going to measure it?’ ‘If you fall short, do we continue to throw money into it?’ Those are the type of questions we haven’t asked enough.”
START-UP NY demonstrates that the state’s growth through central planning approach delivers poor results. The Unseen Costs of Tax Cronyism: Favoritism and Forgone Growth found that the Empire State has given out 52,132 tax carve-outs to select industries – more than any other state. Clearly, tax carve-outs are not working: New York’s economic outlook ranks dead last in the nation, according to the 2015 Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index.
Instead of picking winners and losers through the tax code, New York should focus on what works. Last session, New York lawmakers reduced and simplified the corporate tax, eliminated the individual add-on minimum tax and reformed the estate tax—all positive steps toward a more pro-growth economy. Lowering the tax rate for everyone gives all businesses an equal opportunity to invest, grow and create jobs in New York.
Kati Siconolfi is the Legislative Manager of the American Legislative Exchange Council Center for State Fiscal Reform.
This post has been updated to correct the spelling of the New York State Comptroller.