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Rebuilding New York's Economy: The Cost of Doing Business

5:57 PM, May 26, 2013   |    comments
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By Jon Campbell, Albany Bureau

ALBANY This month, Chief Executive Magazine published its annual poll of top executives. They ranked each state based on how friendly they are to businesses, taking into account issues like taxes, regulations and workforce quality.

New York ranked 49. Only California was worse.

It's a position New York has grown accustomed to. The state has consistently found itself at or near the bottom of similar national rankings, most notably from the Tax Foundation, a conservative think tank that has repeatedly ranked New York's business tax structure at No. 49 or 50.

But is it really that bad? It depends who you ask.

"I get an opportunity to compare notes a lot with colleagues across the country," said John Batiste, CEO of Rochester-based Klein Steel Service. "And, yeah, it is that bad. It's certainly the taxes and fees, but it's the regulations."

He continued: "If I were starting a business, the last place I would do it is New York state."

Criticism of the state's business climate is nothing new, with debate over regulations, business taxes, energy costs and other related issues having stretched on for decades. That debate has gained new life, though, since the recession in 2009 as New York continues to lag behind the national recovery.

The Tax Foundation, in its most recent state rankings in October, put it this way: New York has the highest income tax, the 13th-highest sales tax and the sixth-highest property taxes. When combined with middle-of-the-pack corporate taxes, New York ranked dead last in the group's State Business Tax Climate Index Ranks.

"It was described to me once that complaining about property taxes is like a state pastime in New York," said Scott Drenkard, an economist for the Tax Foundation. "But income taxes are high in New York, especially in New York City, where local taxes add a substantial burden as well."

Gov. Andrew Cuomo's administration and some business groups see reason to believe things are improving. In April, the state's unemployment rate dropped to 7.8 percent, the lowest its been since March 2009. The administration's economic development branch -- Empire State Development -- has spent millions on television advertisements airing from coast to coast, touting New York's improved business climate while hoping to attract companies to the nation's third-largest state.

But Cuomo acknowledges the state's high tax rates have hindered its reputation among the business community. On Wednesday, he proposed a series of "tax-free zones" centered mostly around State University of New York campuses that allow businesses to avoid taxes -- including all sales, income, property and corporate taxes. Most of those exemptions would last for 10 years.

"The problem is the high taxes in this state. It's been the problem this state has had for literally decades," Cuomo told reporters Thursday after touting his plan at SUNY New Paltz. "We're one of the highest taxed states in the nation. As business and societies become more mobile, we have a problem with people just moving away to a lower-taxed state."

The out-migration of businesses -- and their employees -- has been an issue for New York since Cuomo's father was in office dating back to the early 1990s.

In 2010, a report from the Empire Center for New York State Policy found New York lost 393,280 jobs when firms left for other states between 1993 and 2008. It gained just 272,127 from companies moving into the state.

During the same time period, the conservative think tank found the state lost 506,620 more jobs from the closure of employers that it gained from new start ups.

And as the businesses have left for other states, so have people. From 1960 to 2010, Census data analyzed by the Empire Center showed New York lost a net of about 50,500 residents to other states each year.

The state's business lobby says the issue isn't just taxes, but various state regulations and high workers compensation rates that add to their costs - or "death by a thousand cuts," as Ken Pokalsky, vice president of government affairs for the state Business Council, put it.

"Unfortunately, the taxes are so darn high in New York, it's the toughest state to do business," said Frank Castella Jr., co-owner of Harmon & Castella Printing in Poughkeepsie. "When you start to throw in there your workers compensation, your disability insurance, all of your forced mandates that come from the government, it's even more difficult."

Cuomo has pushed for reforms to the workers compensation system and employers saw their rates fall by 2.5 percent this year, but it came after four-straight years of increases.

At the same time, business groups say the state made improvements over the first two years of Cuomo's administration only to take a step back in the third. Particularly, several were angered by two particular provisions in the current state budget: One that increases the minimum wage to $9 by 2016, and another that extends a utility surcharge that had been set to expire in 2014.

"Candidly, I think it's been getting worse and worse for quite some time," said Terry Wood, president and CEO of Willow Food Inc., a Kirkwood, Broome County-based supplier for restaurant chains along the East Coast. "I was encouraged to a degree when they passed a property-tax cap in 2011 and thought that they might be understanding the situation and moving in the right direction. Since then, I think they've reversed course."

But unions and liberal groups said Cuomo is pandering to businesses at the expense of funding for schools and social services.

"We already spend $7 billion a year on tax credits and giveaways to big businesses in the name of job creation," said Ronald Deutsch, executive director of New Yorkers for Fiscal Fairness, a labor-backed group. "If that were working I would suggest that we would have an unemployment rate that is half of what it is today. "

Danny Donohue, president of the Civil Service Employees Association, the state's largest public union, also slammed Cuomo's SUNY plan.

"No amount of TV ads spinning his record can change the reality that his so-called job creation policies have failed. They have mostly benefitted the super wealthy and big corporations and repeatedly failed to deliver real growth and middle class jobs," he said in a statement.

The Cuomo administration, however, points to improved jobs numbers.

Every metropolitan area in the state gained jobs between 2012 and 2013, expect for Binghamton and Elmira, according to the state Department of Labor. New York has added private-sector jobs in 20 consecutive months. Nationally, it's been 31 straight months.

The state's business environment has also benefited from the creation of industry-specific "clusters," with the Albany-based nanoscale science and engineering facilities held up as the gold standard. The Capital Region has been recognized as one of the world's leading nanoscience clusters, leading to major businesses like IBM to take root in the area.

Such an approach has been beneficial to places like Westchester County, where property taxes are among the highest in the nation and major bioscience companies like Regeneron call home.

"We have firms that are being wooed by other states that are coming to Westchester because the county has worked with them to make it a process that has been painless with good equity, but more importantly they're seeing the buzz with key stakeholders in those industries like bioscience," said John Ravitz, executive vice president of the Business Council of Westchester.

But it is areas near the state's border, such as the lower Hudson Valley and the Southern Tier, where businesses find themselves tempted to leave for other states.

Starwood Hotels, for example, gradually moved its company headquarters from White Plains to Connecticut, wooed away in part by a generous tax incentive package from Connecticut state government. About 800 jobs moved to the hotel chain's new 290,000 sq. ft. facility in Stamford, Conn, when the move finished last year.

For Wood, the head of the Binghamton-area restaurant supplier, the thought of moving just a few miles south to Pennsylvania has been tempting, he said. But when his company built a new 250,000-square-foot facility in 1999, it couldn't find a Pennsylvania plot of land close enough to the border.

"The problem was we couldn't find anything close to the border, and we had to go down 30 or 40 miles into Pennsylvania to find a piece of property and I was concerned about losing our employees," Wood said. "We employ nearly 400 employees at this point, and I didn't want to lose those employees."

It's a similar story for Harris Seeds in Rochester, a seed and gardening-supply company that has been rooted in the area since 1879. Richard Chamberlain, the company's president, said he could reduce his costs in other states, but said he'd be hard pressed to find the specialized workers he needs if Harris moved elsewhere.

"We could move to Ohio, we could move to Pennsylvania, we could move to Tennessee, and I know we could bring our operating cost down significantly," Chamberlain said. "I don't see anything coming out of Albany that is company-friendly. They're blowing some smoke in our face, but it's still very, very expensive -- and you'll hear that from just about every businessman."

Others had to be enticed to stay. In 2011, defense contractor BAE Systems received a package of about $40 million in tax credits over five years to stay in the Binghamton area, keeping 1,350 jobs in the area after the company's facility was badly damaged by Tropical Storm Lee.

Empire State Development recently featured BAE in one of its television advertisements.

Speaking to reporters earlier this month, Cuomo said the April job reports prove the state's economy is improving, due in part to its policies and business development initiatives of the past few years.

"I'm not saying it's the beginning of a constant trend, but it is significant progress," Cuomo said. "And even with the (economy's) fits and starts, lowest unemployment rate since 2009 is truly good news."

He added: "Not that our cynics won't be able to find some bad in there, I'm sure they will. But it's really good news. You're going to have to work hard to find bad in those numbers."

Cuomo is hoping his "Tax-Free New York" plan will help. All told, his administration estimates that 3 million square feet of land statewide will be eligible as the tax-free zones -- if the Legislature agrees to the plan. Legislative leaders have expressed initial support, but some rank-and-file lawmakers have been cynical.

Some existing businesses expressed concern about the plan, as well. The state often tries to woo businesses from out of state without worrying about maintaining the companies it already has, said Larry Glazer, CEO of Buckingham Properties, a developer in Rochester.

"What is that going to do? That deters me," Glazer said. "All we're doing is shifting chairs on the Titanic, man. What does that gain us?"

2013 Business Tax Climate Rankings

New York

Overall Rank: 50

Corporate Tax Rank: 23

Individual Income Tax Rank: 50

Sales Tax Rank: 38

Unemployment Insurance Tax Rank: 45

Property Tax Rank: 45

Source: Tax Foundation

About this series

This is the sixth installment in a yearlong Albany Bureau series "Rebuilding New York's Economy" that will look at the key factors affecting New York's economic recovery and whether it is succeeding. Previous installments have looked at New York's farming boom, whether the tax cap is working and how colleges are improving the upstate economy. Upcoming installments will look at whether upstate casinos will help the economy and if the state's regional economic development councils are succeeding.

Coming next month

New York has more than 42,000 openings for jobs on its state Labor Department website. If they were filled, New York's unemployment level would be 10 percent less. New York's unemployment problem has as much to do with aligning people with new careers as it is with companies downsizing.

JCAMPBELL1@gannett.com

Twitter.com/JonCampbellGAN

 

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