Public Hearing: Review Existing Tax Policy and Discuss Reform Initiatives

1 JOINT HEARING BEFORE THE NEW YORK STATE

SENATE STANDING COMMITTEE ON FINANCE 2 AND

SENATE STANDING COMMITTEE ON INVESTIGATIONS AND 3 GOVERNMENT OPERATIONS

----------------------------------------------------- 4

PUBLIC HEARING:5

REVIEW EXISTING TAX POLICY AND DISCUSS REFORM 6 INITIATIVES 7 ----------------------------------------------------- 8 Legislative Office Building

181 State Street 9 Van Buren Hearing Room A, 2nd Floor

Albany, New York 12247 10

September 4, 2013 11 10:00 a.m. to 1:00 p.m. 12 13 PRESIDING: 14 Senator John A. DeFrancisco

Chairman 15 NYS Senate Standing Committee on Finance 16 Senator Carl L. Marcellino

Chairman 17 NYS Senate Standing Committee on

Investigations and Government Operations 18 19

PRESENT:20

Senator Liz Krueger (RM) 21 Senate Finance Committee 22 Senator Kathleen A. Marchione 23 Senator David J. Valesky 24 25 1

SPEAKERS:PAGE QUESTIONS 2 3 E.J. McMahon 11 22

President 4 Empire Center for New York State Policy 5 Joe Henchman 45 67

Vice President of Legal and 6 State Projects

Tax Foundation 7

Ken Pokalsky 86 104 8 Vice President of Government Affairs

Business Council of New York State 9

Frank Mauro 112 134 10 Executive Director

Fiscal Policy Institute 11

Brian McMahon 144 152 12 Executive Director

NYS Economic Development Council 13

Mike Durant 155 162 14 New York State Director

National Federation of 15 Independent Businesses (NFIB) 16 Julie Suarez 164 176

Director of Public Policy 17 New York Farm Bureau 18 Josh Reap 178 184

Empire State Director of 19 Government Affairs

Associated Builders and Contractors 20

Deb Warner 185 200 21 Vice President of Public Policy and

Governmental Relations 22 CenterState CEO 23 Brian Sampson 202 207

Executive Director 24 Unshackle Upstate 25 1

SPEAKERS (Continued): PAGE QUESTIONS 2 3 Jessica Crawford 221 228

President 4 MedTech Association 5 ---oOo--- 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 SENATOR DeFRANCISCO: This is the 2 Finance Committee, and the Investigations and 3 Government Operations Committee, and Carl Marcellino 4 and I will be chairing these hearings. 5 These hearings include today's in Albany; 6 tomorrow in Syracuse; September 12th in Buffalo; 7 October 3rd in Long Island, in Mineola; and 8 New York City on October 4th. 9 And the purpose is to get comments concerning 10 how the tax structure can be reformed in the state 11 of New York. 12 Now, we've made some strides in improving the 13 tax climate in the state of New York, with tax 14 reductions for manufacturers; small businesses, 15 paying under the personal income tax; and for 16 middle-class taxpayers; as well as the property-tax 17 cap. 18 The cap is estimated to have saved 19 1.26 billion in school taxes alone, just in the 20 first two years. As the cap goes forward, the 21 savings will grow substantially greater. 22 However, we still have work to be done to 23 make our system competitive with other states. 24 The purpose of these hearings is to develop 25 recommendations for the upcoming budget cycle, since 1 that's the most likely place that any of these 2 changes could ever happen, to provide the taxpayers 3 of New York with tax reform. 4 The need for tax reform cries out when you 5 consider the following: 6 Our tax codes is far too complex. 7 The personal income tax is 15 different 8 modifications to federal adjusted gross income, and 9 45 different credits. 10 The corporate franchise tax is 11 5 modifications to the federal "AGI," and 35 -- 12 that's adjusted gross income -- and 35 different 13 credits. 14 Most of these credits and modifications are 15 designed to benefit a limited number of taxpayers. 16 The average taxpayer cannot fill out his own 17 taxes without the assistance of a tax professional 18 or tax software. 19 Corporate franchise tax filings are sent to 20 the tax department in boxes, not envelopes. 21 New York has been determined to be the least 22 business-friendly of the 50 states by the 23 Tax Foundation, a member of which will be testifying 24 today. 25 The most important factor in attaining this 1 50th ranking was that New York is number one in 2 state and local tax burden, and that's where the tax 3 cap also was helpful. 4 New York has gained 110,500 private-sector 5 jobs in the last year -- that's June '12 to 6 June '13 -- however, that equals a rate of growth of 7 just 1.49 percent, which ranks 31st in the nation, 8 over one-half of 1 percent below the national 9 average. 10 In August 5th "Gannett News" article, it was 11 reported that New York had about 59,200 layoffs 12 between January and July, 60 percent more than the 13 same period last year. 14 According to Challenger, Gray & Christmas, a 15 Chicago-based placement firm, these heavy cuts are, 16 in part, due to New York's core industries, 17 including the financial sector, cutting more than 18 26,500 jobs. 19 This is a sobering thought when one considers 20 the heavy reliance New York has on tax revenues from 21 the financial sector. 22 And I've got all other different types of 23 indications as to why these tax hearings are 24 necessary, and, it's not only upstate, it's all 25 throughout the state of New York. 1 However, there is some glimmer of hope, 2 nationwide. Many states are cutting taxes. 3 North Carolina just enacted a major 4 restructuring of both personal income taxes, 5 corporate taxes, and sales taxes; 6 Indiana cut personal income taxes, business 7 taxes, and repealed the inheritance tax; 8 Oklahoma cut personal income taxes; 9 Virginia cut fuel taxes; 10 And Idaho cut business and personal-property 11 taxes; 12 North Dakota cut personal income taxes by 13 20 percent, fueled by an oil boom in that state; 14 Kansas cut personal income taxes by up to 15 24 percent, and eliminated taxes on small businesses 16 paying under the personal income tax. 17 So it can be done, but by other states doing 18 it, it puts us further and further behind. 19 So what we're going to do today, we have a 20 list of speakers, and I'm going to call on 21 Carl Marcellino also to speak, but I just wanted to 22 mention, procedurally: 23 The way we've got it, is each speaker is 24 15 minutes for their remarks, plus comments. It's 25 kind of tight, so, obviously, if we need additional 1 time, but, please -- we'll provide it. 2 But, please, don't just read a single-spaced 3 8-page report, because it just doesn't -- it -- 4 well, we've got the reports, the statements, that 5 you gave us. 6 I'd really appreciate a more 7 conversational-type discussion here, so that we can 8 really get something out of these hearings for a 9 productive result. 10 So, with that said, I'm going to ask Carl if 11 he has any -- Carl Marcellino has any additional 12 comments. 13 SENATOR MARCELLINO: Thank you, John. 14 A pleasure to be here. 15 It seems like everyplace you look, every time 16 you turn around, New York is taxing something. 17 Everything in New York is taxed, including our 18 patience, and the limitation, and what my colleague 19 John DeFrancisco was saying in his opening 20 remarks, is that we are in competition with the rest 21 of the states, especially the ones around us. 22 We are in competition with our friends to the 23 north in Canada, we are in competition with our 24 friends to the south, in Puerto Rico and the 25 Virgin Islands and other places, where businesses 1 are looking to go, people are looking to take their 2 wealth, and move it so that it doesn't get taxed. 3 Now, it's difficult to avoid the federal 4 income tax wherever you go, but it's not that 5 difficult to avoid local taxes -- state and local 6 taxes. 7 So if you go to a place that isn't taxed, it 8 doesn't have a state income tax, or they've cut 9 their taxes, we are no longer competitive. 10 We're creating jobs, that's true, but many of 11 those jobs are part time, they're not up to what 12 they once were, salaries are not the equivalent of 13 what they once were. 14 So in a sense, we're falling behind, and 15 we've got to find a way to make and keep New York 16 competitive so we don't lose populations, so we 17 don't lose our young people. They come here, they 18 go to our colleges, they get a first-class great 19 educational background, and then leave; take their 20 brains, take their ingenuity, and take their 21 discoveries and creations, and move to other places 22 where the climate is more friendly, and perhaps even 23 the weather is a little more friendly. 24 But, we want to keep them here in New York. 25 We want to keep New York number one, the 1 Empire State. 2 That's the purpose of this -- of these 3 hearings that John and I are holding throughout the 4 state, and a report will be issued at the end so 5 that we'll move ahead with recommendations, so that 6 we can -- so our colleagues can have it and share it 7 and see it. 8 This is being videoed, and if anyone would 9 like to watch this again, you've got to be sick, 10 but, if you want to watch this again, it will be 11 there, it will be provided for you, on the State 12 website, so you can see that, and hear it, in case 13 you missed something that is important. 14 I anticipate from the look of the speakers, 15 that we're going to have some interesting comments 16 and some very valuable comments, that will be made 17 here, and some good ideas will come forward. 18 I'm looking, and I'm hoping to hear, creative 19 ideas. Not just, this is bad, this is bad, this is 20 bad, this is bad. 21 I'm looking for some positive thought; some 22 ideas that we can bring back to our colleagues, and 23 the Governor, so that we can work together, and as 24 John said, probably through the budget process, but 25 legislatively if necessary, to do it that way if we 1 have to. 2 But the budget process, I think, is probably 3 the more appropriate location for stuff that we're 4 looking at in creating a new tax platform. 5 So, with that, I'll turn it back to John, and 6 we can introduce our fellows. 7 SENATOR DeFRANCISCO: Okay, first we have 8 Senator Liz Krueger, the ranking member on the 9 Senate Finance Committee; 10 To my far right, Dave Valesky, a fellow 11 Syracusan; 12 And Senator Marchione from the North Country. 13 And barring anyone who really needs to make 14 an opening statement, I would like to get into the 15 testimony at this point. 16 I, in advance, thank all the speakers. We've 17 got some great speakers with a lot of great 18 knowledge in this area, the first of which being, 19 E.J. McMahon, executive director of the 20 Empire Center for New York policy. 21 E.J. McMAHON: Good morning, and thank you 22 very much, Senators DeFrancisco, Marcellino, 23 Krueger, Valesky, and Marchione. 24 Thank you very much for this opportunity. 25 I don't know if you'd call this the best -- a 1 better time than any other to start -- 2 SENATOR MARCELLINO: E.J., can you bring that 3 mic closer, and make sure it's on? 4 E.J. McMAHON: Okay. 5 Is that any better? 6 SENATOR MARCELLINO: Yes. 7 E.J. McMAHON: Okay. 8 Senators, thank you for this opportunity. 9 I don't know if I'd say there's never been a 10 better time for you to start looking at tax reform, 11 but I think it's an opportune moment, and I think 12 it's actually overdue, if you really get into the 13 sweeping structural issues associated with tax 14 reform. 15 There's macroeconomic factors that also lend 16 themselves to this. 17 And while I don't have an 8-page 18 single-spaced statement from which I'll read 19 verbatim, I do have a two-and-three-quarter-page 20 statement to which I will refer, to make sure 21 I don't miss some points that I want to make. 22 I've also given you an article I wrote for 23 the "Albany Government Law Review," that went into 24 some detail on the history of our personal income 25 tax in particular, and on aspects of the tax changes 1 enacted in 2011, for your reference. 2 As you know, Wall Street, which really has 3 been our cash cow for 20 years, in terms of marginal 4 revenue growth, is retrenching in an era of slower 5 economic growth in the new economy that we're faced 6 with. 7 Businesses are less willing to shoulder costs 8 they can avoid by moving elsewhere or investing 9 elsewhere. 10 And I don't think I need to point out that 11 most states can offer, in different ways, a 12 lower-cost business environment than New York, 13 especially when we're talking about the downstate 14 region where the bulk of our economy is focused. 15 And while we have certain competitive 16 advantages, as an -- that we offer economically, as 17 a state, we can't simply rely on those advantage and 18 ignore the high tax toll we impose, on entrepreneurs 19 in particular. 20 Unfortunately, the State's enacted a series 21 of major tax increases since 2009, including, what 22 I think is important to point out, is the largest 23 single income tax increase since the 1960s. 24 Only a portion of that supposedly temporary 25 increase was rolled back by the temporary changes 1 you enacted in 2011. 2 And the net effect of the budget you just 3 enacted was to extend a net $5 billion in, 4 supposedly, temporary tax increases over the next 5 four fiscal years, up to 2 billion-plus a year, on 6 an annual basis. 7 Meanwhile, despite last December's 8 fiscal-cliff deal in Washington, tax policy on the 9 federal level is unsettled. I think we all need to 10 recognize that. 11 And when it is settled, it could be settled 12 in a direction that would be unsettling for 13 New York. 14 I can't point out strongly enough that 15 President Obama wants to strict -- to pretty 16 severely curtail the deductibility of state and 17 local income taxes for high-income payers, and that, 18 actually, most congressional Republicans are 19 inclined to go along with that idea. Many would 20 like to tightly cap itemized deductions, and there 21 is quite a bit of support for eliminating the 22 deduction for state and local income taxes. 23 That would hit New York harder, and 24 especially our tax base, in general, than any other 25 state -- any other single state. 1 And in terms of total income, it would -- 2 only California would rival us. 3 I think we also should recognize that our 4 last true structural tax reform dates back to 1987. 5 And that since the enactment of the 1995 Tax 6 Relief Act, which was -- would be George Pataki tax 7 cut, and our last significant broad-based tax cut. 8 The general drift of state tax policy has 9 been to toward targeted tax breaks. 10 The result is a tax code increasingly 11 cluttered with credits, deductions, and other 12 loopholes driven more by short-term policy goals and 13 political considerations than by the basic 14 principles of tax fairness, efficiency, simplicity, 15 visibility, and last, but not least, 16 competitiveness. 17 The epitome of this tendency is the newly 18 enacted program known "as Start-Up NY," also known 19 as "Tax-Free NY." 20 The tax breaks offered through this program 21 will be microtargeted to college campuses and sites 22 near campuses, necessarily entailing -- and let me 23 stress, "necessarily," under its own terms, it's 24 difficult to do it any other way -- a complex 25 multi-step planning and application process, 1 ultimately controlled out of the Executive Chamber. 2 If there's one positive thing that can be 3 said about Start-Up NY, is that it is so extreme in 4 its targeting, and the tax benefits offered in those 5 microtargeted areas are so large, that it really 6 calls attention to how far we've gone, in fact, gone 7 too far, in our efforts to very narrowly offer tax 8 benefits to some and not to all. 9 I'd respectfully suggest it's time to turn 10 away from targeting, and to place a renewed emphasis 11 on developing a tax code designed to encourage all 12 businesses to come to New York or to stay in 13 New York, encouraging them to invest, hire, and grow 14 anywhere in New York that suits their purposes, and 15 as part of this change to reverse policies and 16 encourage some economically successful New Yorkers 17 to take their capital elsewhere. 18 Now, I have some recommendations in three 19 areas. This is no means meant -- by no mean meant 20 to be all-inclusive. It's simply touching across 21 the surface of some major themes that I would like 22 to lay out for you, and then we can discuss. 23 Starting with the personal income tax: 24 So as I alluded to earlier, in 2009, the 25 legislature and governor temporarily raised our top 1 rate from 6.85 percent to 8.97 on rates as low -- on 2 income then as low as $200,000. 3 And I should point out that, in a case of 4 that increase, and in your subsequent extension of 5 the increase, the tax increases apply to all taxable 6 income. It was, essentially, a flat tax on all 7 income, not just a marginal rate. 8 That makes it, for most of the taxpayers 9 affected, a higher tax than you'll find in some 10 states with higher rates, such as New Jersey. 11 In December of 2011, a temporary higher rate 12 of 8.82 percent was extended for three more years on 13 income starting at a million for individuals and 14 2 million for couples, but it's continued to apply 15 as a flat tax on all taxable income. 16 As part of the current budget, this increase, 17 which is a not-insignificant 29 percent tax 18 increase, which is nearly $40,000 for couples 19 affected by it, was pushed out to 2017. 20 The temporary changes of the past several 21 years were added to a PIT code that's become more 22 complex and opaque since the enactment of the 23 Tax Relief Act of 1995. 24 For example: Our tax form is now four-pages 25 long. It's twice as long as the Federal 1040 form. 1 And that doesn't include the extra paperwork 2 necessary to claim all of the income, tax credits, 3 that you cited in your opening statement, Senator. 4 We need to move in the opposite direction, 5 back to a simpler, flatter tax structure. 6 And I would suggest three ways to go to 7 accomplish that: 8 First, immediately begin a phase out of the 9 so-called "millionaire bracket" of 8.82 percent. 10 Commencing with the next budget, the rate 11 should drop by a half a percentage point a year, 12 culminating in a sunset at the end of tax year 2017. 13 A tax increase that's supposedly temporary, 14 but is actually very significant, that, 15 theoretically, is going to expire all at once at the 16 end of some period of time, is something that is 17 built to be extended indefinitely. 18 You're creating a fiscal cliff for yourself 19 by doing that. 20 Two, permanently enact the temporary 21 provision indexing to inflation, all tax brackets, 22 personal exemptions, and standards deductions. 23 The federal government, as you know, did that 24 over 30 years ago. 25 It's high time we did it permanently. 1 Third, aim to achieve a simpler, more 2 efficient, and competitive tax structure by 3 broadening the tax based to the extent possible, 4 reducing allowable deductions while expanding 5 personal exemptions, and pulling down the marginal 6 rate to the extent that you can. 7 I'd like to now turn to a second subject that 8 I think has not gotten as much discussion as it 9 deserves, and that's our estate tax. 10 We're now one of only 19 states, a number 11 that's been dwindling, that continue to impose 12 either an inheritance tax or an estate tax, or both, 13 and this is leaving us at a significant competitive 14 disadvantage. 15 However you may feel about the estate tax, 16 sometimes referred to by as the so-called 17 "death tax," regardless of how you feel about that 18 as a tax policy, in general, or on the federal 19 level, the fact of the matter is now, that we are 20 part of a dwindling -- one of a dwindling number of 21 states that still impose it, and that's a 22 disadvantage. 23 It's imposed at a rate of 16 percent on 24 estates valued at over $1 million. It's 25 particularly harmful to owners of family businesses 1 and farms. 2 Remember, that includes primary residences, 3 and even life insurance, so it's not that hard to 4 reach a million dollars. 5 Senator DeFrancisco's proposed taking an 6 important first step in the right direction, by 7 raising the taxable threshold, from 1 million, to 8 the federal level of 5 million. 9 And the revenue impact of that would be 10 negligible, and so I think it's an obvious step, but 11 I think we also need to go further. 12 The goal should be nothing less than a 13 phased-in elimination of the estate tax, which, of 14 course, because it raises a billion dollars a year, 15 would have to be phased in. 16 Keep in mind, however, that the revenue from 17 this tax is offset to a degree as yet unknown, by 18 ongoing economic and revenue losses resulting from 19 encouraging some high-net-worth households to move 20 elsewhere, taking their incomes, their philanthropy, 21 and other economic activity with them. 22 With a maximum rate of 7.1 percent, our 23 corporation franchise tax, on a statewide level, is 24 lower than those of neighboring states. 25 However, it should be noted that that 1 30-year-old Metropolitan Transit District surcharge 2 in the New York City region actually boosts this tax 3 to 8.3 percent throughout that region. 4 And in New York City, with the corporate tax 5 rate there, it's over -- a combined federal, state, 6 and local rate of over 16 percent. 7 As you know, many businesses have a choice of 8 organizing in ways that subject them to one tax or 9 the other. 10 You've taken steps to allow small businesses 11 to file under the personal rate. 12 But I think that, to achieve true neutrality, 13 you want to align all of your rates, personal and 14 corporate, at the same level to avoid economic 15 distortions, with the goal of reducing the statewide 16 tax to an absolute minimum. 17 When county and New York City rates are 18 included, turning to another subject, we also have 19 one of the nation's highest sales and use taxes. 20 By broadening the taxable base for the sales 21 and use tax to include, for example, personal and 22 professional services now exempt from the tax, you 23 could raise enough revenue to put a dent in the 24 current rate, which, typically, is at least 25 8 percent in most parts of the state. 1 In addition, if you assume enactment of the 2 proposed federal "Main Street" legislation, which 3 would clear the way for uniform taxation of online 4 sales, if that happens, there's two things I would 5 suggest that need to be done: 6 First, is to direct the tax department to 7 report within the year on the amount of revenue -- 8 added revenue this tax is generating. 9 Based on that finding, secondly, commit 10 yourself to reducing the sales-tax rate by a like 11 amount; that is, if it raises $600 million in 12 revenue, or, about 5 percent of current tax 13 collections, you could reduce the rate by 20 basis 14 points on the state level, and encourage local cuts 15 as well. 16 Now, again, these recommendations are just a 17 start. I've just cut across the surface of some 18 major tax themes, but, in the time left, I'd be 19 happy to engage in a discussion of what some of the 20 implications of these things are, and other ideas. 21 Thank you. 22 SENATOR DeFRANCISCO: Thank you. 23 Any questions? 24 SENATOR VALESKY: Yes, just one. 25 SENATOR DeFRANCISCO: Senator Valesky. 1 SENATOR VALESKY: E.J., thanks for your 2 testimony. 3 I'm familiar with, certainly, most of these 4 proposals and thoughts that you've shared with us 5 this morning. 6 I'm less familiar with the -- your last 7 point, in regard to enactment of the proposed 8 federal "Main Street" legislation. 9 Are you -- when you say "assuming enactment," 10 how confident are you that the federal government is 11 going to do that? 12 I'm just not that familiar with it. 13 E.J. McMAHON: I'm not how confident to be at 14 this stage. 15 For a while it was moving, and now it seems 16 unclear whether it is moving. 17 Your next speaker might have more light to 18 shed on that. 19 SENATOR VALESKY: Okay. 20 E.J. McMAHON: But, since it's definitely a 21 possibility, and a stronger possibility than it has 22 been at any point in the Internet Era, it is 23 something to be aware of. 24 And I think that we -- the State should 25 commit itself now, especially given our very high 1 rates, to not simply glomming onto the added revenue 2 and doing nothing. 3 It's an opportunity, if you have a one-time 4 bump-up, but a permanent bump-up, in revenue 5 resulting from this. 6 It may not be quite as large as some people 7 have implied, but whatever it is, I think it's an 8 opportunity to begin whittling away at the rate, 9 which is quite high. 10 SENATOR VALESKY: Okay, thank you. 11 E.J. McMAHON: You're welcome. 12 SENATOR DeFRANCISCO: Senator Krueger. 13 SENATOR KRUEGER: Good morning, how are you? 14 E.J. McMAHON: Good morning. 15 SENATOR KRUEGER: As we have discussed on any 16 number of times, while we may have different 17 political ideologies, we come full circle when it 18 comes to tax policy, very often. 19 And I appreciate your analysis, and I find 20 myself in great agreement with much of what you 21 proposed. 22 I wanted to jump back to your discussion of 23 two different ways to file taxes as a business in 24 New York, and the -- I forgot the term you used, 25 I don't think you have it written down, but the real 1 differentiations we see in how much taxes are being 2 paid by whom, and the -- I share your agreement, the 3 problems when two businesses may, in fact be very 4 parallel in everything, except the taxes they pay. 5 Could you give us a couple of examples? 6 E.J. McMAHON: To oversimplify -- at the risk 7 of greatly oversimplifying: 8 Two businesses, and it could be a service 9 business or a manufacturing business, not tiny, but 10 call them "smallish," okay, employing a couple of 11 hundred people. Gross revenues of a few 12 million dollars a year. 13 For one reason or another, one of those 14 companies may be organized as a C corporation, fully 15 incorporated. It is Service Corporation, Inc.; 16 And the other may be a Subchapter S 17 corporation, organized as some sort of partnership 18 with some multiple personal owners. 19 And depending on, especially their -- and 20 also their location in the state, they could be 21 subject to two different -- one would be subject to 22 Article 9-A, and the other could be subject to 23 personal income tax. 24 Now, we've taken strides to kind of reduce 25 the differential -- any differential in the way we 1 tax them, but the ideal for tax reform is to simply 2 treat them as alike as possible. 3 We do offer credits. 4 For instance, if they're a manufacturing 5 business, and you're eligible for an investment tax 6 credit, I believe you can claim the tax credit 7 against income, both, as partners in a Sub S, and 8 as -- or as -- an Article 9-A C corp can use that 9 credit to reduce its tax burden. 10 So, there is a -- there are parallels there, 11 but to the extent there are any distortions, it's 12 just something to be aware of. 13 Like, when we talk about reducing one rate or 14 the other rate, we need to be more aware, up front, 15 of any differential we're opening or creating 16 between the two different rates. 17 So, for instance, right now, if we go 18 permanently to -- if we ever went permanently to an 19 income tax of close to 9 percent, we would have 20 reopened the differential, and, you never know, 21 perhaps created an incentive for somebody to think 22 harder about organizing as a C corp. 23 One of the benefits of thinking and talking 24 about tax reform, is to think harder about, sort of, 25 general principles. 1 And one general principle that you alluded to 2 is that, people engaged in the same sort of economic 3 activity should be taxed to the -- to the greatest 4 extent possible, it's difficult to be perfect, at 5 the same rate. 6 If you and I are doing the same thing and 7 making the same income from that thing, tax policy 8 should be taxing us at the same rate. 9 And that was the point of that allusion. 10 I think, in the past, when we made great 11 strides in reducing our income tax, we didn't take 12 account of what impact that would have on how people 13 would organize. 14 And so, to a certain degree, we've kind of 15 caught up with it again. We're offering smaller 16 businesses the ability to file at a personal 17 income-tax rate, for instance. 18 But, I'm just saying that there will be a lot 19 of talk today about ways to reduce the corporate 20 income tax, for instance, and restructure it. 21 That, in doing that, or in reducing the 22 personal income tax, we should be conscious of that 23 goal of horizontal equity of treating all of the 24 people involved in the same activity the same way. 25 SENATOR KRUEGER: A follow-up on another 1 statement you made, where you shifted a bit to the 2 local tax issues. 3 There are proposals, I think from later 4 testifiers, about actually having different tax 5 rates depending on what county you're in in the 6 state, and reducing significantly sales tax, which 7 is, obviously, a significant income source for our 8 counties and our cities. 9 Given the economic problems our cities and 10 many of our counties find themselves in, and I would 11 even argue on the verge of crisis, how do you see 12 dealing with the concerns about equity and balance 13 and tax policy with the demands that we are seeing 14 at the local level all over the state? 15 E.J. McMAHON: Well, if you're alluding -- 16 are you alluding to the proposals for local income 17 tax -- for special local income taxes, or -- 18 variations? 19 SENATOR KRUEGER: No, I think a couple of the 20 of the other testifiers had already put out 21 statements to the press, calling for reduced taxes 22 in certain counties. 23 E.J. McMAHON: Okay. 24 SENATOR KRUEGER: And also in reducing, 25 specifically, sales taxes. 1 E.J. McMAHON: Well, I mean, I haven't seen 2 all of those proposals in detail. I think I'm aware 3 of some of them, but, I think that, to the extent 4 they're end -- at end of promoting -- aimed at 5 promoting greater tax competitiveness in troubled 6 localities, then, obviously, it would create some 7 benefits. 8 I mean, if you could -- if we're able to -- 9 for instance, the idea behind reducing the rate at 10 least a smidgen, if, for instance, more revenue is 11 generated by the so-called "Main Street" tax, or the 12 revenue generated by broadening the base, if you 13 could, for instance, theoretically, generate a net 14 billion dollars more in revenue by broadening the 15 sales-tax base to some things that are not now 16 taxed, which would allow you to reduce the rate by a 17 certain amount, say, up to a half a percentage 18 point, you would be creating a similar benefit, 19 although, not completely evenly for localities 20 across the state, and giving them the opportunity to 21 become more competitive by reducing their rates; 22 and, so, it would actually ease the way for those 23 types of proposals. 24 If I understand those proposals correctly. 25 SENATOR KRUEGER: Thank you. 1 E.J. McMAHON: You're welcome. 2 SENATOR MARCELLINO: Thank you for coming, 3 and thank you for your testimony. It's very 4 interesting to see. 5 Just a broad question. 6 Senator DeFrancisco mentioned earlier that 7 certain -- some states have gone to a flat tax. 8 Should New York? 9 E.J. McMAHON: I'm sorry, I didn't hear the 10 whole question. 11 SENATOR MARCELLINO: Some states, as was 12 mentioned in Senator DeFrancisco's opening 13 statement, have already gone to a flat tax. 14 Should New York? 15 E.J. McMAHON: Well, I think a flatter tax 16 structure -- I'm in the school of thought that 17 believes a flatter tax structure is a better tax 18 structure. 19 We had gone to a -- we had, post 1997, gone 20 to a flattish tax structure, or, less steeply 21 graduated than it used to be, but, nonetheless, with 22 a progress result. 23 By the way, I'd like to point out here that, 24 in 1987, there was a very overwhelming bipartisan 25 consensus in favor of a flat tax in New York. 1 In fact, the Assembly Democrats proposed a 2 purer flat tax, and the Republicans in the Senate 3 proposed a modified one. 4 So, this is -- this is something that has 5 been raised before in New York. 6 When we collapsed our bracket structure down 7 to few -- many fewer brackets than there had been 8 before, we were moving in that direction. 9 I think that you can create a tax structure 10 that is flat, or almost flat, in terms of its rates, 11 while still having a progressive result in terms of 12 the distribution of the tax burden through the use 13 of larger standard deductions and personal 14 exemptions. 15 I think we did that in New York. 16 And, in fact, under our permanent code, as 17 was in effect with one brief -- one three-year 18 interruption before 2009, we already had a 19 progressive distribution of the tax burden, with a 20 relatively flat structure. Not necessarily purely 21 flat, but pretty flat. 22 And I do think it's a desirable thing to have 23 as broad a base and as flat a rate as possible. 24 I think that's the consensus of many, not 25 all, people in the tax field, that steeply -- 1 steeper marginal rates are a disincentive to 2 investment, and to income earning, in the 3 jurisdiction that imposes it. 4 SENATOR MARCELLINO: You mentioned expanding 5 the state sales tax to cover personal and 6 professional services. 7 Would that mean a greater burden on the 8 business community, in the fact there's more 9 companies are required to navigate the state 10 sales-tax system? 11 E.J. McMAHON: Well, it would -- it would if 12 you -- it would redistribute the tax burden to more 13 businesses, and that's why it needs to be 14 considered, but, also, studied in more detail. 15 There's a lot here that would require further study. 16 Certainly, one of the problems with -- one of 17 the problems with the sales tax, in general, that's 18 frequently overlooked, is that the sales tax is 19 administered by the people who collect it, in 20 effect. 21 And it is always, to a certain extent, a 22 burden. 23 But a consumption tax is, arguably, 24 especially if it's broader, is, in some ways, less 25 of a burden, or creates less of a distortion, than a 1 heavier reliance on income taxes, and that's why 2 they've always been part of the mix. 3 So the question is: If we could lower the 4 rate significantly, or at least noticeably, on other 5 types of sales and business activities, would it be 6 worth the added impact of having more businesses 7 collect the tax on other things? 8 I think it's a question that you need to 9 examine. 10 There's so many myriad aspects to this, that 11 it's hard to give a blanket answer, but there's no 12 question about it, if you have more types of sales 13 subject to a sales and use tax, you have more 14 businesses involved in collecting the sales tax. 15 SENATOR MARCELLINO: Some have said that a 16 flat tax, you have to eliminate deductions that are 17 very popular right now. Charitable deductions, the 18 property-tax deductions, things like that. 19 I gather from your testimony, that you would 20 favor retaining some deductions in the system if we 21 go flatter? 22 E.J. McMAHON: It depends. 23 This would require further study -- I have 24 not done, like, a detailed, thorough study of the 25 alternatives. 1 Depending on, also, what your revenue target 2 is, and if you're willing to forgo, and how quickly 3 you're willing to forgo, the revenue you have raised 4 through your temporary tax increase. 5 But, I, certainly -- there's an argument to 6 be made from curtailing a lot of deductions, and how 7 that affects individuals depends on what you do with 8 other aspects of the tax code. 9 If you do enough of a reduction in the rate, 10 a lot of people could realize no net increase, even 11 a small net savings, from a tax code that eliminated 12 many of the deductions they might be eligible to 13 take. 14 In fact, one of the most revolutionary 15 changes of the 1995 tax cut, following up on the 16 earlier tax cut of 1987, and fulfilling it, and 17 going a little beyond it, was the expansion of the 18 standard deduction, which has resulted in a large -- 19 much larger number of New Yorkers taking the 20 standard -- finding it to their advantage to take 21 the standard deduction, and not even having to use 22 those itemized deduction. 23 At the moment, you're not allowing your 24 highest income taxpayers to claim most of their 25 itemized deductions in some categories, in any 1 event. 2 So, I think that you need to think about how 3 many items -- you know, those are some of the items 4 that you need to think about. 5 In other words: 6 How many people actually are itemizing now? 7 What deductions are they claiming? 8 And, how would they do if you completely 9 restructured the tax code? 10 For instance, if you could figure a way to 11 eliminate or phase out the so-called 12 "benefit recapture"; that is, the aspect of the tax 13 code that makes the code -- that makes the tax 14 rate -- the top rate a flat tax in several 15 categories. 16 In fact, as I should have responded to you 17 earlier, we have a flat tax for some people. 18 Everybody who earns over $150,000 pays a flat 19 tax; and people who earn over a million, starting 20 for individuals, pay another higher flat tax. 21 So you have -- you have, kind of, the worst 22 of all worlds: you have a graduated flat-tax rate 23 system, starting for certain people in certain 24 income levels. 25 You need to back away from that approach, in 1 general, I think, and if you had a true flat tax, 2 all the other things you could mix and match into 3 that could result in no net-tax increase for the 4 vast majorly of taxpayers. They wouldn't be so -- 5 they're wouldn't be, quote/unquote, losing something 6 even if the deduction was taken away. 7 SENATOR MARCELLINO: Thank you very much. 8 SENATOR DeFRANCISCO: I just have a few. 9 First of all, the thing I hear most, and have 10 heard most, since we indicated that we're going to 11 have these hearings, is, you know: We've been 12 cutting. We've been -- put up a -- we passed a tax 13 cap for property taxes. We can't afford to do any 14 more tax cuts. We just can't afford to do it. 15 What would your response be to that? 16 E.J. McMAHON: Well, first of all, the 17 problem, one reason you might -- some people might 18 feel you can't, quote/unquote, afford to do more tax 19 cuts, is that, actually, in the sense of what that 20 phrase "tax expenditures," you've already spent a 21 lot of money on targeted tax cuts. 22 You're committing over $400 million a year in 23 outright subsidies to the motion picture and 24 TV industry, including what you're paying, and let 25 me use that word advisedly, "paying" NBC to build a 1 studio for the "Tonight Show." 2 I mean, that's why -- that's one reason why 3 you don't have the money to, quote/unquote, afford 4 broad-based tax relief. 5 The problem now is, that you've got so many 6 targeted tax cuts soaking up so much capacity, in 7 terms of resources, that you may feel that, on the 8 margins, there's -- you can't, quote/unquote, afford 9 it, but I think you could afford more if you undid a 10 lot of the targeted tax credits you've enacted. 11 And, also, in addition to the exercising 12 spending restraint necessary to do broad -- and 13 devote yourself to broad-based tax cuts. 14 I think targeted tax cuts become an excuse 15 and a distraction from doing broad-based tax relief. 16 SENATOR DeFRANCISCO: And I remember that 17 same refrain during the Pataki Administration, when 18 the last major tax cut in 1995 that you were -- in 19 1995, or '7, that you were talking about -- I can't 20 remember which year -- but, somehow, the books still 21 balanced after the major cut in rates. 22 You just spend less, I guess, is part of the 23 answer. 24 The second part of the answer is, what you 25 just mentioned: You can't have the best -- you 1 can't have everything. 2 So, we've got to think of a methodology as to 3 how we can approach this subject as a true 4 broad-based tax cut. 5 And I want your thoughts on this methodology. 6 Should -- right now we're, according to the 7 Tax Foundation, we're, like, 50th, and most of the 8 problem is our tax structure, or a good part of it. 9 Let's suppose that we wanted to aim to be 10 midway. Obviously, we're not going to be competing 11 with Texas next year, with no income taxes. 12 But, say we wanted to go midway. 13 Would a methodology that makes sense, figure 14 out what the number is you need, look at all the 15 different categories, including deductions, like 16 Senator Marcellino talked about; look at whether 17 this "Main Street" tax comes in as a potential 18 source to fill that number; and, in addition, 19 credits, like you just referred to, that you 20 can't -- and, presumably, if you have a fairer tax 21 structure, everybody benefits rather than the 22 favored few? 23 So is the methodology of finding the 24 number -- does it make sense to find the number that 25 you want to reach, and figure out how you arrive at 1 that number? 2 Or do you have a better methodology? 3 E.J. McMAHON: Well, in general, if you 4 wanted to even move halfway toward the national norm 5 for combined state and local taxes, you would have 6 to reduce taxes by billions of dollars. 7 I don't know the exact figure right now. 8 I think at one point I calculated it. It was 9 three or four billion dollars a few years ago. 10 Some big strides were made in that direction 11 in the mid-1990s, and then we retreated partway 12 from some of those strides. 13 I think that it's a combination of things. 14 I do think that there needs to be -- using 15 the old cliche, that the journey begins with a 16 single step, or at least a few steps, there needs to 17 be a commitment to broad-based tax relief, and to 18 doing it every year; to setting aside a certain 19 amount of money in your financial plan, every year, 20 for broad-based tax relief, and only for broad-based 21 tax relief, and to start doing it. 22 And, again, for example: When you structure 23 a temporary higher tax rate, so that it stays fully 24 in effect up to midnight on December 31st of a given 25 year, that is almost -- there's almost a 1 self-fulfilling prophecy built into that. 2 You're going to find it very difficult to 3 just yank away a $2 billion tax cut all at once, 4 once you've spent up to that amount. 5 And that -- there is a weaning process that 6 needs to occur here; weaning yourself off that 7 revenue and rededicating that revenue, in a 8 multi-year sense, to tax relief. 9 So, I think the goal of looking at the 10 financial plan, and through a combination of 11 reclaiming revenue dedicated to targeted tax 12 credits, as you mentioned, the reclamation project, 13 and, also, of suppressing spending, to the extent 14 necessary, to dedicate a few hundred million dollars 15 a year. 16 I suggested in -- at one point, it's a 17 half -- at least $500 million a year. 18 Two-fifty to five hundred, just to start 19 with, to phasing out, or a move toward broad-based 20 tax cuts, would be a start. 21 Just phasing out the higher income tax rate, 22 basically, would require at least $500 million a 23 year to accomplish. 24 And, I think you need to do that; you need to 25 start moving in that direction, and continue moving 1 in that direction, and to complete. 2 When you were talking about the '95 tax cut, 3 I was involved in that. And that was, literally, 4 one of those things about which they said it 5 couldn't be done. 6 "Couldn't be done, it was preposterous. How 7 can you propose a tax cut like that?" 8 Well, it was done. 9 In fact, it was, quote/unquote, paid for by 10 spending restraint at that time, because, while the 11 economy ended up booming nationally, in the state 12 level, that was by no means -- it was by no means 13 clear that that was going to occur. 14 In fact, we weren't out of the woods well 15 into the second year, when there were calls to 16 repeal the tax cut. 17 So, that, I think shows the way. 18 That was a $4 1/2 billion tax cut. 19 And I think it shows how these things are 20 possible, if, once you've built it into the 21 financial plan, it's part of what you have to do and 22 what you have to deal with. 23 SENATOR DeFRANCISCO: Thank you very much. 24 SENATOR KRUEGER: A follow-up question? 25 SENATOR DeFRANCISCO: A follow-up question by 1 Senator Krueger. 2 SENATOR KRUEGER: Thank you. 3 You were talking about the history in the 4 '90s, with the changes in tax policy, and you were 5 also highlighting the tax expenditures that we 6 distributed in the state. 7 And so I want to just say on the record: 8 It's $7 billion a year in business tax expenditures 9 and deductions. 10 Did we have anywhere near that level in the 11 '90s? 12 E.J. McMAHON: I don't know what the level 13 was exactly in the '90s. We've certainly done a 14 lot since then. 15 I can think, offhand, of a half billion that 16 we did. It's a lot. 17 Some of that is -- a lot of that are tax 18 credits that were enacted before the '90s, though. 19 However, also, investment tax credits, for 20 instance, date back to the late '70s, 21 early '80s. 22 SENATOR KRUEGER: And they've just grown at 23 enormous rates. 24 E.J. McMAHON: Right. 25 I mean -- but the point is, if you simply 1 reclaim, however they're valued -- 7 billion, 2 5 billion, 4 billion -- however much you value -- 3 however you attach a value to the so-called 4 "tax expenditures," if you simply take that money 5 and plow it back into the budget and spend it, and 6 do nothing with broad-based rates, you're not 7 accomplishing anything, other than making us even 8 less competitive. 9 And if you were to, for instance, given all 10 of the business taxes we raise, if you took 11 $7 billion on -- and on a revenue-neutral basis, 12 said, We're going to, you know, cut state 13 business -- all state business taxes by $7 billion, 14 you would have a significant tax cut, obviously, on 15 the rate side. 16 And at least thinking in that direction, and 17 then beginning to think about the implications of 18 some of the things involved in doing away with all 19 tax credits and exceptions, is at least a 20 conversation that you ought to be having. 21 And I think the thing that needs to stop, is 22 that we've come down a road now, where every 23 discussion of tax policy and of the -- and of, 24 quote/unquote, tax cuts focuses solely on targeted 25 tax cuts. 1 How can we give a break to this group of 2 people that we want to give a break to, or this 3 group of businesses? 4 We've ceased having any discussion of 5 broad-based tax policy in Albany. 6 There's a lot of reasons to that. There's no 7 need to finger-point, but I think nobody will deny 8 that that's the case. 9 And it would be good to take stock, and stand 10 back, and start going in the opposite direction. 11 SENATOR KRUEGER: And what I was trying to 12 get the answer, and you gave it to me, was, that, 13 yes, we could do an enormous amount in impacting 14 broad-based tax policy, equity, and also decrease 15 many burdens on businesses, if we dealt with 16 $7 billion, I hear you, not simply taking it out of 17 the tax code and spending it -- 18 E.J. McMAHON: Right. 19 SENATOR KRUEGER: -- but taking it out of the 20 tax code as is, and moving forward with a 21 broad-based -- a broader-based, equitable, even tax 22 model, we could turn around tax policy in the state? 23 E.J. McMAHON: Well, for example: There is 24 talk now, and that one interesting idea that's been 25 talked about is, taking steps. 1 There's a -- now we're in the middle of 2 phasing down and reducing the rate on manufacturers. 3 You can argue both sides of that in terms of 4 tax policy, but it's -- there's a -- a strong case 5 could be made for it on some grounds. 6 One thing to point out is, there's a lot of 7 tax credits and tax exemptions available to 8 manufacturers. 9 The beauty of eliminating the corporate tax 10 on manufacturers, is that you also eliminate all the 11 tax credits and exceptions, because who needs to 12 reduce their tax bill with an ITC if they're not 13 paying taxes on their net income to begin with? 14 So, that is something worth considering. 15 SENATOR KRUEGER: Thank you. 16 SENATOR DeFRANCISCO: Thank you, very much. 17 We really appreciate it. 18 The next speaker is, Joe Henchman, 19 vice president of legal and state projects for the 20 Tax Foundation. 21 Thank you for appearing. 22 JOE HENCHMAN: Good morning. 23 Thank you, Senators. 24 Thank you for the opportunity to speak to you 25 today. 1 I believe you've been provided with my full 2 statement, which goes through 20 states, on what 3 they've done this year. 4 I'm not going to do that here for you, but, 5 certainly, if you have questions about any of them, 6 we can go into it, but, I just want to hit some of 7 the highlights and the broader themes of what we see 8 going on out in the states. 9 For those of you not familiar with the 10 Tax Foundation, we're a 76-year-old non-profit 11 organization based in Washington, D.C., and our 12 purpose is to educate Americans about tax policies. 13 So, we put out a number of different studies 14 and reports and rankings on all matters of state tax 15 issues throughout the year. 16 So, we have reports on many of the subjects 17 that's already been raised so far this morning: 18 local sales tax, local income tax, the Internet 19 sales-tax issue in Washington D.C. 20 And on any of that stuff, I'm happy to answer 21 any questions, or provide you with supplementary 22 materials, now or in the future. 23 And, of course, all of it's on our website, 24 available for free, for download, at 25 taxfoundation.org. 1 One of the reports we put out every year is 2 our "State Business Tax Climate Index," which 3 Senator DeFrancisco referenced in his opening 4 statement. 5 This is a look at 112 different aspects of 6 state tax policy, evaluating them for whether they 7 comport with the principles of good tax policy; that 8 is, the idea that taxes should be simple, neutral, 9 transparent, and stable. 10 And as was mentioned, New York is 50th out of 11 the 50 states on that "State Business Tax Climate 12 Index." 13 So there's -- you know, although it's 14 disheartening to convey this news, it's also a -- 15 represents a blueprint or a road map for 16 possibilities, because every item on the list where 17 New York scores more poorly than its regional 18 competitors, and competitors across the nation, it's 19 also an opportunity for the State to look at. 20 And so, I believe, Senator Marcellino, you 21 had a question of, you know, "What would it take for 22 New York to get from 50th to the middle of the 23 pack?" for instance. 24 And, you know, we're happy to have that 25 discussion, and provide ideas and suggestions. 1 I would also pause it, that it may not be 2 necessary for New York to be 50th -- to be middle of 3 the pack, because states compete about all number of 4 things, taxes just being one of those. 5 And, you know, I'm from the Tax Foundation, 6 but I freely concede that there are other things 7 that matter for individuals and entrepreneurs when 8 they make business- and individual-location 9 decisions, and investment decisions. 10 New York has all number of strengths compared 11 to its other states, so, although the tax system is 12 a weakness, and in some cases, an albatross, it's -- 13 there's still a lot of people doing business here, 14 and still a lot of people living here, because, for 15 many of them, the virtues of being in New York 16 outweigh those limitations and those restrictions. 17 So, it's finding that right balance for what 18 works for New York. 19 If you had Texas's tax code, I don't think 20 New York could be stopped, but you don't need to 21 have Texas's tax code to be a successful state. 22 So with that said, let's talk about some of 23 the issues going on across the country, and some of 24 the reforms done so far this year. 25 I want to highlight three states in 1 particular: Nebraska, North Carolina, and Michigan. 2 And then, as I said, in your folders, and in 3 my testimony, I go through about another dozen and a 4 half states. And if you want to highlight any of 5 those, in questions, I can certainly do that. 6 Starting with Nebraska: 7 Nebraska has done what I would term an 8 "incremental approach." 9 And every year, over the past five or 10 six years or so, they've honed in on what they've 11 considered one of the weakest, more esoteric aspects 12 of their tax system, and fixed it. 13 And, they've now done this every year, for 14 several years; and, so, at this point, the 15 ten weakest aspects of their tax system, they fixed. 16 So, for instance, they've not allowed net 17 operating loss carry-forwards, which is one of these 18 esoteric subjects that make a lot of people's eyes 19 glaze over when you talk about it, but, it was a 20 significant limitation on business activity and 21 business investment. 22 So just to speak very briefly on it, of 23 course, we collect taxes on a calendar-year basis, 24 and this isn't any rocket science involved in it. 25 It's just a matter of convenience, so people can 1 know, when the tax year starts, and when the tax 2 year ends, and we just go based on that. 3 But, of course, business activity and, in 4 many cases, individual income, don't always comport 5 to the tax year. Some businesses have good years 6 and bad years. In some years they pay a lot of tax, 7 and some years they don't pay any tax at all, 8 because they didn't earn any profits. 9 Net operating losses helps smooth that out, 10 and make sure that you're not overly penalized in 11 the good years right after you've had bad years, and 12 so forth. 13 Nebraska didn't recognize that, and now they 14 do, and that's a great strength for their tax 15 system. 16 And I can give you -- you know, I can go 17 through all of the other different things that 18 Nebraska did over the past several years, but, it 19 was a very effective incremental approach that's 20 been noticed by a lot of the business community. 21 Nebraska is a small state, less than 22 2 million people. They've got five Fortune 500 23 companies located there. They've got big 24 investment. The unemployment rate is probably the 25 most jealous of the country -- in the country, for 1 unemployment rates. 2 And it's -- their big weakness is a cultural 3 bias against living and working in the midwest, in 4 Omaha. People certainly don't think of Omaha the 5 way they think of New York City, but, that's what 6 they're struggling against, and having a better tax 7 system is helping them overcome that. 8 They're not resting on their laurels either. 9 Earlier this year, the governor proposed a 10 very ambitious tax reform, looking at taking out 11 some of the deductions in the sales tax, and using 12 that revenue to lower individual and corporate 13 income-tax rates. 14 It wasn't structured ideally, so the plan 15 didn't go far in the legislature, but what the 16 legislature did do, is set up a new commission that 17 will be looking at what they can implement, and some 18 more well-thought-out solutions for tax reform. 19 And we're preparing a book, similar to the 20 book with did in North Carolina, which I'll 21 reference shortly, which will be helpful -- help 22 advise legislators on options they can take to 23 improve their tax system. 24 Skipping North Carolina for a minute, I just 25 want to speak about Michigan. 1 Michigan is -- I bring up Michigan, because 2 their economic-development policies in the past have 3 been very similar to what New York is pursuing in 4 economic development today; that is, the idea, if 5 you have a very high tax system, you have a very 6 burdensome tax system, you have a very problematic 7 regulatory environment. 8 And, in order to help businesses get around 9 to that, you offer a lot of targeted credits, and a 10 lot of specific, either by geographic or by industry 11 type, favorable treatment, to encourage a particular 12 industry to grow. 13 And that's what Michigan did for many years, 14 and it led to a decaying state, because, if you 15 weren't one of those favored, politically connected 16 industries or individuals, you were stuck paying 17 very high tax rates. 18 And I sometimes give the example, I live in 19 Washington, D.C., and just north of us is Baltimore, 20 which has a very nice neighborhood called the 21 "Inner Harbor." 22 I don't know whether any of you have ever 23 been there, a lot of good restaurants and aquariums, 24 and so forth. 25 What the Inner Harbor is, is this tax policy 1 in action. 2 The Inner Harbor is very nice, and part of 3 the reason it's very nice, is because nobody there 4 pays any property taxes. Property tax is completely 5 waived for everybody in the Inner Harbor. 6 And the rest of Baltimore, you pay 3 percent, 7 which, as far as property tax goes, is a very high 8 property tax. 9 So what you've seen is, the rest of Baltimore 10 decay, and developments on the Inner Harbor and the 11 neighborhoods surrounding it really start to grow. 12 And, you know, people focus on the 13 Inner Harbor, and how great and how fun and how nice 14 it is, but they don't see the cost happening 15 elsewhere. 16 And that's what you see with this kind of 17 distorted tax policy. 18 Michigan is that happening on a statewide 19 level, at least until the current governor and the 20 current legislature took office, and they resolved 21 to stop a lot of that. 22 And it was more of a meat-clever approach 23 than the scalpel that Nebraska took. 24 Michigan used to be one of the New York's 25 chief competitors for film tax credits, for 1 instance. 2 Michigan ended its program. 3 And while they're not getting as many film 4 productions as they used to, they also have hundreds 5 of millions of dollars that used to be paid out to 6 these transient out-of-state industries that weren't 7 creating a lot of jobs or economic activity, and, 8 instead, used that for either tax reductions or for 9 other public priorities, which I think everybody in 10 Michigan is now of the view that that's a better 11 approach. 12 They also had a lot of scandal and missed 13 allocation in the film office, which is something 14 we've seen in other states with extensive 15 film-tax-credits programs. 16 So, it was kind of a long overdue move. 17 And they did that, not just for film credits, 18 but for a lot of their economic-development 19 incentives across the board. 20 Michigan also had a very destructive type of 21 business tax known as a "gross-receipts tax." They 22 modified it a couple of ways. 23 It's, kind of, the worst aspects of a 24 gross-receipts tax, coupled with the worst aspects 25 of a corporate income tax, together, and then you 1 had to calculate it a whole bunch of different 2 number ways in order -- and then pay it. 3 Every economic researcher, left or right, 4 views gross-receipts taxes destructive to the 5 economy. 6 And we've got a lot of papers on this. 7 I sometimes describe it as "the tax that 8 brought down the Spanish Empire," because it did. 9 It's -- and it was doing a lot of damage to 10 the state of Michigan, and to its economy, and to 11 its future. 12 And, again, to the credit of the current 13 governor and the current legislature, they got rid 14 of it, and they replaced it with a good 15 old-fashioned corporate income tax, like the kind 16 that most states have, which raises about the same 17 amount of money, but does it in an incredibly less 18 economically costing manner. 19 And that's really what it comes down to, 20 because, I mean, we -- the two main reports that we 21 put out, are the "State and Local Tax Burden's 22 Report" and the "State Business Tax Climate Index," 23 of which New York has the enviable position of being 24 worst on both. 25 The burdens is the "how much?" question. 1 How much are you raising, how much are you 2 collecting, and how much are your residents paying 3 in state and local taxes? 4 So, for instance, New Yorkers are paying, if 5 you just divide it out of, the total payments, 6 divided by people, $6,375 per capita in state and 7 local taxes. 8 And that's the third highest in the country. 9 As a percent of income, it's the first 10 highest in the country, at 12.8 percent, and that's 11 a lot of payment. That's a lot of money. 12 And that's just one aspect of it. 13 The other aspect of it is how you raise it. 14 Because you can raise that money in a way 15 that is intended to minimize the economic cost, 16 minimize the distortions, minimize the harm that it 17 does to growth and to economic opportunity; or, you 18 can do it in a way that really damages the economy. 19 And, the Organization for Economic 20 Cooperation and Development in Europe, which is a 21 multi-national entity, kind of a think-tank, but 22 government-sponsored in -- and it's based in Paris, 23 they've surveyed the economic research, and kind of 24 given a thumbnail sketch. 25 In terms of destructiveness to economic 1 growth, it goes: gross-receipts taxes, corporate 2 income taxes, individual income taxes, sales taxes, 3 and property taxes. 4 And even scholars on the left, if you really 5 hold them down, they'll admit, that, yes, corporate 6 income taxes and individual income taxes, they do 7 more harm for economic growth -- long-term economic 8 growth, broadly speaking, than sales taxes and 9 property taxes. 10 Now, sometimes they'll say, that, you know, 11 it's maybe the wrong kind of economic growth. 12 And, certainly, questions of fairness and 13 distribution are important to continue to consider 14 in these questions, but, that said, there is a trade 15 off there, between complexity of your tax system, 16 and the distortions it causes in the economy, and 17 bad structures, and, economic growth and 18 opportunity. 19 North Carolina did maybe the -- what I would 20 call the "Go-Big approach"; and that was driven, in 21 part, by significant changes in their legislative 22 makeup. 23 The Republican Party in North Carolina gained 24 the governorship and both houses of the legislature 25 for the first time since Reconstruction. 1 So, they had a big long list of things that 2 they wanted to do, and one of them was tax reform. 3 And like many tax bills, like many pieces of 4 legislation, it changed quite a bit over the 5 legislative process. It got better, and then it got 6 worse, and then it got great, and then it got 7 terrible, and then what they passed, ultimately, was 8 not so bad. 9 So, just to give you a thumbnail sketch of 10 it: 11 The -- prior to the reform, Nebraska had a 12 number of different tax rates. 13 The top one was 7.75 percent on income over 14 $60,000, which was the highest in the region, and, 15 actually, fairly high nationally; 16 They had a corporate tax rate in excess of, 17 I think it was like 6.9 percent. Very high sales 18 tax; 19 And heavy dependence on incentives. They 20 offered a lot of incentives to try to get the tech 21 industry there, to try to get banking there, but 22 were running into a lot of problems of retaining 23 talent, because of the high income taxes. Running 24 into problems of growing beyond those sectors, 25 because of the high tax rates. 1 And, so, they looked to resolve all of that, 2 and -- instead, and do their best to clear out a lot 3 of the credits and deductions, and use that to pay 4 down lower rates -- pay down the rates. 5 So their top individual tax rate is coming 6 down. Their top corporate tax rate is going to come 7 down. 8 And if -- they have a trigger, so if revenue 9 exceeds the estimates that they have, then the 10 corporate rate drops even further. 11 And that's been an approach that I think 12 Nebraska is considering doing too, just because it's 13 kind of one of these new innovative things. 14 Sometimes they say there's nothing new in tax 15 policy, but, I'm usually proven wrong on that every 16 year. 17 They're also studying, looking at reforming 18 their franchise tax and sales tax. 19 And this is maybe a good place to transition 20 into the overall trends that we're seeing at the 21 state level, one of which being sales-tax reform. 22 Sales taxes, for the most part, came about as 23 an emergency measure in the Great Depression. 24 And so there -- most states, essentially, 25 model their sales tax off of Mississippi, which was 1 the first state to adopt a sales tax. 2 And sales tax is, for the most part, tax-only 3 goods, because that's what our economy was in the 4 1930s. 70 percent of our economy at the time was 5 the sale of goods. Sale of services was very 6 modest. 7 Today, that's flipped. 8 We're increasingly a -- we're certainly a 9 service-based economy now, and increasingly becoming 10 an almost-exclusively serviced economy. 11 Services now make up about 70 percent of 12 consumption in the United States. Goods, less than 13 30 percent. 14 But, our sales taxes, for the most part, have 15 not kept up. 16 So, as late as the 1970s, sales taxes applied 17 to 60 or 70 percent of what people bought and sold. 18 Today it's less; today it's about a third. 19 And in New York, it's less than 30 percent. 20 So, of everything that New Yorkers buy and 21 sell, and, of course, the visitors, like me, to 22 New York, buy and sell -- and I'm doing my best to 23 buy what I can on my brief visit here -- they -- 24 only 30 percent of it, less than that, is subject to 25 the sales tax, which means that which you do tax, to 1 raise same amount of revenue, has to be three times 2 as high. 3 And, you know, it's not that hard to go into 4 a list of some of these things. It's not all, you 5 know, sweetheart deals negotiated by powerful 6 plutocrats. It's things like groceries, and things 7 like clothing, which we all view as necessities, and 8 we all view as important, that everybody be able to 9 buy, but, they also make up a huge percentage of 10 what people buy and sell. 11 And it's also one of the more stable items of 12 what people buy and sell. 13 So when you take that out of the sales-tax 14 base, it means the rate on everything else that you 15 do tax has to go up, and it also means your sales 16 tax is that much less volatile. 17 Now, as that example suggests, reforming your 18 sales tax, although, you can probably get most 19 public-finance scholars to -- you know, if you got 20 five public-finance scholars of all across the 21 political spectrum, and you said, "Design me a sales 22 tax," what they're gonna come up with is pretty 23 similar: You tax all final sales of goods and 24 services, once, and only once, and you don't tax any 25 business inputs. 1 Not because businesses are special treatment, 2 but because, when you tax business inputs, that 3 means you're double taxing and triple taxing and 4 quadruple taxing some items, based on how frequently 5 they go through the production chain. 6 But, it's a political problem, because, 7 people like having no tax on groceries, people like 8 having no tax on sales of their home, people like 9 having no tax on the sale of clothing. 10 And I could run down the list of all 11 politically powerful, and all majoritarian views, 12 but, the sum total of it means that you're 13 collecting a third as much in sales-tax revenue than 14 you would be if you had a properly structured sales 15 tax base; revenue that could be used for public 16 priorities, or, for reducing taxes in other areas, 17 such as income tax or corporate income tax. 18 [Unintelligible] the corporate income tax, 19 I will -- I have started making the prediction that 20 this is a tax on the way to extinction. 21 SENATOR KRUEGER: Sir, you can repeat that? 22 JOE HENCHMAN: "The corporate income tax is a 23 tax on the way to extinction," and let me give you a 24 couple of reasons why I think that is. 25 One, a lot of states have moved -- back in 1 the day, in order to -- you have the problem of 2 multi-state businesses, where a company is doing 3 business all over the country. 4 And, so, when they have their aggregate 5 profit for the year, how do you divvy that up 6 amongst the states to -- subject to corporate income 7 tax? 8 And back in the 1950s and 1960s, all the 9 states agreed on a standard formula to use to divvy 10 up that income so that everybody got their share. 11 Now we don't have that, you know, formula. 12 Iowa was the first to break off from the 13 pack, and as soon as they did, now everybody else 14 wants to, kind of a prisoner's-dilemma thing. 15 And, so, every state is moving towards 16 double-weighting their sales factor, exclusively 17 weighting their sales factor, on their corporate 18 income tax, as every state's trying to grab more 19 than their fair share. 20 Well, we'll soon get to the point where 21 everybody -- every state has adopted this, so every 22 state has grabbed more than their fair share, and 23 then we're just back to where we started, except, 24 businesses -- homegrown businesses that employ a lot 25 of people, that sell a lot of things, but do it 1 outside the state, are, essentially, not paying 2 corporate income tax within the state anymore. 3 And so the net result will be, every state 4 will be back to uniform, but collecting a lot less 5 in corporate income tax because they've adopted 6 single-sales factor. 7 And, so, you'll still have the tax, and 8 everybody will still be going through all of the 9 rigmarole of calculating it and estimating it, but 10 states won't be getting that much. 11 You also have the rise of non-C business 12 forms, so states have allowed businesses to set up 13 as S corps or as LLCs or as partnerships, businesses 14 that, in the past, would have been C corporations, 15 but, today, are in these alternate business forms, 16 where they get the benefit of perpetual life and 17 limited liability, and being able to sue and be sued 18 as an entity, but without having to pay corporate 19 income tax. 20 Now, mind you these, businesses are still 21 paying tax. They're paying it under the individual 22 code rather than the corporate code, but, that also 23 means that the corporate code looks a lot less 24 successful than it did in the past. It's raising 25 less revenue under that. 1 And then, finally, there's also incentives. 2 The corporate code is usually the place where 3 businesses are handing out incentives, and that 4 does -- that reduces the take from that tax that 5 states -- states are doing that. 6 So, for instance, we just ran the number for 7 Nebraska, and for every dollar they're collecting in 8 corporate income tax, they're giving somewhere 9 between 40 and 70 cents away in incentives. 10 And, you kind of reach the point of, why even 11 bother with this tax anymore if that's what you're 12 doing with it? 13 And so the approach that I think most 14 public-finance scholars would recommend is, move 15 away from that, by industry, by business approach, 16 and aim for creating a business climate favorable 17 for all that all can take on even terms. 18 And that, I think, has been some of the 19 trends we've been seeing in some of the more 20 successful reforms so far this year, especially on 21 the individual income-tax and corporate income-tax 22 side. 23 North Carolina's reform on the individual 24 income tax, although it lowered rates across the 25 board, it also took away a lot of the deductions, 1 and some of these were very controversial. People 2 like their home mortgage-interest deduction, because 3 they think they benefit from it more than they 4 actually do, which, you know, it's hard to convince 5 with a table of information about, Well, actually, 6 you only get, like, a -- you know, a $500 tax break 7 off of this deduction, and you'd get way more from 8 the individual income-tax cut. 9 SENATOR DeFRANCISCO: Excuse me. 10 Could you leave some time for questions? 11 JOE HENCHMAN: Certainly. I apologize. 12 SENATOR DeFRANCISCO: Okay, but, if there's 13 some -- I don't want you to -- cut you off at a 14 specific point, but if you're at close to that 15 point, keep the questions in mind. Okay? 16 JOE HENCHMAN: Certainly. 17 SENATOR DeFRANCISCO: Thanks. 18 JOE HENCHMAN: Thank you, Senator. 19 I apologize for that. 20 And, North Carolina, it was certainly 21 politically difficult to take that away in 22 North Carolina, but legislators and the general 23 public were convinced that they would be better off 24 under the reform system, with reduced rates across 25 the board, even if it meant giving up some of the 1 deductions. 2 And that's kind of the overarching themes of 3 tax reform that we've seen elsewhere. 4 So with that, Senator, thank you. 5 SENATOR DeFRANCISCO: Senator Valesky. 6 SENATOR VALESKY: Thank you, Mr. Chairman. 7 Thank you, Mr. Henchman, for being here. 8 You've certainly provided a great deal of 9 information that you didn't even touch on, and we 10 appreciate that; and, so, I think it's always 11 instructive and helpful to look at what other states 12 are doing; and, certainly, tax policy is no 13 different. 14 I just want to ask, just one question, and 15 it's similar, if not the same question that 16 Senator DeFrancisco asked of E.J. McMahon, although, 17 from a different perspective. 18 Your tax fact and comparison sheet, which 19 you've published, I think, for a number of years, 20 50th state in terms of state business-tax climate, 21 first in terms of state and local tax burdens. 22 The third item, "Tax Freedom Day," May 6th 23 here in New York State, New York taxpayers worked 24 126 days into the year, until May 6th, to pay their 25 total tax bill. 1 Incidentally, this is always on the news at 2 tax time. It's something I think that New Yorkers, 3 they're easy to understand that they've paid their 4 local, state, and federal burden, and for the rest 5 of the year, they're earning their income and salary 6 for themselves. 7 So my question is, you indicated that it is 8 18 days after National Tax Freedom Day, April 18th. 9 So, similar to Senator DeFrancisco's 10 question, from the 50th burden, to somewhere in the 11 middle of the pack, what would it take -- and you 12 may not have this, but if you could get it to us, 13 what would it take, in terms of a cost or economic 14 or fiscal impact, to move New York State, and 15 May 6th, to the National Tax Freedom Day of 16 April 18th? 17 What are we talking about? 18 JOE HENCHMAN: Sure. 19 So as you mentioned, "Tax Freedom Day" is the 20 combination of your federal tax burden, and what 21 New Yorkers are paying in federal income tax and all 22 other federal taxes, as well as the state and local 23 tax burden. 24 So, state and local tax burden, New York's 25 the highest in the country. I've already given you 1 the numbers on that, so, is kind of -- you know, 2 you're highest in the country on that, so, it 3 depends on where you want to be, and, you know, we 4 can work out the number on how far down you want to 5 go on that. 6 With respect to the federal income tax, 7 that's primarily a feature of the high incomes that 8 New Yorkers earn. 9 Our federal income tax is highly progressive. 10 It -- it's -- a lot of it is paid by very 11 high-income people, so when a state has a lot of 12 high-income people, it's paying a lot in federal 13 income tax. 14 And, so, that's a feature we see of a lot of 15 the northeastern states, higher incomes than 16 average, that they're paying a lot of income tax. 17 And, you know, I don't think this is news to 18 New Yorkers. I mean, it's -- New Yorker -- New York 19 is a -- what some call a "donor state." It's 20 sending more money to Washington than it's getting 21 back. 22 And that's not because the New York 23 delegation isn't getting enough pork for New York; 24 it's because New Yorkers have high incomes and we 25 have a progressive income tax at the federal level. 1 SENATOR DeFRANCISCO: Can you actually 2 compute what fiscal amount we would need to find 3 either tax credits or additional revenue, or 4 whatever, to get to the -- like David asked for, the 5 average date? 6 JOE HENCHMAN: For Federal, I don't have that 7 at my fingertips, but I can certainly provide that. 8 For the state level, as I mentioned, 9 New Yorkers paying 6,375 per capita. 10 The U.S. average is 4,112. 11 So, the difference between those numbers, 12 times the population, would bring you to average on 13 that. 14 SENATOR DeFRANCISCO: Okay, thank you. 15 Anyone else? 16 Senator Marchione. 17 SENATOR MACHIONE: Mr. Henchman, thank you 18 for being here. 19 JOE HENCHMAN: Sure. 20 SENATOR MARCHIONE: You provided a great deal 21 of information to all of us. 22 But, I listened to your, you know, statement 23 on how some states take incremental changes, and -- 24 to make their state better. 25 JOE HENCHMAN: Yes. 1 SENATOR MACHIONE: Do you have suggestions on 2 what would be New York State's incremental? 3 If we looked at, incrementally, trying to get 4 better, where would you focus on? 5 JOE HENCHMAN: That is a great question. 6 And, if that's something the Committee would 7 be interested in, we can certainly put together some 8 options. 9 We -- in the "State Business Tax Climate 10 Index," of which New York is 50th, again, that's the 11 evaluation of state tax structure, as I mentioned, 12 there's 112 different variables. And this would 13 involve us, kind of, going through each one and 14 seeing what New York could improve. 15 We broadly categorized them by the type of 16 tax, so, New York has scores on the corporate income 17 tax, the individual income tax, the sales tax, the 18 unemployment-insurance tax, and property tax. 19 And, New York is 50th on individual income 20 tax; 21 45th on unemployment-insurance tax; 22 And 45th on property tax; 23 And then, corporate income tax, 23rd, so, 24 maybe one of the better ones; 25 And, then, 38th on the sales tax. 1 So, my suggestion would be, since you're 2 bottom five, bottom six, on the individual income 3 tax, unemployment tax, property tax, those might be 4 key areas to focus on. 5 And we can certainly provide more specifics 6 if that's something the Committee is interested in. 7 And then, sales tax, not too far behind. 8 SENATOR MACHIONE: Thank you. 9 SENATOR DeFRANCISCO: Senator Krueger. 10 SENATOR KRUEGER: Thank you very much. 11 So just to repeat in, I guess, layman's terms 12 for me, as I heard you testify: 13 Based on the research you've done around the 14 country, the targeted tax versus across-the-board, 15 sort of, more fair, equitable tax policies, you're 16 finding are not working in other states, and 17 New York is also suffering from falling heavily into 18 that category? 19 JOE HENCHMAN: That would be my contention. 20 I'm certainly -- you can certainly find 21 people that disagree with that; certainly, at least 22 the beneficiaries of those industries. 23 So, you know, if I was a representative of a 24 film company that's the recipient of the New York 25 program, I'd probably say it was a success, and a 1 stellar success, and that you should continue it, 2 and expand it, and increase the credit amounts, and 3 everything. 4 But I think, on the whole, looking at both 5 the seen benefits as well as the unseen costs, that 6 this is not an effective manner for economic 7 development and long-term economic growth. 8 And, you know, I don't want to belabor the 9 point of some of the states out there, but, you 10 know, some of Plain states that people think very 11 lowly of, like South Dakota or Wyoming, or even 12 Texas, you know, Who would want to live there? Who 13 would want to work there? the gains that these 14 states have made in employment and in economic 15 growth over the past ten years have been 16 considerable, and haven't yet really been documented 17 and evaluated beyond just the statistics and the 18 numbers. 19 And even a state like -- well, I'll just 20 leave it right there. 21 SENATOR KRUEGER: And I appreciate that 22 you -- you said this up front, because you are the 23 Tax Foundation, and I read your materials, and you 24 pointed out that you measure, you know, the business 25 climate based on the tax numbers. 1 JOE HENCHMAN: Yes. 2 SENATOR KRUEGER: But we know that taxes 3 aren't the only determination, either in business 4 success or business -- or reasons for businesses to 5 be there or grow. 6 I mean, I know that many of the states who 7 fall much lower on your tax numbers, would, 8 literally, kill to have the business activity that 9 we have here in New York. 10 So, knowing that, do you have an ability to, 11 I don't know, estimate, of all the different 12 determinations that impact businesses, coming 13 somewhere, staying somewhere, growing, how big a 14 determination is marginal tax rates? 15 JOE HENCHMAN: It's a very good question. 16 And there is kind of anecdotal evidence, and 17 there is academic evidence, and then there's 18 statistical evidence, which is kind of uncertain as 19 to correlation and causation. 20 But, your point is certainly a very important 21 one. 22 So, you know, for instance, what would it 23 take to -- how bad would have it to get for the 24 New York Stock Exchange to move out of New York? 25 It would have to, probably, get pretty bad. 1 But, that -- for the -- not New York, but the 2 Chicago Mercantile Exchange, it -- they did reach 3 that point, with Illinois's recent tax increases. 4 They were looking on moving out of the state, until 5 Illinois came through with a targeted incentive 6 package to keep them in the state, but -- just to 7 avoid the negative publicity of the 8 Chicago Mercantile Exchange leaving Illinois. 9 But that is to say, that taxes do affect 10 things. 11 Incentives matter and taxes matter; precisely 12 to what extent I think is where the debate occurs. 13 There's very few people who say that, you 14 know, you can -- it doesn't matter, New York could 15 have a 50 percent income tax, and you'll still have 16 all of the same business activity you have here. 17 And then there's also some people who say, 18 you know, if you raise the tax by one dollar, 19 everyone's going to leave. 20 And the real truth is somewhere in the 21 middle. 22 We've put out a survey piece looking at all 23 of the academic research on the question of taxes -- 24 the relationship between taxes and economic growth, 25 some 30 studies, "the study of studies," so to 1 speak. And there's significant evidence in there 2 that marginal tax rates, particularly on the 3 corporate and individual income tax, have a strong 4 effect on economic decisions, and on economic 5 growth. 6 And, indeed, even the Center on Budget and 7 Policy Priorities, which is a -- left on the 8 political spectrum, they conceded that the debates 9 at least mixed; that there's valid research on both 10 sides arguing the point. 11 So, I think that it's pretty strong evidence 12 that there is a relationship. 13 Part of it's a limitation of data. 14 So, for instance, if you were to move from 15 one city to another, or one state to another, and 16 somebody asked you, "Did you do it for tax reasons?" 17 well, maybe you did it because you had a better job 18 opportunity; or maybe you did it because of the cost 19 of living; or maybe you did it because of housing 20 prices. 21 And all of those things are not taxes, but 22 they can be influenced by taxes, and maybe directly 23 influenced by taxes. 24 So, it's a bit difficult to answer the 25 question with any certainty. 1 And that's -- I enjoy engaging in the debate 2 and in the discussion. 3 I think there's strong -- as I said, strong 4 evidence that the taxes do affect economic behavior. 5 Precisely at what point, I think, varies by 6 person, and by company. 7 SENATOR KRUEGER: Changing question: I'm of 8 the belief that we in the state underfund our 9 localities: our towns, our cities, our counties. 10 And, they tell us that all the time, and they 11 seem to be struggling very badly; although, there 12 are other cities around the country who also face 13 these problems. 14 In New York, the only tax they control for 15 themselves is the property tax. 16 Every other tax there is, through approval of 17 us, or moves to us, and then whether we send it back 18 to them, is a separate question. 19 Have you looked, from your state-to-state 20 surveys, on other states' models, of helping to make 21 sure that their -- that their tax policies aren't 22 strangling their localities? 23 And what are the successful models? 24 JOE HENCHMAN: Sure. 25 Well, we've put out studies on, not just 1 property taxes, but also local income taxes and 2 local sales taxes. 3 And, somewhat counterintuitively -- and 4 I don't think we've ever put this to -- pen-to-paper 5 on this, but, somewhat counterintuitively, I think 6 the more struggling localities are the ones with 7 more access to a diverse array of tax-revenue 8 sources. 9 The locality is -- they, essentially, depend 10 entirely on the property tax. They usually are the 11 ones that are able to provide services, and do so 12 cost-effectively and efficiently, and, have high -- 13 you know, high marks from their residents as doing a 14 good job. 15 And the localities that have a, you know, 16 share of the state sales tax or the local sales tax, 17 and have share of the income tax, and have a bunch 18 of state aid and a bunch of federal aid, those are 19 the ones that usually always seem to be on the ropes 20 and struggling to provide services. 21 And I'm not sure why that is. 22 We've always -- and I'm going to say 23 something that's very unpopular for the state of 24 New York. 25 We've always been fans and defenders of the 1 property tax as a revenue source, because, one of 2 the reasons we give, is that it helps to keep the 3 decisions local; that, if your local government is 4 going on a spending spree, and all they have is the 5 property tax they collect from you, it's very easy 6 to stop them from doing that. 7 But when you start mixing in state revenue 8 sources and state mandates, and, the local 9 government has to do this, even though it doesn't 10 make sense, and they have to pay this wage scale 11 because the State Capitol tells them to, and, 12 they're going to get this revenue whether the 13 citizens revolt or not, you get a disconnect between 14 local decisions and what the local government is 15 doing -- what the local government is doing, and 16 what the local citizens want them to do. 17 And I think that's what causes the broader 18 problem. 19 So, what I might look at for local 20 governments in New York is, look at what you and 21 Albany require the local governments to do, and 22 whether you require them to do it a particular way. 23 Certainly, that's the complaint that local 24 leaders, that I've spoken to in New York, are 25 saying; that, you know, Albany makes us to do this, 1 and they make us do it this way. 2 And that's the real problem, when they're not 3 complaining about funding. 4 But, I wouldn't just look at, you know, 5 "How do we get more State aid to local governments?" 6 because that doesn't necessarily solve a broader 7 problem of, if they're providing the wrong services, 8 the wrong way, for people. 9 SENATOR KRUEGER: But we capped their 10 property-tax ability in the state, so that -- 11 JOE HENCHMAN: The growth, yeah. 12 SENATOR KRUEGER: -- yeah, so that limits 13 their ability to do what you were just describing. 14 JOE HENCHMAN: I think you can -- does it 15 have a voter-override option? 16 So there's that, at least. 17 SENATOR KRUEGER: Thank you. 18 SENATOR DeFRANCISCO: Thank you. 19 What -- I just want to get back to the 20 "methodology" issue, because this is difficult 21 stuff, to figure out what policies you want to 22 change, and how you want to effect things. 23 The methodology, for example, in 24 North Carolina, to determine what they're going to 25 do, was there a goal of where they -- the dollars 1 they -- did they have to first determine the dollars 2 they would need, and then once -- to do an effective 3 tax cut, and then, look at the credits, look at the 4 deductions, look at other sources of revenue? 5 What was the methodology that was used? 6 Or, what's the methodology that's most 7 effective for a legislature to use? 8 JOE HENCHMAN: I would like to say yes to 9 that question, but that wouldn't be truthful. 10 The answer was, that I think the legislators 11 and the governor came in, knowing the current system 12 wasn't working, and not really sure why; so, kind of 13 being open to changing things, but not really having 14 a firm idea on what they wanted to do beyond making 15 it lower. 16 And, you know, some state senators and 17 state representatives are experts on the topic, and 18 they knew the tax code frontwards and backwards, but 19 I think, for the most part, a lot of the 20 legislatures [sic], that was their knowledge going 21 into the debate, and going into the discussion. 22 So, a lot of input was gathered. We wrote a 23 book on the subject of North Carolina's tax system, 24 and options to reform everything, from incremental, 25 to broad-reform approaches. 1 Other think-tanks put out similar material, 2 other organizations put out position papers, and 3 I think that I that did a lot to kind of inform 4 things. 5 North Carolina also had a body of previous 6 studies. They had, I think, seven previous 7 tax-reform commission reports that were on shelves 8 gathering dust. 9 And I would say they agreed on about 10 70 percent of the recommendations, between them, 11 and, so, I think that also provided a good corpus of 12 background of, Well, you know, we don't need another 13 study on this necessarily. Maybe we should just do 14 what the studies in the past have said. 15 And the general approach was: We need to do 16 something about the declining sales-tax base, we 17 need to do something about our high income-tax 18 rates, our franchise tax system is broken, and the 19 corporate income tax is not productive. 20 And those eventually transformed into 21 concrete policy ideas, that, as I mentioned, changed 22 along the way considerably, but, I think the overall 23 goal was to broaden the base, lower the rate, and 24 provide a net-revenue reduction, but not a shocking 25 one. One that people would feel, but one that 1 wasn't necessarily -- it wasn't just about cutting 2 rates and getting money out; it was also coming up 3 with a better-structured tax system. 4 SENATOR DeFRANCISCO: Okay, and, lastly, 5 I know the revenues, you have to find the money 6 someplace. Okay? 7 Hopefully, there will be a boom in the 8 economy, because of the national economics is going 9 much better. 10 And, hopefully -- 11 JOE HENCHMAN: California is in its 12th year 12 of budgeting, hoping for that. 13 [Laughter.] 14 SENATOR DeFRANCISCO: Yes, yes. 15 But if it happened -- and if it happened, 16 hopefully, the boom would go directly to some of 17 these cuts we've been talking about. 18 But, the biggest rub, I would think, assuming 19 that there is no such economic boom, and all of a 20 sudden, we're flush with cash, then, the only way to 21 adjust these things, it seems, is to deal with the 22 deductions, the credits, and, change, and make it 23 broader-based, so that there's not just haves and 24 have-nots. There's, everybody is participating in 25 a fair, equitable way. 1 These cuts -- these states that have done 2 some of these changes, I assume there was an outcry, 3 at least at the beginning, that, we're losing this 4 deduction, we're losing this credit, we're losing 5 this or we're losing that. 6 You gave Michigan as an example. 7 I -- what was the reaction of some of -- 8 whether it's -- I know what the reaction of the film 9 industry would be, but what about the average 10 Joe Citizen, and some of these deductions that they 11 relied on, and they're not getting anymore? 12 JOE HENCHMAN: Well, the key was, to make the 13 case to them that, that, the whole picture, at the 14 end of the day, was going to be more beneficial to 15 them, and to the economy as a whole, and to their 16 children, and so forth, than the current system, 17 where, they got it -- you know, they got all of 18 these different deductions and credits, but everyone 19 else had to pay very high rates. 20 And, beneficiaries -- some of the 21 beneficiaries did not like that, of course, and, 22 opposed it, and resisted it. 23 But, for the most part, I the case -- the 24 reason these were successful, and this is the 25 difference between successful tax reforms and 1 unsuccessful ones, is successfully making that case 2 to most people. 3 And -- I mean, you're not going to get there 4 offering, you know, a credit for this industry and a 5 credit for that industry. That's not going to get 6 you to the [unintelligible]. 7 The way you do it is, by making the case for 8 what the state will look like afterwards; what the 9 revenue picture will look like. 10 This is how the entire package -- not just 11 you lose your mortgage interest deduction, but, the 12 whole package, where, your sales tax rate goes down 13 and your income tax rate goes down, and this 14 economic growth is generated, what it looks like at 15 the end of the day for you. 16 And so, North Carolina, for instance, had 17 a -- I mean, it was just something as simple as 18 this: 19 They had a tax calculator on the caucus 20 website, where you could put in your income, and you 21 see how your income will be changed under the 22 entirety of the tax provision. 23 Because, of course, people were getting 24 flyers, and saying, You're going to lose your 25 mortgage-interest deduction if this passes; 1 Whereas, they were making the case, Well, 2 that's true, but, you're also getting these other 3 benefits from this tax reform, and you need to look 4 at it holistically. 5 And it can be a tough case to make. 6 And, certainly, there's a lot of special 7 interests interested in preventing legislators from 8 making that case. 9 But I think, on the whole, not only it 10 worked, but it's beneficial for everybody, on the 11 whole. 12 SENATOR DeFRANCISCO: Thank you very much, 13 and thank you for coming up from Washington. 14 We really appreciate it. 15 JOE HENCHMAN: Thank you for the opportunity. 16 SENATOR DeFRANCISCO: You may be getting some 17 calls for more information. 18 JOE HENCHMAN: Happy to take them. 19 SENATOR KRUEGER: Thank you. 20 SENATOR DeFRANCISCO: The next speaker is 21 from the Business Council of New York State, 22 Ken Pokalsky. He's the vice president of government 23 affairs. 24 KEN POKALSKY: Good morning. 25 SENATOR DeFRANCISCO: Good morning. 1 KEN POKALSKY: We appreciate this 2 opportunity. 3 The Senate's been -- had a longstanding 4 leadership on tax and budget reforms in 5 New York State, so we appreciate you asking, and 6 appreciate the opportunity to be here today. 7 We did submit long testimony. You have it. 8 I'm not going -- I'm certainly not going to read it. 9 I'm going to touch on a handful of key issues, 10 though. 11 But, first, I just wanted to, in response to 12 some of the things already said today, I think, if 13 you haven't noticed yet, tax law is very complex, 14 and getting more complex every day, because of -- 15 the types of transactions are becoming more complex. 16 Just one example: Talking about extending 17 sales tax to services, think of the example of 18 cloud-based -- a cloud-based computer program that's 19 used in multiple states from a company based in 20 Michigan. 21 Where is the sale -- "Where does the sales 22 happen?" would be the basis of where it gets taxed. 23 So it's very complex, and a lot of the stuff 24 is interrelated. 25 In response to a comment -- when E.J. McMahon 1 was talking about, or comparing, treatment of C corp 2 income versus S corp, the flip side of that is, the 3 monies paid from -- to the shareholders of a C corp 4 as a dividend, comes out of the taxable profits of 5 the business. It's taxed at the corporate 6 franchise-tax level, and taxed at the PIT level when 7 it's received, in New York State, as ordinary 8 income. 9 Compare that to a Sub S, it has a very 10 nominal tax payment as the corporate entity, under 11 Article 90 of the franchise tax, but it's taxed 12 at -- it's mostly taxed at the PIT. 13 So just equalizing the rates that the income 14 is subject to doesn't mean that the same dollar of 15 income is treated the same way under -- as a C corp 16 and S corp. 17 My only point is, that these are -- there's a 18 lot of interconnections here, and when you move one 19 piece, you have to look at how it compares to the -- 20 make sure you're comparing apples to apples when 21 you're making -- or, trying to make reforms that are 22 intended to treat income or an activity equitably or 23 similarly under the tax law. 24 With that preamble, state business climates 25 obviously matter. They're influenced by a lot of 1 factors, including taxes, so an argue, taxes 2 definitely do matter. 3 When we talk to our members, things that come 4 up most often: 5 Cost of employer-provided health care, which, 6 in New York, is driven by state-coverage mandates; 7 Cost of energy, which, actually, prices have 8 come down a little bit, due to factors beyond our 9 control; 10 And, taxes; in particular, property taxes. 11 And when a business, particularly a 12 multi-state business, looks at where to make its 13 next capital investment, the return on investment is 14 important, and it's influenced by these types of 15 factors. 16 So you definitely tax -- taxes on the margin 17 definitely matter in terms of economic development. 18 You already heard about the high level of 19 combined state and local tax burden in 20 New York State. 21 Analysis that we've done is, if you look at 22 that overall burden, about 25 percent of all 23 State-imposed taxes, and about 40 percent of 24 local-imposed taxes, primarily property and sales 25 tax, are born by the business community, for a 1 combined share, by our projections, about 2 34 percent. 3 And, by the way, if you did an 4 across-the-board expansion of sales tax to services, 5 that number would go up because of the significant 6 use of services by business. 7 And, we would concur with the comment by the 8 Tax Foundation, that if there is a broadening of a 9 sales tax to services, it should be done at the 10 final sales, and not be a tax on business inputs, 11 because then you have a pyramiding of the impact of 12 the tax. 13 And last thing, on the impact issue, you 14 know, New York State's economic performance, 15 particularly upstate, has been a great concern to 16 us. 17 Looking at just the recent history, from the 18 beginning of the most current economic slowdown, to 19 now, June 2013 is the last date I looked at, 20 New York State has done a fairly good job of 21 recovering. It's above its prerecession peak, but, 22 virtually, all that net job growth happened north 23 and west of the Tappan Zee Bridge. 24 If you look at the 52 upstate counties, from 25 2008 to today, we're still below prerecession 1 levels. 2 Moreover, over the last -- since 1990, so, 3 the last 33 years, job creation in New York State 4 has been one-third the national rate: 7.2 percent 5 versus 22 percent. 6 If all New York State did was kept up with 7 national trends, we'd have produced more than a 8 million new jobs. And that has tax-revenue 9 consequences as well. 10 The point being, we have a -- we think, an 11 economic-climate issue. 12 We see it in our job performance, both, in 13 recent terms, particularly upstate, and for last 14 two generations, that New York State has been 15 lagging behind the national. 16 And when, and if, national economic growth 17 comes, New York State cannot influence that. 18 What we can influence is the share of 19 national economic growth that comes to 20 New York State and stays in New York State. 21 So we do think, business policy, that 22 business climate-factors matter, taxes are an 23 important part of business -- of business climate. 24 So, a couple of specifics of tax reform: 25 We do support broad-based reforms, both, in 1 terms of how taxes are collected, how returns are 2 filed, as well as tax rates. 3 The Business Council generally supports a 4 modernization of the state's basic business taxes 5 that was drafted by the tax department a couple 6 years ago. 7 It blends the bank tax into the Article 9-A 8 corporate franchise tax, modernizes the tax. It 9 would reduce the entire net-income base tax rate, 10 from 7.1 to 6.5. 11 We would support further reductions to, 12 perhaps, the 4 percent range. 13 It would simplify compliance for taxpayers 14 that currently have part of their business in two 15 very different parts of the tax code, which requires 16 four returns: state, and local -- or, state; bank; 17 and corporate franchise tax; New York City multiple 18 taxes, because of the two articles. 19 Simplified rules for doing combined reports. 20 When you're a multi-party corporate entity, 21 you have to -- you bring different entities, perhaps 22 unrelated entities, into a single report. 23 New York State, right now, has an incredibly 24 complex nine-step process to define -- to require 25 combination based on a term known as 1 "significant intercorporate transactions." 2 This bill simplifies the criteria for 3 combined reports, to figure out what the taxpayer 4 is, to be subject to New York State corporate 5 franchise tax. 6 We -- that bill would continue the 7 "single-sales factor" portion in the business 8 income, a provision that gives a more competitive 9 tax treatment to businesses that are subject to 10 New York State tax, that have significant employment 11 and capital in New York State. 12 We support the elimination of the alternative 13 minimum tax, which is in that bill, which, frankly, 14 erodes -- well, one hand, we give tax credits; on 15 the other hand, we take away the value of those tax 16 credits by imposing the AMT. 17 The bill's not perfect. 18 There's some provisions in there that have, 19 what we think, are unintended tax -- adverse-tax 20 impacts, including, in some cases, subjecting a 21 business to same amount of business income to 22 taxation in multiple states. 23 But, in any case, it's a step forward; it's a 24 simplification of our basic business taxes. 25 And we can provide the two Committees with 1 our detailed discussion of its components, because 2 it's about a hundred-piece under -- part -- piece of 3 legislation. 4 Turning, for a minute, to the manufacturing 5 sector: 6 The important thing about manufacturing, and 7 this, for us, is particularly important upstate, you 8 hear a lot of commentary from business and from 9 labor, and from others, about the erosion of the 10 middle class. 11 And in New York State, and particularly 12 upstate, you know, from our view, what you're really 13 talking about is manufacturing. 14 New York State has lost manufacturing -- the 15 manufacturing employment nationwide, it's been on 16 a -- in a decline. 17 New York State, for the last 40 years, has 18 lost manufacturing jobs at more than double the 19 national rate. 20 In Upstate New York, the average 21 manufacturing job, compared to the average 22 non-manufacturing private-sector job, pays, in 23 salary alone, about $16,000 more a year. 24 These are incredibly valuable jobs. 25 And I would argue, in a lot of locations in 1 Upstate New York, once gone, they're, virtually, 2 irreplaceable, and certainly irreplaceable at that 3 income level. 4 These are important -- this is an important 5 component, particularly in the upstate economy. 6 And we do support some of the existing 7 franchise-tax components that benefits this -- this 8 vital sector. 9 We supported this year, the reduction of the 10 marginal rate for manufacturers, ultimately, down to 11 just under 5 percent. 12 In 2019, we think that could be brought down 13 further. 14 We think there are some slight modifications 15 necessary to what -- what a "manufacturing" is. 16 With diversification of companies, you see 17 businesses with significant manufacturing activity 18 in New York State, but it's not a majority of their 19 income. 20 We think they should continue to be 21 considered manufacturing. 22 And, again, to this issue of taxation of 23 business income, as a C corp versus an S corp, we 24 would recommend making corresponding reductions for 25 manufacturing businesses taxable under the personal 1 income tax for Sub S, partnerships, and LLCs. 2 Importantly, not everything we do that feels 3 like a tax is called a tax. 4 We definitely support an expedited phase out 5 of the so-called "18-A assessment" on electric 6 power, which is a particular issue for 7 energy-intensive manufacturing. 8 And I'll point out, while we have done some 9 tax reform over the years, since New York State 10 repealed the gross-receipts tax on utilities, which, 11 at the time, was about a $150 million tax reduction. 12 It took 5 years to get done in the legislature. 13 It's hailed as a great step forward. 14 New York State has imposed more than 15 a billion dollars a year, in different assessments, 16 on the energy sector. 17 So we cut a million -- 150 million in GRT. 18 We added a billion in 18-A, in SBC, RPS, et cetera. 19 It feels like a tax, we pay it like a tax; 20 it's not called "a tax." 21 So, we have to look at these other things the 22 State does that adds to the costs as well. 23 Moving away from the tax code, we have a 24 couple -- there's a number of things the State can 25 do in the way taxes are administered, that, 1 generally speaking, don't cost money, they don't 2 reduce taxes, but they make our lives easier, and 3 they would make the department's life easier as 4 well, eliminating some of the friction costs in 5 taxation. 6 A couple of examples: 7 The corporate franchise tax, right now, 8 requires a first-quarter estimated payment of 9 40 percent of, basically, last year's -- last year's 10 tax liability. 11 If you had a significant non-recurring event, 12 you sold a subsidiary, you pay -- in effect, pay 13 estimated taxes on that in the first quarter of 14 every year, and wait a year, basically, to get it 15 back, when you true-up your actual tax liability, 16 and when you the file returns that go through audit. 17 Allowing for that estimated payment to be 18 based on projected revenues, rather than last year's 19 revenues, is useful to the business; ultimately, it 20 provides the same amount of revenues to the State. 21 The second example, cities and villages are 22 authorized to impose gross-receipts taxes on 23 utilities. 24 And by my count, it was about 420 entities 25 that do so. These are all separately administered. 1 It would be useful to the affected businesses 2 if this was a centrally administered, centrally paid 3 tax, like we do for sales taxes collected, through 4 the tax department, not through 420 separate taxing 5 entities. 6 And there's others; things that are 7 administrative, that produce the same revenues, but 8 they reduce costs. 9 And, quite frankly, some of the reforms in 10 that Article 9-A bill I talked about, tend to 11 eliminate issues that we spend a lot of time on 12 audit. 13 Not having to fight as much about the 14 combination of rules, for example, saves time. 15 The last thing I want to talk about, and then 16 I'd be happy to take any questions you have, is the 17 issue of tax credits. 18 I want to make a couple of general points. 19 There are a lot -- yes, there are a lot of -- 20 a number of tax credits in Article 9-A and 21 Article 22, et cetera. 22 Only a handful of those have significant 23 costs attached to them, so we're really talking, 24 I think, about the major ones: 25 Empire Zones, which is fading away; the film 1 credit; the brownfield credit; the -- Excelsior is 2 now growing; and then the ITC. 3 Beyond that, I don't know that there's an 4 Article 9-A tax credit that costs more than 5 $10 million a year, pointing, after first handful, 6 they really fade away. 7 So any focus should be limited to the -- 8 I think, to the -- I think the real debate's on the 9 major ones. 10 Second, some acts -- some types of business 11 activities are far less influenced by tax factors 12 than others. 13 Businesses that are there exclusively serving 14 the local community probably aren't that influenced 15 by marginal tax rates. 16 Certainly, not location in the state. 17 They're going to be located around where their 18 businesses are. 19 On the other hand, some other types of 20 activities, like brownfield redevelopment, are 21 heavily influenced; particularly in New York State, 22 the way our brownfield law is structured, are 23 heavily influenced by the financial incentives that 24 go along with that. 25 I would make the same case for things like 1 the investment tax credit, where manufacturers 2 serving a national -- a regional and national, and 3 even a worldwide market, certainly has locational 4 decisions. 5 And, thirdly, one thing that tax credits do 6 that tax reform usually can't do, is you have a more 7 immediate impact. 8 Generally, when we have done broad-based tax 9 reform, it's come in multiple-year steps. 10 Sometimes, those steps are disruptive. 11 You do a tax -- a new tax -- targeted tax 12 credit today, you see some immediate results. 13 And the final comment is, I think the 14 question that has to be asked of tax credits is, 15 Do they have a real effect? 16 Is it influencing something? 17 Are you giving a credit for something that 18 would happen anyway? 19 And even if there is an effect, is it 20 cost-effective? 21 Again, I'll just use the film credit as an 22 example. 23 It's an expensive program, no doubt. 24 If you look at employment, New York City 25 employment in the film industry, it's up about 1 20,000 jobs since the beginning of the recession. 2 And, right now, it's about 50 percent of its 3 historic rate, if you look at what that industry 4 had, in terms of jobs, over the last 20 years, 5 So you could argue it's had an effect. 6 And the second question is, What's the 7 payback? 8 I think, if you gave enough tax credits to 9 almost anything you, could make it happen in 10 New York State. 11 Is there a balance between the benefit and 12 the tax expenditure? 13 I think we need -- if we're gonna to take a 14 serious look at tax cuts, I think you have to 15 have -- look at both of those issues: Is it having 16 an effect? Is it worth it? 17 Senator Krueger brought up a recent study 18 that said there's a -- you know, $7 billion in 19 combined economic-development incentives. 20 What that report didn't say, is they were 21 looking at state, New York City, county-level, and 22 some city-level incentives. 23 That's $7 billion on a combined, by my count, 24 expenditure of about 225 billion, so it's a little 25 bit less than 3 percent of total expenditures. 1 And that's just -- that's through a quick 2 analysis. 3 So you've got to put it in the context. 4 Is it -- is it a large -- it's a large 5 number, but it's a large number on almost a 6 quarter of a trillion dollars worth of budget. 7 And, second, it really -- it questioned 8 whether some of these were impactful and efficient. 9 It didn't answer the question. 10 I think some are doc -- are argued -- are 11 demonstrably effective and cost-effective. 12 You know, I think the brownfield program is 13 both. 14 If you look at it, it's at least -- it's 15 almost a 9-to-1 payback, just looking at the capital 16 expenditures versus the tax credits, not counting, 17 you know, the benefits of jobs and secondary 18 impacts. 19 So we do think there is a role for targeted 20 tax credits, including an investment tax credit, 21 R&D credit, continuation of the brownfield credits. 22 You know, everything can be looked at, 23 everything can be made better, but we do think there 24 is a role for those in the state's tax policy. 25 And I'm going to just briefly make some 1 comments on the personal income tax. 2 There's a lot of issues on how the income tax 3 impacts business activity, both in terms of taxation 4 of business income and how it impacts employees, 5 particularly multi-state employees. 6 That, we're going to save for another day. 7 We're going to submit written comments on 8 that to you before your hearing process is over. 9 But, two quick questions on the PIT. 10 First, you know, contrary to some of the 11 conversation, when we're -- did the last, sort of, 12 three rounds of millionaire's tax, New York State 13 has, continues to have, a fairly progressive 14 personal income tax. 15 Probably among one of the more progressive 16 taxes in New York State, through a number of 17 measures, including our earned-income tax credit, 18 the lowest percent -- the lowest 40 percent of 19 taxpayers, measured by New York adjusted gross 20 income, pay no income tax in New York State. 21 And as you go through every tranche of income 22 classification, the next highest income tranche pays 23 a higher effective tax rate than the lower one, 24 based on our running of the number. 25 So we have an effective tax rate, and we 1 had -- I'm sorry, a progressive tax rate, and we had 2 one prior to the adoption of the millionaire's tax. 3 Second, the income tax does tax a significant 4 amount of business and business income. 5 There's about 100,000 more S corps in 6 New York State than C corps, and that doesn't count 7 LLCs and partnerships. 8 There's a fair amount of businesses, and 9 business income, that is -- that pays its primary 10 taxes, or, its income taxes, to the State under the 11 PIT rather than the corporate franchise tax. 12 So we'll be following up with the Committees 13 on some specific comments and analysis on the PIT. 14 So with that, I'll stop. 15 We've touched on some other issues, 16 property-tax administration, sales-tax issues, in 17 our testimony. 18 But, with that, I'd just like to stop, and 19 take whatever questions and comments you have. 20 SENATOR DeFRANCISCO: Senator Valesky. 21 SENATOR VALESKY: Thank you, Mr. Chairman. 22 Actually, not a question, but just an 23 announcement, Ken, and I'm pretty sure you're 24 already aware of this, but, certainly, for others 25 who are here: 1 We here, my colleagues on this panel, and, 2 certainly, all of us as legislators, hear from you 3 and the businesses you represent, about tax burdens, 4 certainly, but also about regulatory burden. 5 So I just want to remind everyone that I will 6 be, in my role as Chair of the Commerce, Economic 7 Development, and Small Business Committee, 8 co-hosting a series of public hearings across the 9 state with Senator Marchione, Senator Gallivan, and 10 Senator Carlucci, on business regulations, and will 11 be -- and the hearings will be industry-specific. 12 So I would just encourage, and invite you, 13 and others, to participate. 14 We've made this, the schedule public -- 15 I'm looking at Scott up here. 16 We've made that schedule public, and we'll be 17 looking to you for your feedback and input, on the 18 regulatory side, in addition to what you've provided 19 today in regard to the tax structure. 20 KEN POKALSKY: We plan on doing so. 21 SENATOR VALESKY: Okay. 22 KEN POKALSKY: Look forward to it. 23 SENATOR VALESKY: Thank you. 24 SENATOR DeFRANCISCO: Carl, any questions? 25 SENATOR MARCELLINO: Ken, I'm glad to hear 1 that you favor the extension of the brownfields 2 credits. 3 A lot of people have complained that these 4 credits are too expensive and somewhat unwieldy. 5 Do you agree? 6 KEN POKALSKY: Some have. I don't know if a 7 lot have. 8 I know some have -- it's one of those things, 9 someone says it, and it gets repeated multiple 10 times, it seems like it's being said often. 11 We had some sharp criticisms of the 12 State Comptroller's report, that -- you know, when 13 they did their report, they said, Well, here's this 14 environmental remediation program of municipal 15 sites, paid for out of this pot; and here's the 16 brownfield program, paid through tax credits; and 17 the first is a lot cheaper than the second. 18 But they really were comparing apples to 19 oranges. 20 In the ERP -- or, the EER-ERP averaging, they 21 left out the high outliers. 22 If you took out the three largest brownfield 23 projects, the average cost, you know, drops by under 24 a million dollars worth of tax credits. 25 And the median tax credit for a brownfield 1 site is $200,000. 2 You could certainly -- most of the larger 3 projects, in terms of consuming the tax credits, 4 were what are called "commercial residential 5 development." 6 So there are adjustments you could make. 7 We've already gone through at least 8 two rounds of adjustments on the tax-credit side, to 9 bring the redevelopment credits more in line with 10 the cost of the cleanup. 11 So we think it wasn't -- it's not that 12 expensive, at least the average project is not that 13 expensive, compared to other remedial projects in 14 the state. 15 The other thing that the -- that particular 16 report really gave little consideration to, is what 17 the economic benefit was. 18 Is it creating jobs? 19 Is it adding -- is it producing tax revenues 20 because of the project, et cetera? 21 We -- in looking just at the capital 22 expenditures at these projects, the payback to the 23 State is 8 to 1, without looking at these secondary 24 effects -- 25 SENATOR MARCELLINO: Say that again? 1 What was the payback rate again? 2 KEN POKALSKY: I'm sorry? 3 SENATOR MARCELLINO: You mentioned a payback 4 rate. I couldn't hear it. 5 KEN POKALSKY: Oh, the -- if you look at the 6 value of the capital spent, both in cleanup and the 7 redevelopment, versus the value of the tax credit, 8 that ratio is, I think, 8.5 to 1, give or take. 9 So it's -- and that's not counting any of the 10 secondary effects. 11 Thirdly, I think, in most of these projects, 12 the ones that I'm familiar with, these are sites 13 that maybe would have been redeveloped, someday, but 14 most hadn't been touched in 20 years. 15 In part, they were doable, because of some of 16 the liability protections, some of the certainty as 17 to what the cleanup requirements are, but also the 18 tax credits. 19 I will point out, you know, and it was one of 20 the interesting things, you see something presented 21 and lack of follow-up. 22 New York State, I think, has completed a 23 couple hundred brownfield projects. 24 Over the same period of time, where, 25 Pennsylvania's completed a couple of thousand, and 1 they offer, virtually, no tax credits. 2 So it's not just the tax-credit side of a 3 brownfield program that determines whether it's 4 successful or not. 5 It's, what's the process, what's the 6 certainty of the process, both in terms of the 7 outcome and the timetable? 8 You know, what is the -- what are the 9 environmental standards applicable? 10 What are the liability protections 11 applicable? 12 So, you might able to make -- I would argue, 13 you could make the program more effective by looking 14 at both sides; not just the tax-credit side, but the 15 substantive side of the program as well. 16 SENATOR MARCELLINO: As you may know -- well, 17 you know, of course, brownfields was my baby many 18 years ago, and we kept doing it. 19 It's coming to a point where it's got to be 20 renewed; that we're looking through to that again. 21 I'd be happy to get some recommendations from 22 you and your people, as to what modifications you 23 think might work, how they might be done better, how 24 the program might be modified. 25 Like, you can -- you know, you can talk to 1 Debbie in my office, and we'll be happy to take your 2 recommendations, because, that program, I think, is 3 an effective one, and can be made much more 4 effective, as you point out. 5 KEN POKALSKY: Sure. 6 SENATOR MARCELLINO: Question: The MTA tax, 7 I'm going to go out on a limb, I'm guessing you 8 favor the repeal? A total appeal? 9 KEN POKALSKY: I am -- I'm assuming you're 10 talking to the payroll tax, not the preexisting 11 surcharges? 12 SENATOR MARCELLINO: Yeah. 13 KEN POKALSKY: It's a tax on jobs, it's a tax 14 on payroll; and as such, it strikes me as a -- as 15 a -- it's not a great tax policy, as far as economic 16 development is concerned. 17 We -- the one -- we opposed it. 18 We believe, and I think others believe, there 19 are efficiencies to be achieved within the MTA 20 structure, to offset some of the necessary -- the 21 revenues that were otherwise necessary in the 22 payroll tax. 23 I, my own, have an equation for you today 24 that says, repeal it -- 25 SENATOR DeFRANCISCO: Your answer is "yes"; 1 right? 2 KEN POKALSKY: I'm sorry? 3 SENATOR DeFRANCISCO: Your answer is, yes, 4 you're opposed to the payroll tax? 5 KEN POKALSKY: The question, though, is, 6 Should we just repeal it? 7 SENATOR DeFRANCISCO: Oh -- 8 KEN POKALSKY: My only answer is -- 9 SENATOR DeFRANCISCO: -- you don't know? 10 KEN POKALSKY: We do. 11 We didn't like it. We think it's a bad 12 policy. 13 We think, to repeal it, you'd have to come up 14 with, you know, some cost-savings, and other -- 15 I assume some other revenues. 16 We have not, you know, filled out the other 17 pieces of that equation. 18 But, yes, we oppose the payroll tax. 19 We've gotten rid of -- we've eliminated some 20 of the worst aspects of it, by taking out, you know, 21 some sole proprietors and small business, but, it's 22 a tax on -- it's a tax on having jobs in the region. 23 Sorry, sir. 24 SENATOR MARCELLINO: Thanks a lot. 25 SENATOR DeFRANCISCO: Thank you very much. 1 Next speaker, Fiscal Policy Institute, 2 Frank Mauro, executive director. 3 I see by our clock, it's only 9:20, and he 4 was supposed to be on at 10:45, so we're way ahead 5 of schedule. 6 [Laughter.] 7 FRANK MAURO: It's still morning; so, good 8 morning. 9 Should I start? 10 SENATOR DeFRANCISCO: Yes, please. 11 FRANK MAURO: Okay, thank you. 12 Thank you very much for the opportunity to 13 speak to you this morning. 14 A thorough review of the tax system is 15 certainly in order from a number of perspectives. 16 Back in December of 2011, the Governor and 17 the legislative leaders joined in calling for a 18 thorough review of the fairness of the tax system. 19 And that's certainly one important basis for 20 evaluating the workings of any tax system, including 21 New York's, but two other criteria, adequacy and 22 stability, are also important. 23 It is difficult to say that one of these 24 criteria -- fairness, adequacy, stability -- is more 25 important than the other two. 1 Governors and legislators have to try to 2 achieve all three objectives simultaneously, so 3 that's not easy. 4 The result is, that making state tax policy 5 is a difficult balancing act. 6 In addition to these three traditional values 7 of high-equality tax systems, policymakers also 8 yearn for a tax system that will encourage the 9 creation and retention of jobs and broadly shared 10 prosperity. 11 Simply put, this is easier said than done. 12 Just because a policymaker's heart is in the 13 right place doesn't mean that the policies that he 14 or she advances, sometimes successfully, will work 15 as intended. 16 Just think of the legacy costs that 17 New York State was left with when it moved to 18 correct, and later when it moved to end, failed 19 programs, like the Job Incentive Award Program, 20 which was eliminated in 1982, or the 21 Empire Zones Program which was more recently 22 eliminated. 23 Hopefully, we have learned from these 24 experiences and be will be careful before launching 25 new programs that can incur significant obligations 1 with little to show for it. 2 We are on the verge of doing that right now, 3 unless we take a deep a breath and rethink the 4 Start-Up New York Program before launching it. 5 Once you start making commitments under these 6 programs, you can't unwind them, as you can see from 7 what's happening with the Empire Zones Program now. 8 The same goes for the minimum-wage 9 reimbursement credit that was enacted as part of the 10 2013-14 budget agreement, and which is scheduled to 11 take effect in January of 2014. 12 We have citations at the end of the paper of 13 this testimony, to our more in-depth papers on both 14 of those tax credits, so I won't go into that now. 15 From the perspective of family tax burdens, 16 policymakers also need to rethink the $350 family 17 rebates before these checks are put in the mail. 18 If we have 410 million to spend on family tax 19 relief in each of the next three years, wouldn't it 20 be better to focus on an effective form of relief 21 for those homeowners and renters who are most 22 overburdened by residential property taxes? 23 There are also just numerous inequities in 24 the program. 25 If your income is under $40,000 a year, even 1 if you have income-tax liability, you get no tax 2 break, based on the reasoning, I guess, that most 3 people with incomes below $40,000 don't have 4 income-tax liability. 5 But, if your income is between, forty, or as 6 high as three hundred thousand, and you have 7 zero tax liability, you get the $350 credit. 8 So, it just doesn't make sense. 9 There are better ways to provide family tax 10 relief. 11 It is good that you are having public 12 hearings in which organizations, like ours, and 13 others that are speaking to you today, have a chance 14 to share ideas with your two Committees. 15 One of the things I realized, when the fellow 16 from the Tax Foundation was talking, and talked 17 about the North Carolina debate, and mentioned the 18 Center on Budget and Policy Priorities, which is a 19 Washington think-tank we work with a lot and is very 20 well-respected on tax policy, that they were part of 21 the discussion and input in North Carolina, as was 22 the Tax Foundation, but, we seem to have a much more 23 one-sided line-up here. 24 So, we think it's important to reach out to 25 all the experts. 1 It's also important to hear from the public, 2 because I think if these hearings were more open to 3 the public, the one thing you would learn, which I'm 4 sure that most of you, in effect, know, is that the 5 tax that most New Yorkers care about is the property 6 tax, and the need for property-tax relief. 7 And there are people throughout the state, 8 they're more concentrated in the New York City 9 suburbs, who pay outrages portions of their income 10 in property taxes. 11 But if you compare -- let's compare 12 Long Island and Syracuse. 13 In Long Island, a higher percentage of 14 families are paying an inordinate share of their 15 property tax in income; 16 But, in Syracuse, just because the average 17 isn't that high doesn't mean there aren't also lots 18 of families in Syracuse who are paying an inordinate 19 share of their income and property taxes. 20 The property tax is not a tax that applies to 21 people equally on the basis of their ability to pay. 22 Because of losing a job or becoming disabled, 23 there are people who continue to have property-tax 24 bills but don't have income available to it. 25 And we think the most targeted way to do this 1 is a real-property circuit-break tax -- tax 2 circuit-breaker that provides relief based on the 3 individual, and the individual family and its 4 property taxes relative to its income. 5 So I think it's important that you have 6 forums or hearings or town halls where it's open to 7 the public, because there are people throughout this 8 state who have worked on the property-tax issue, and 9 who know what's going on at the grassroots. 10 It's also important to remember two 11 additional points: 12 First, both sides of government budgets, the 13 revenue side and the expenditure side, have an 14 impact on the economy, and we sometimes forget that. 15 Basics such as education, infrastructure, the 16 legal system, fire protection, crime control, clean 17 water, the list goes on and on, those are things 18 that the free market can't provide for itself, that 19 government does, but they allow for the free-market 20 economy to flourish. Without them, we don't have an 21 operating economy. 22 So you have to keep both sides of the budget 23 in mind when you're thinking about tax policy. 24 Second, and very related to that first point, 25 the state and local system is one system, not two 1 separate and independent systems. 2 And what do we mean by that? 3 Each state decides for itself what it's going 4 to do directly, and what government responsibilities 5 it's going to delegate to local governments. And it 6 also gives local governments certain tax sources, 7 and doesn't give them others, and gives them aid. 8 So the State is really determining the 9 overall structure. 10 And what's important, is the overall state 11 and local tax system, not an individual tax here or 12 there. 13 New York State's tax system, like every 14 state's tax system, is a combination of some state 15 taxes and some local taxes, with some of those taxes 16 being regressive, and others being progressive. 17 The speaker for the Tax Foundation talked 18 about why they supported the property tax. 19 It brings stability to the mix, but it also 20 brings some inequities, so you have that balancing 21 act you have to engage in, and you have to think 22 about the system as a whole. 23 While it is interesting to examine the 24 distributional impact or fairness of individual 25 taxes, the much more important question is the 1 fairness or distributional impact of the state and 2 local tax system as a whole. 3 In New York, local governments are 4 responsible for raising a large share of the revenue 5 necessary to support needed public services, and 6 this places great pressure on the property-tax base. 7 In New York, the one local government that 8 has a very broad revenue base is New York City. 9 It has a diverse revenue system. 10 It has a progressive income tax; it's got a 11 corporate income tax; a bank tax; it's got almost an 12 endless list of taxes, but it's a much more diverse 13 system, so there's much less pressure on the 14 property tax in New York City. 15 So, one point that comes to mind on this, 16 that I would disagree with the Tax Foundation 17 speaker on, is, in New York, I don't think we have 18 the experience that he has observed nationally, that 19 local governments that rely only on the property tax 20 have the least fiscal problems. 21 I think if we looked at the situation that 22 our cities face in New York, that New York City has 23 a much easier time of balancing its budget than do 24 the upstate cities, which have, as their only 25 free-and-clear revenue source of any magnitude, the 1 property tax, in which there's great pressure on the 2 property tax. 3 With the imposition by the State in 2011 of a 4 cap on local property-tax levies, it is more 5 important than ever for the state government to 6 honor its commitments, to cover a reasonable share 7 of the cost of the central public services through 8 adequate funding of revenue sharing with 9 general-purpose local governments and adequate State 10 aid to school districts. 11 New York State, and every state, divides 12 responsibility for different services between itself 13 and its local governments. 14 So New York State gives certain service 15 responsibilities to local governments, like running 16 public schools and teaching math. 17 Now, that costs an amount per pupil, and 18 there are certain increments for English-language 19 learning that goes on, and poverty, and other 20 things, but the big mismatch, is that the primary 21 revenue source, the property tax, taxable values, 22 aren't by some magic distributed in the same 23 proportion among school districts as children. 24 Same thing with counties: some counties, like 25 Fulton and Montgomery county, have larger 1 concentrations of poor people than they have of 2 taxable value. 3 And, so, you have tremendous variety in 4 New York State in the effective property-tax rate 5 that's necessary to pay for the local share of 6 Medicaid costs. 7 So there are endless fiscal disparities. 8 The reason I mention this is because, one of 9 the responsibilities the State has, and it should 10 recognize and it should work on, is that, because of 11 the service responsibilities and revenue sources it 12 gives to local governments, there are disparities 13 that exist that put many local governments in a 14 bind. 15 And in some of the local governments that 16 have the most difficult situation, have the least 17 fiscal problems. Because they're very conscious of 18 their situation, they just simply don't provide the 19 amenities that other places provide. 20 Just because somebody doesn't have a fiscal 21 problem doesn't mean they aren't being treated 22 unfairly. 23 The focus has to be on the fact that the -- 24 what is the tax base that a locality has relative to 25 its service responsibilities? 1 Discussions about state -- and because of 2 this, discussions about state tax rates and tax 3 credits indirectly determine how much pressure is 4 placed on the property-tax base and whether or not 5 local governments will be to able meet their service 6 responsibilities. 7 Why is that? 8 Because the rates and credits, and everything 9 else you said, at the state level, determines how 10 much state revenue there is; and how much state 11 revenue there is determines how much you're going to 12 be able to honor the traditional legal commitments 13 in revenue sharing and school aid; and that 14 determines what the pressure that remains on the 15 local elected officials and the local tax base. 16 So, you have to think about this as a state 17 and local challenge. 18 New York State has a progressive income tax. 19 Not as progressive as it used to be. 20 When Nelson Rockefeller left office, 21 New York State had 14 brackets, going from 2 percent 22 to 15 percent. 23 And, for several of the years, at the end of 24 the, Rockefeller, Wilson, Administrations, and the 25 early carriers, there was 2 1/2 percent surcharge, 1 so the top marginal rate was 15.3 -- effectively, 2 15.375 percent. 3 Over time, there was a flattening out of the 4 bracket structure. 5 So between the beginning of the 6 Kerry Administration and the mid-'90s, brackets were 7 eliminated from the bottom and the top. 8 The 2 and 3 percent brackets were eliminated, 9 so it started with 4 percent, and the top bracket 10 was 6.85 percent. 11 So there were four brackets, all in a very 12 narrow range, from 4 to 6.85 percent. 13 And you reached the top bracket in terms of 14 taxable income, for married couples at $40,000 of 15 taxable income, and, for single people, $20,000. 16 Now, it's not as bad as it sounds, because 17 that's -- it's bad, but not that bad, because that's 18 taxable income that's after deductions and 19 exemptions. 20 So that means, a family with about $60,000 of 21 total income has about 40,000 of taxable income, so 22 they're just beginning to get in that area where 23 they're paying taxes at the top marginal rate. 24 It wasn't until 2003 that the legislature 25 reached an agreement on a temporary three-year 1 increase in the top rate. It did a temporary 2 three-year increase again in 2009. And that's -- it 3 extended that now, through 2017. 4 So the temporary top rates that have been in 5 place since 2009, for 3 years, it was 8.97 percent, 6 and it's currently 8.82 percent. 7 You are -- given the mix of witnesses you 8 have at the hearings, you'll obviously hear a lot 9 about how that personal income-tax rate should be 10 less. 11 And what's the implication? 12 The implication is that, somehow, because of 13 us having a high income-tax rate, and having 14 increased the high -- the top marginal income-tax 15 rate in 2009, that we lost high-income people. 16 And, so, there are various statistics that 17 are thrown around about migration studies, whatever, 18 from the IRS. 19 But what you can look at, is the bottom-line 20 information published by the IRS on the distribution 21 of taxpayers, by state, for years. 22 From 1997 through 2001, they have data on 23 their website, breaking it down to increments up to 24 a million; 25 From 2002 until 2009, only up to 200,000; 1 But starting in 2010, 2010 and '11, the IRS 2 has published data again, showing the distribution 3 of taxpayers, by state, in income brackets, up to 4 and including a bracket of a million and above. 5 What does that show about New York State? 6 Over this 10-year period, from 2000 to 2010, 7 the number of federal taxpayers with adjusted gross 8 income above $1 million increased 17.1 percent 9 nationally; but, nationally, that increase was 10 38.9 percent. 11 In New York State, the amount of these 12 taxpayers' adjusted gross income increased 13 20.8 percent nationally, but 57.4 percent for 14 federal taxpayers from New York. 15 In the "500,000 to a million" category, the 16 number of taxpayers grew 37 percent nationally; 17 41 percent in New York. 18 In the "100,000 to 200,000" category, it grew 19 faster at the national level. 20 But at those very high income levels, which 21 were the income levels that business groups warned 22 us would be depleted if New York increased its high 23 marginal income-tax rate, New York grew faster than 24 the nation, not slower; 25 And for the middle income brackets, New York 1 grew just a little bit slower than the nation, 2 commensurate with its slower population growth; 3 And in no way provides any evidence of the 4 implication, because it's only an implication, not a 5 conclusion, that the migration data indicates that 6 New York is losing income-generating taxpayers who 7 can also generate jobs. 8 Why do I mention this? 9 Because I think, from both a fairness and an 10 economic perspective, the best way to provide the 11 revenue, both for adequate services and for 12 property-tax relief, is through a progressive income 13 tax. And I think you have to weigh that. 14 And I think the progressive income tax is 15 good for the economy, not bad for it. 16 So I take issue with some of the earlier 17 speakers on that. 18 Let me just go quickly through the remaining 19 portions of the testimony, just focusing on the 20 topics. 21 "New York State should not provide tax 22 subsidies." 23 Well, I tend to agree with some of the 24 earlier speakers who argue that we should try to 25 reduce tax subsidies, generally, so I agree with 1 that. 2 But at the very least, we shouldn't provide 3 tax subsidies for companies that outsource jobs, or 4 otherwise reduce employment in the state. 5 "Economic-development tax breaks should only 6 go to businesses that create and maintain 7 good-paying jobs for the state." 8 Take the state's investment tax credit, for 9 example, it's pushed as something that's going to 10 increase employment, but there's no employment 11 tests. 12 So you could very easily, and I won't go into 13 the details now, modify the investment tax credit to 14 increase the number of years for which the 15 employment incentive credit is based, so that firms 16 that reduce employment get less of a benefit, and 17 firms that increase employment get more of a 18 benefit. 19 Next major category: 20 "Loopholes and tax breaks that allow large 21 multi-state and multi-national corporations to pay 22 proportionately less in state income taxes than 23 small businesses, should be fixed or eliminated, and 24 the integrity of the corporate alternate minimum tax 25 should be restored so that large profitable 1 corporations are not able to reduce their tax 2 liability below a reasonable percentage of net 3 income." 4 This is on pages 5 through -- 5 and 6. 5 And I go into detail about two things that 6 were touched on by earlier speakers. 7 The speaker from the Tax Foundation talked 8 about the move away from a uniform method of 9 apportionment called the "three-factor formula." 10 In the early 1950s, many businesses and 11 government officials got a model law adopted, the 12 "Uniform Division of Income for Tax Purposes Act," 13 that recommended that all states use the same 14 apportionment formula. 15 And, starting -- the speaker from the 16 Tax Foundation mentioned Iowa, but New York really 17 began the march of more -- of larger states doing 18 this, when in a special session in December of 1975, 19 New York State broke away from the traditional 20 three-factor formula and double-weighted sales, on 21 the theory that it would reward firms that brought 22 wealth into the state by reducing their taxes; and 23 firms that benefited from the state, but didn't have 24 as much property and payroll here, would pay more. 25 Several years later, there was a tax-study 1 commission that had access to the tax data for doing 2 an analysis. 3 And what it found out is, the deal in 4 December of 1975, was that the State would increase 5 the corporate income tax rate by a percent. 6 I think it was, from 9 to 10 percent. 7 And -- but to temper that for the companies 8 that brought wealth into the state, it would adopt 9 double-weighting of sales. 10 The study by the tax-study commission in the 11 early '80s found that the benefit to the firms 12 that benefited from the double-weighting of sales 13 wiped out all of the revenue increase from the firms 14 that paid the higher rate. 15 So the double-weighting of sales gave a 16 revenue benefit to a small number of firms that was 17 greater than the tax increase that all the other 18 firms paid by the rate increase. 19 The -- it -- I couldn't tell if the 20 Tax Foundation supports the move to single-sales 21 factor, or not. 22 Given their integrity on some tax-subsidy 23 issues, I wouldn't be surprised if they did not 24 favor this, but, they might. 25 But, a lot of business groups, business 1 organizations, like the Business Council, adamantly 2 support the move to weighting on only sales. 3 The trick is, that there's a federal law, 4 Public Law 86-272, which says that a state can only 5 tax the -- a portion of the income of a firm that 6 sells goods if that firm has a physical presence in 7 the state, has property or payroll in the state. 8 That, if it has only sales, it's not taxable at all. 9 So as business groups have been lobbying 10 state legislatures around the country, getting more 11 and more state legislatures to move to 12 single-weighting of sales, or, at the very least, 13 higher weighting of sales, it reduces the amount of 14 the income of multi-national corporations that's 15 taxable by any state. 16 But to show what creative and effective 17 lobbyists they are, they're simultaneously pushing 18 for something in Washington called "BATSA," the 19 Business Activity Tax-Simplification Act, which 20 would say, that, Well, you could have a little bit 21 of property and payroll in the state, and still not 22 be subject to taxation. -- creating a de minimis 23 standard, and, there are proposals to extend that 24 exemption to the sale of services as well as goods. 25 So it's a double-squeeze that's going on: 1 Getting the states to allocate income for corporate 2 income-tax purposes more on the basis of sales, and, 3 trying to get the federal law changed to make it 4 harder for states to tax income based only on sales 5 apportionment. 6 So, the states aren't taking action in the 7 interim, and some of them are doing the things which 8 you'll -- is a little hard to argue, on a fairness 9 perspective, but you can understand the frustration 10 of the states that, in recent times, have moved to 11 gross-receipts taxes as opposed to a corporate 12 income tax. 13 The other thing that Ken Pokalsky, from the 14 Business Council, mentioned, that I touch on in my 15 testimony, he said that the alternate minimum tax 16 for corporations should be eliminated. 17 So why do we have an alternate minimum tax? 18 It dates to 1987, when there was final action 19 in the legislature in 1987, on a corporate tax 20 reform, based on six years of study of the type 21 you're proposing, to look at an overall review of 22 the tax system; to look at the idea of broadening 23 the base, by eliminating credits and deductions, and 24 lowering the rate. 25 The original proposal was to lower the rate, 1 from 10 to 7 percent, and to eliminate a large 2 number of preferences. 3 What finally made it through the legislature 4 in 1987, was a proposal that didn't go as far, but 5 it did some rate reduction. But the way it did some 6 rate reduction, was by imposing the alternate 7 minimum tax. 8 And to oversimplify, this is on page 6: 9 "The intended purpose of this set of changes 10 was to provide that a firm would pay state taxes on 11 its income at 9 percent, with preferences; or 12 3.5 percent, without preferences." 13 So the alternate minimum tax is actually a 14 form of broadening the base and lowering the rate. 15 It's providing a safety net under the 16 corporate income-tax system. 17 In 1987, when this was enacted, the 18 Business Council strongly supported the proposal. 19 Since then, as times have created the opening 20 to go further, they now ask for repealing the 21 alternate minimum tax, which was an essential part 22 of the compromise that allowed for the overall rate 23 reduction and simplification that they supported in 24 1987. 25 Page 7: 1 "Provisions of the law that allow 2 investment-management income to be taxed less than 3 wages or other business income should be 4 eliminated." 5 This is primarily an issue with the 6 New York City unincorporated business tax. 7 New York State should reduce the pressure 8 that it places on the local property tax, by 9 increasing revenue-sharing, and by increasing the 10 State's share of the cost of both education and 11 Medicaid. 12 And our final point, on page 8: 13 "New York State should provide targeted tax 14 relief." 15 Technically, the way to do this is called a 16 "real-property tax circuit-breaker." 17 New York State should provide targeted tax 18 relief to longtime residents for whom, through no 19 fault of their own, property taxes on their primary 20 residences have become an inordinate share of their 21 income. 22 Thank you. 23 24 25 1 SENATOR DeFRANCISCO: Senator Krueger. 2 SENATOR KRUEGER: Thank you, Frank. 3 You, as usual, are offering us a dissertation 4 on what we should think about in tax policy, so 5 I want to thank you. 6 You were here, I believe, when I was asking, 7 I think, one or two of the previous testifiers about 8 the impact of New York State having different models 9 for corporations who pay taxes -- the S, the C, the 10 LLC -- and the potential skew in the outcomes of our 11 having that policy. 12 What's your opinion about whether we ought to 13 be reforming and going to a, you know, one-size 14 model? 15 FRANK MAURO: I think you should think about 16 it, and try. 17 I think there's an additional problem that 18 you would be able to address in doing this. 19 We frequently talk about the personal 20 income-tax system in terms of adjusted gross-income 21 categories. 22 And the reason I know why I do that, is 23 'cause all the data from the state and federal 24 government is published based on adjusted 25 gross-income categories. 1 In some years, and this is also the same for 2 the federal data, the same time period I mentioned, 3 that, for '97 through 2001 this data is available, 4 and, again, for 2010 and '11, it's available, but 5 it's not available for 2002 through 2009. 6 In its breakdown of tax returns, by state, by 7 adjusted gross-income categories, for the two most 8 recent years, and for those earlier years, but not 9 for the previous eight, the IRS and the State Tax 10 Department doesn't do this for any years. It just 11 does adjusted gross-income categories, and it does 12 adjusted gross-income categories, primarily, in any 13 detail, for only returns with tax liability. 14 What the IRS has available for some years, is 15 a category of AGI of a dollar or less, or, break 16 even or less. 17 And, so, you have loads of taxpayers who have 18 negative AGI because of paper losses; not real 19 losses, but paper losses, from depreciation, from 20 creative partnership investments, from a whole 21 variety of things. 22 So, I don't remember the numbers in detail, 23 but they are impressive. 24 When you look at 2010 and 2011, and you look 25 at that category of a dollar or less of AGI, 1 including people with negative AGI, you find, for 2 New York State, for example, the -- and I don't 3 remember this number exactly, it's something in the 4 hundred and sixty to a hundred and eighty thousand 5 dollar range, that the average AGI of New York 6 taxpayers in the one-dollar-or-less AGI is a hundred 7 and six -- a negative a hundred sixty to a negative 8 a hundred and eighty thousand. 9 Now, there's not many poor people who are 10 making up that average, but because there are some 11 poor people who probably have zero income, but file 12 for certain benefits, but, you can't really have 13 zero income and get the earned income tax credit. 14 SENATOR KRUEGER: You have to have wages. 15 FRANK MAURO: You need that earnings. 16 So it's probably -- it's probably even very 17 few poor people who are in the AGI category of a 18 dollar or less, or for some years called "break even 19 or less." 20 So, I think that -- and then there's a 21 breakdown. 22 And, so, in those categories where you see 23 the big negatives, are business or farm income are 24 big negatives, and partnership and S-corporation 25 distributions are big negatives. 1 So I think that one of the problems that the 2 existing system of taxing unincorporated businesses 3 have, is, while a business owner can pay him or 4 herself a salary, and that salary is taxable like 5 anybody else's wages, it gets combined with the 6 Schedule C bottom line, which can be negative, and 7 negative enough to make the entire return negative 8 in terms of AGI. 9 So I think there are -- you know, while the 10 Business Council has called for looking into this, 11 I think there are some things that -- some business 12 people, maybe not their members, benefit from 13 greatly, that could be exposed. 14 So I think that there are a lot of ways that 15 we haven't really scratched the surface of, and -- 16 by which really high-income people have no or 17 negative tax liability. 18 SENATOR KRUEGER: Thank you. 19 I'm very interested in anything more anyone 20 can share with me about that. 21 SENATOR MARCELLINO: Frank, the question that 22 I asked of somebody else before, it was E.J., the 23 progressive tax we have now, should we replace it 24 with a flat tax, as some states seem to be moving in 25 that direction? 1 KEN POKALSKY: What would be the reason for 2 doing it? 3 SENATOR MARCELLINO: Spread it out. 4 Fairness. 5 FRANK MAURO: Okay. 6 Well, I would say no, if the argument is on 7 fairness, because I would say, not all income is 8 equally capable of paying taxes. 9 "Not all income is equally capable of paying 10 taxes," what does that mean? 11 Thinking back to macro -- basic introduction 12 to macroeconomics, the consumption function, the 13 marginal propensity to consume, that out of your 14 first -- I'm going to simplify -- out of your first 15 $30,000 of income, you probably have to spend, 16 virtually, all of it to live. 17 Out of your [unintelligible] $30,000 of 18 income, you probably don't have to spend any of 19 it -- out of it to live. You can either invest it 20 or save it. 21 So what we have in the tax system are 22 methods, both, of shielding subsistence income from 23 taxation, and taxing earlier increments of income at 24 a lower rate than higher incomes. 25 So I believe in a progressive income tax. 1 I think you have enough taxes that are 2 already, not just a flat tax, but worse than a flat 3 tax, that you need to ameliorate. 4 It gets back to the argument of, Do you care 5 about the fairness of the tax system as a whole, or 6 an individual tax? 7 The tax that people want to make flat is the 8 personal income tax, which is the one most 9 progressive element of the tax system. 10 But, the tax system is made up of progressive 11 taxes and regressive taxes. 12 So, while the income tax taxes a higher 13 portion of the income of a millionaire than it -- 14 well, a millionaire who's paying taxes on their 15 income -- than of a lower-income person, the 16 property tax, while the high-income person might be 17 paying more in property tax, they're almost 18 certainly paying a smaller percentage of their 19 income in property taxes than the middle-income 20 family. 21 So, there's property tax, sales tax, excise 22 taxes; there are many elements of the tax system 23 that are already regressive, that hit lower-income 24 people and middle-income people at a 25 higher percentage of income basis than high-income 1 people. 2 So if you took and made the personal income 3 tax flat, made it a flat rate, that would make the 4 tax system, as a whole, more regressive. 5 You know, I would think an interim -- if 6 you're interested in a flat tax, an interim goal 7 might be, to try to make the tax system, as a whole, 8 flat. Try to make the state and local system, as a 9 whole, flat, where you're taking into consideration 10 the overall workings of the federal, state, and 11 local tax system, and looking at what people pay in 12 state and local taxes, as a whole, of all kinds of 13 state and local taxes, not just the income tax. 14 Because if you made the personal income tax 15 flat, you would be making the tax system, as a 16 whole, less fair. 17 SENATOR MARCELLINO: So a circuit-breaker -- 18 FRANK MAURO: Is one way to do that. 19 SENATOR MARCELLINO: -- placed exactly? 20 The circuit-breaker, if you eliminated 21 everything, lowered the rates, all deductions -- 22 take out the deductions, lower the rates, everybody 23 pays -- 24 FRANK MAURO: Well, a circuit-breaker is a 25 way to use revenue from the income tax to reduce the 1 property-tax burden on taxpayers that are 2 overburdened. 3 So, if you don't have a progressive income -- 4 I mean, one of the things I said several times in my 5 testimony, one of the reasons for a progressive 6 income tax, is it gives you the revenue necessary to 7 provide relief to the property tax. 8 Now, somebody will say, but there's no 9 guarantee you're going to do that. 10 And, so, I can't speak for you, but I would 11 like to see you use it for that purpose; that, use a 12 progressive income tax to honor the commitments on 13 revenue sharing and school aid, and to fund a 14 realistic middle-class circuit-breaker. 15 SENATOR MARCELLINO: So if -- well, in line 16 with this, but, if we increase -- state level, we 17 increase aid to localities, we increase school aid, 18 we increase, whatever, are we not just spreading the 19 tax burden around? 20 Aren't we shifting the burden? 21 If the state takes on more responsibility, 22 and then pays it back with increased aid, are we 23 shifting the burden on the statewide taxpayer? 24 Or -- 25 FRANK MAURO: Yes, yes, you are. 1 In other words -- I mean, there's an irony. 2 You know, take Long Island, because 3 Long Island is higher, on average, in income, but it 4 also -- you know, we've done analysis, which I sent 5 to you, which divides the state into four areas: 6 Long Island, New York City, the metro north suburbs, 7 and the rest of the state. 8 And on average -- because, remember I said in 9 my testimony, that while, on average, people on 10 Long Island pay a higher percentage of their income 11 in property taxes than people in Syracuse, it 12 doesn't mean that there aren't people in Syracuse; 13 they're just fewer and far -- further between, but 14 there's still a good number of them that are paying 15 ridiculous shares of their income in property taxes. 16 So when we break the state into four regions, 17 using the microdata from the American Community 18 survey, what we find is that, on average, on 19 Long Island is the highest property taxes, or, the 20 highest percentage of income; 21 Second highest in metro north; 22 Then very low in both upstate and in 23 New York City. 24 Property taxes in Upstate New York are, on 25 average, low, relative to income, because home 1 values are very low. 2 So property taxes in Upstate New York, the 3 Governor frequently says: Well, 16 of the counties 4 in the United States with the highest property taxes 5 relative to home value are in Upstate New York. 6 Well, what about if you looked at the overall 7 cost of housing, both your mortgage and your 8 property taxes, and it would be among the greatest 9 bargains in the country. 10 So one of the reasons why property taxes are 11 very high relative to home value in 12 Upstate New York, is that home values are relatively 13 low. 14 So I think the real test of property-tax 15 burden is property tax relative to income; the 16 residential property tax paid by the household 17 compared to the income of the household. 18 And, it can't be done on an average basis. 19 While I'm saying that, on average, 20 Long Island is higher, that's not a reason to have a 21 tax policy that says we're going to provide a 22 special tax break for Long Island. 23 It's because there's a high concentration of 24 people on Long Island, and we should treat people in 25 the whole state the same. 1 And if we did provide this circuit-breaker, 2 and we increased the income-tax rate to pay for it, 3 yes, on average, Long Island is going to contribute 4 more than Western New York is going to contribute, 5 but Long Island is also going to benefit more from 6 the circuit-breaker. 7 SENATOR MARCELLINO: I would appreciate that 8 analysis you were talking about -- 9 FRANK MAURO: Yes. 10 SENATOR MARCELLINO: -- if you could send it 11 to us, please. 12 FRANK MAURO: Yeah. 13 Yeah, I'd like to talk to you about it. 14 SENATOR MARCELLINO: That would be great. 15 FRANK MAURO: Okay, thank you. 16 SENATOR DeFRANCISCO: Thank you very much. 17 FRANK MAURO: Okay, thank you, 18 Senator DeFrancisco. 19 SENATOR DeFRANCISCO: Next speaker, 20 Brian McMahon, executive director of New York State 21 Economic Development Council. 22 BRIAN McMAHON: Good afternoon, Senators. 23 SENATOR DeFRANCISCO: Good afternoon. 24 BRIAN McMAHON: Thank you for the opportunity 25 to testify. 1 I will be brief. A number of the issues that 2 I cover in my testimony have been covered, and 3 I will certainly refer to that. 4 Our members represent local 5 economic-development agencies throughout the state, 6 as well as private-sector service providers to local 7 projects. 8 Taxes matter in economic development, and 9 New York's tax system is too expensive, it's too 10 complex, it's too unpredictable, and, it's too 11 uncompetitive. 12 And, because of our tax environment, as well 13 as other factors, they have had an impact on job 14 growth in New York State over the past several 15 decades. 16 And I have provided a chart which shows 17 private-sector job growth in New York compared to 18 the U.S., by decade, beginning in 1940, and, 19 obviously, the state is lagging the rest of the 20 country by a lot. 21 But if this chart compared just upstate to 22 the rest of the country, the disparities would be 23 much greater. 24 In surveys of company executives, and site 25 location, consultants have identified the most 1 important factors that influence where companies 2 will invest and build new facilities. 3 A safe business tax environment is a top-five 4 factor. 5 In the -- in its 2012 survey, 6 "Area Development Magazine" ranked taxes as the 7 fourth most important consideration for businesses 8 when deciding where to locate new facilities, and 9 80 percent of those surveyed said that taxes were 10 either very important or important. 11 I can tell you, anecdotally, that tax burden 12 is a door-closer for economic-development purposes. 13 It often prevents our members and our 14 partners at ESD from even getting the opportunity to 15 talk to company executives about the advantages of 16 building projects and doing business in New York. 17 This year, the Governor and the Legislature 18 created Start-Up NY Program, which implicitly 19 recognizes the harmful impact that New York high-tax 20 burden has on private-sector investment and job 21 creation. 22 The program creates a tax-free environment in 23 which to operate a business, while, we believe, 24 leveraging one of the state's most important 25 economic assets, its colleges and universities. 1 But while programs like Start-Up NY are 2 important, New York will never shed its reputation 3 as a high-tax state until it commits to implementing 4 broad-based business tax cuts. 5 The key is to begin, and the goal should be 6 to become tax-competitive, especially for New York's 7 manufacturing sector. 8 And, Ken Pokalsky, from the Business Council, 9 referenced a number of statistics which shows, kind 10 of the multiplier effect that manufacturers have 11 compared to other sectors. 12 There's a $16,000 wage premium for 13 manufacturing jobs. There is a 35 percent 14 multiplier effect. 15 So, for every dollar invested by a 16 manufacture, another $1.35 cents is invested in 17 the -- in the economy. 18 So, to maintain and grow this high-wage, 19 high value-added sector, we would urge the 20 Legislature to consider phasing out the corporate 21 income tax for manufacturers. 22 Research conducted by the 23 Edward Lowe Foundation shows that 80 percent of job 24 growth comes from existing businesses that expand. 25 Consequently, manufacturers that are already 1 here will account for most of the future growth that 2 will occur in this sector. 3 However, most of the state's 4 economic-development and tax-incentive programs are 5 geared toward attracting new businesses to New York 6 and apply to new jobs or investment. 7 Elimination of the corporate income tax would 8 help retain New York's existing manufacturing base, 9 give these employers justification to expand here, 10 allow them to invest more in technologically 11 advanced equipment and worker training, and 12 eliminate an important obstacle that prevents many 13 manufacturers from investing in New York State. 14 For non-manufacturers, the State should 15 commit to significantly lowering tax rates over the 16 next five years, possibly by half; and at the same 17 time, we think that a systematic review of the 18 efficiency of New York's lengthy list of tax 19 exemptions and tax credits for people and businesses 20 should be conducted, with the goal of allocating 21 savings toward broad-based tax cuts. 22 And one thing that I just want to emphasize, 23 I mean, economic-development programs that we use to 24 try to attract investment by companies, either, 25 they're already here, or, they're coming in and 1 we're trying to attract into the state, they're 2 important because of how high our taxes are. 3 So, to the extent that we can reduce our tax 4 burden, these tax credits and tax incentives become 5 less important. 6 And I would urge, that if such a review of 7 tax exemptions and tax credits is undertaken, 8 I would also look at the real-property tax 9 exemptions that exist in the real-property tax law. 10 If you look at real-property -- or, 11 Section 400 through, I think, 800, in the 12 real-property tax law, there are 13 some-165 real-property exemptions. 14 And I think those should be looked at as 15 well, and I think that that would add to revenue 16 that could be generated by local governments also. 17 E.J. McMahon mentioned the estate tax. 18 We support either eliminating the estate tax 19 or pegging it to the federal threshold. 20 Carl Schramm, who's the former president and 21 CEO of the Kauffman Foundation, current university 22 professor at Syracuse University, proposed 23 eliminating the estate tax as part of a plan to 24 revitalize upstate. 25 We believe that eliminating the estate tax, 1 or, as I said, pegging it to the federal threshold, 2 would be an incentive for older New Yorkers to stay 3 here with their families and grandchildren, friends, 4 and, with their money. 5 They would buy cars here, shop here, go to 6 restaurants here, and, generally, add wealth back 7 into the communities they otherwise would likely 8 depart for more tax-friendly states. 9 It's time to re-shore the wealth that leaves 10 the state because of our unfriendly estate taxes. 11 The 2 percent real-property tax cap, which 12 was enacted three years ago, was intended to slow 13 the growth rate of New York's most uncompetitive tax 14 by requiring local taxing jurisdiction to hold the 15 line on spending, by holding the line on their 16 revenue, or seeking permission from voters to go 17 beyond the 2 percent threshold. 18 But the cap has also allowed -- intended to 19 allow tax levies to rise, based on quantity change, 20 or new growth or significant additions or 21 improvements to existing properties, due to economic 22 development. 23 The additional new growth is to be factored 24 into the tax-levy growth factor to determine the 25 amount of increase from the prior year that taxing 1 jurisdictions can increase their tax levy. 2 Unfortunately, the new growth that is subject 3 to a payment in lieu of tax agreement or pilot is 4 excluded from the calculation for determining a 5 jurisdiction's tax-levy growth factor. 6 As a result, communities that are successful 7 in attracting new economic growth, through 8 incentives provided by IDAs, for example, are 9 penalized. 10 Senator O'Mara has introduced legislation, 11 S3591, that would allow changes in assessed value 12 for each property, under a pilot contract, to be 13 factored into the tax-levy growth factor. 14 And we would urge your consideration of that 15 legislation. 16 Let me close by making one recommendation 17 related to New York's innovation economy. 18 Two years ago, New York allowed its primary 19 startup tax-incentive program to expire. 20 The Qualified Emerging Technology tax-credit 21 program provided incentives to both startup 22 businesses and investors. 23 And since then, New York has adopted a number 24 of new programs aimed at facilitating tech-based 25 startups. 1 One important gap remains in New York's 2 startup toolkit: a tax credit to encourage angel 3 investors to fund startups. 4 We support, and would recommend, adoption of 5 a significant credit that could be taken over 6 three years for seed equity investments. 7 There are a number of ways you could cap it. 8 You could cap it at a maximum amount per 9 investor. You could also cap it on a total 10 statewide basis. 11 We think that should be considered. 12 With that, there's another -- there are other 13 statistical background information, but, I'd be 14 happy to answer your questions. 15 SENATOR DeFRANCISCO: Thank you, but just one 16 point you made, that, if you start lowering the 17 corporate tax rates, start lowering the manufacture 18 rates, there's less and less a reason for some of 19 these credits. 20 BRIAN McMAHON: Correct. 21 SENATOR DeFRANCISCO: So, in other words, 22 there is a give-and-take, and the business community 23 would, obviously, if their taxes are going down, 24 along the -- in a fair way among all corporations, 25 there'd be some people complaining, the ones that 1 had the big tax credits, because for a practical -- 2 as a practical matter, it will benefit more people, 3 more companies. 4 Is that fair to say? 5 BRIAN McMAHON: Yeah, I mean, I think that, 6 you know, eliminating a number of our tax credits, 7 I think, can be looked at. 8 We compete every day, Senator, with states 9 that have much lower tax -- business tax rates and 10 tax burdens than we do, but that still offer 11 significant tax incentives. 12 To me, I think the key is to look those that 13 are the most efficient, that are producing the 14 economic outcomes that we all want, and keep those, 15 and make decisions on the others. 16 And I think if we look at all of them, 17 I think we will find considerable savings, and we 18 will be able to apply them to broad-based tax 19 reduction. 20 But, I mean, the other thing that I would say 21 too, is that there's an impact. 22 I mean, we're not recommending this simply to 23 lower taxes for businesses; we're recommending this 24 to increase economic development for the state. 25 And we think that revenues will actually 1 increase for the state if you lower taxes across the 2 board and make New York more tax-competitive. 3 That happened in the '90s when we lowered the 4 personal income tax. Revenues went up, and they 5 went up, by the way, as a percentage of overall 6 taxes paid. 7 SENATOR MARCELLINO: The tax credit on 8 brownfields? 9 BRIAN McMAHON: Strongly support it. 10 I agree with comments that Kent Pokalsky 11 made; when you look at the cost of the program on 12 the development credits, most of the cost is 13 associated with a very small number of projects. 14 I think that if you look at the formula for 15 development tax credits, and modify them in a fair 16 way, but still make those credits meaningful, we 17 would support that. 18 But, I don't support, or we don't support, 19 making brownfield cleanup credits as a right, but 20 not the development credits, or allocating the 21 responsibility for determining whether there will be 22 development credits throughout the Empire State 23 development, as the Comptroller has recommended. 24 We think, let's -- if there's a cost issue we 25 have to address, and we think there is, we can 1 address it, but, you will have fewer cleanups if 2 there's not a development at the other end. 3 SENATOR MARCELLINO: Thank you. 4 SENATOR DeFRANCISCO: Thank you very much. 5 BRIAN McMAHON: Thank you. 6 SENATOR DeFRANCISCO: Mike Durant, 7 New York State director of the National Federation 8 of Independent Businesses. 9 MIKE DURANT: Good afternoon. 10 Thank you, Senators, for the timely, and 11 I think pertinent topic of today's hearing, and for 12 inviting us to participate today. 13 I'll follow up Brian McMahon's methodology of 14 doing this, and try to keep the lightning round 15 moving a little bit for all of you. 16 NFIB represents nearly 11,000 small 17 businesses in every corner of the state, from sole 18 proprietors, to farmers, and manufacturers, and 19 retailers. 20 We represent a broad spectrum of businesses, 21 and the importance of small business in the state's 22 economy cannot be understated. 23 At most recent count, there are approximately 24 1.5 million small businesses in New York which 25 employ more than 60 percent of New York's 1 private-sector workforce. 2 I'm not going to go through the stats, but 3 we've heard them before: We're 50th in business-tax 4 climate. Our state and local tax burden is 5 significant. 6 And I think our tax burden has been 7 adequately described as linked to numerous fiscal 8 problems we're seeing at both the state and local 9 level. 10 It has also led to a significant 11 out-migration population in New York which has a 12 direct impact on our state's revenue. 13 We have lost political clout in D.C., and 14 we're suffering from a, quote/unquote, "brain-drain" 15 that has put our current and future workforce in 16 peril. 17 Tax policy has a powerful ability to impact 18 the trajectory of the economy. 19 Simply, when you tax more of something, 20 you're going to receive less of it. 21 There is a reward/punishment or risk/reward 22 balance with tax policy. 23 The higher or more you tax individuals, 24 statistics show there will be gradually fewer of 25 them to tax. 1 The same holds true for goods and services, 2 with the effect the more amplified when the effect 3 of being taxed is mobile. 4 The Governor, when he took office, stated 5 that, quote, "New York has no future as the tax 6 capital of the nation." 7 This recognition of the problem is the first 8 step in any rehabilitation exercise; however, 9 there's been little done that has fully and 10 comprehensively addressed the problem. 11 Political simplicity has been trumping 12 public-policy necessity. 13 The decades-long theme of addressing 14 low-hanging fruit or implementing quick fixes have 15 not worked. 16 Initiatives, such as the recently enacted 17 Start-Up NY, are an acknowledgment of New York's 18 high-tax reputation, yet are used as a strategic 19 means to acquire new economic investment. 20 The signature shortcoming of this policy 21 initiative is that it fails to address the 22 considerable weight of our tax burden on existing 23 taxpayers and small business owners, which is why, 24 hopefully, we're here today. 25 As part of our testimony, NFIB has submitted 1 a 10-point comprehensive tax-reform agenda. 2 While the cost-savings of this plan for small 3 business is still being calculated, our hope is that 4 these ideas are a starting point of a significant 5 dialogue, from now through the budget season in the 6 next legislative session. 7 The focus of the majority of our agenda is on 8 those small businesses with net incomes of less than 9 $500,000 annually. 10 This is done because the prototypical, or 11 normal, quote/unquote, NFIB member has 7 to 12 10 employees, with an annual net income of around 13 $500,000. 14 It's imperative for lawmakers and the 15 Administration also to include personal income-tax 16 reductions with any corporate income-tax reductions. 17 A majority of small businesses are set up as 18 pass-through entities. This means that many small 19 business owners pay their business tax through 20 personal income tax. 21 A corporate-only approach, or a 22 personal-income-tax-only approach, will not fully 23 capture the small business community of the state of 24 New York, and that tax reform would fall flat. 25 Also included in our reform is: 1 The use of regional and local economic 2 factors in the sales-tax assessment process; 3 A three-tiered corporate tax cut for small 4 businesses with a net income of less than 500,000 5 annually; 6 A personal income-tax cut for small 7 businesses with ENI of less than 8 three hundred thousand dollars a year, with a more 9 modest cut to those between three hundred and 10 four hundred and fifty thousand per year. 11 As a slight change from what was submitted at 12 the end of last week, we recommend an immediate 13 repeal of 18-A assessment. 14 We also have tax cuts for small 15 manufacturers, and another reform, if not full 16 repeal of the MTA payroll tax. 17 Addressing our current tax issues is equally 18 as important as putting forth best legislative and 19 administrative practices, moving forward. 20 To that end, we are pushing for two 21 initiatives which would help promote a more balanced 22 tax policy, moving forward. 23 This proposal would require fiscal notes on 24 any legislation which would financially impact small 25 business and taxpayers, and we recommend a super 1 majority to improve any future tax increases. 2 We must also acknowledge the integral role 3 our family farms play in New York's present and 4 future economy, and address the threats they face. 5 Agriculture contributes billions to the 6 state's economy, and, currently, 23 percent of the 7 state's land area is used by farmers. 8 Without a cap on the annual-percent increase 9 for agriculture assessments, many family farms will 10 be forced to sell their land, permanently altering 11 this valuable and necessary component of New York's 12 economy. 13 Currently, legislation capping the ag 14 assessment is pending the Governor's signature, and 15 NFIB strong urges him to do so. 16 Absent the Governor's approval, there must 17 continue to be productive dialogue in an effort to 18 reduce the fiscal property-tax burden on our family 19 farms. 20 And, lastly, any discussion on comprehensive 21 tax reform must include mandate relief in our 22 property taxes. 23 NFIB strongly supported and advocated for the 24 property-tax cap, and thank you all for your 25 leadership on that issue, but we must continue the 1 dialogue by pushing for mandate relief. 2 Our position, always, was that reducing the 3 property-tax burden was a multi-faceted approach to 4 tax-cap plus mandate relief. 5 We've seen some with Tier 6, but we need to 6 see more. 7 Our state will never be truly open for 8 business if we have schools in our communities 9 suffering fiscal peril heightened, even where they 10 are now, or going bankrupt. 11 New York will never be a truly receptive for 12 new economic investment if our tax policy is not 13 broadly and dramatically overhauled. 14 New York will never be truly an attractive 15 destination to invest or live unless our tax burden 16 decreases. 17 Our proposal submitted today is somewhat 18 narrow and focused, yet comprehensive in impact. 19 This exercise, we hope, leads to more 20 discussions; we hope that these discussions turn 21 into action. 22 The Governor has, and continues to 23 acknowledge, taxes are a deterrent to the -- to a 24 revitalization of our economy. 25 Lawmakers on both sides of the aisle in both 1 Houses of the Legislature have continued to 2 highlight the importance of small business in both 3 the current and future state economy. 4 There's not anything that we have submitted 5 to you today that is easy. 6 I'm sure that there is not a reform idea 7 submitted by any organization today that is 8 politically simplistic, but the stats are there, the 9 facts are there, and the acknowledgment is now 10 there, so let's, together, work to dramatically 11 reform our tax system. 12 Thank you. 13 SENATOR DeFRANCISCO: Questions? 14 SENATOR MARCELLINO: What's the NFIB position 15 on brownfields, tax credits? 16 MIKE DURANT: Well, I'll do this: 17 One, we're neutral on that. 18 We believe that, you know, our members are -- 19 care about the environment. 20 We believe that there's a lot of land that's 21 been negatively impacted, that if receiving these 22 benefits could produce new economic activity. 23 We also look at the SECRA, the whole process, 24 and we strongly encourage significant SECRA reform, 25 so, our focus has been more there than on the 1 brownfield, but we've been neutral, and we take a 2 look at it each year. 3 SENATOR MARCELLINO: You talk about SECRA 4 reform. 5 Do you have thoughts on this? 6 Or -- well, you don't have to do it right 7 now, but, can you give us information on that -- 8 MIKE DURANT: I think if I was going to push 9 lawmakers to look in a certain direction on this, 10 I would look at the timeliness, the length of time 11 through the process, and the cost that the business 12 has to pay going through that. 13 It is a -- it inhibits activity, on the 14 outset, and seems to take, as we hear with a lot of 15 regulatory-type things, a significant amount of 16 time. 17 So I would look at doing what's best for the 18 environment, what's best for economic activity, but 19 doing so in a streamlined fashion. 20 SENATOR MARCELLINO: What's your thought on 21 repealing the MTA tax for counties outside of 22 New York City? 23 MIKE DURANT: Well, our position has always 24 been to look at repealing it throughout the MTA 25 service area, so, we're fine with that. 1 SENATOR MARCELLINO: Thank you. 2 SENATOR DeFRANCISCO: Thank you very much. 3 The lack of questions does not indicate a 4 lack of interest. 5 MIKE DURANT: Well, that's why I tried to 6 speak fast. 7 SENATOR DeFRANCISCO: But having presided 8 over many, many, many hearings, this happens in 9 every hearing. 10 MIKE DURANT: No problem. 11 SENATOR DeFRANCISCO: So, I appreciate the 12 information. 13 We've got your written material, and it's 14 very important. 15 Thank you. 16 MIKE DURANT: Thank you. 17 SENATOR DeFRANCISCO: Julie Suarez, director 18 of public policy, New York State Farm Bureau. 19 JULIE SUAREZ: Thank you, good afternoon. 20 SENATOR DeFRANCISCO: Good afternoon. 21 JULIE SUAREZ: Again, my name is 22 Julie Suarez. I work for New York Farm Bureau. 23 And as you all know, New York Farm Bureau is 24 the state's largest general agricultural advocacy 25 organization for our family farms in New York State. 1 I wanted to thank you very much for including 2 our farm families in this hearing today on tax 3 policy, because it is a topic that's of vital 4 importance to our members. 5 Of course, our members, as Mike Durant 6 alluded to, tend to be land-rich and cash-poor, as 7 the saying goes; and so, by far, the biggest issue 8 that our family farms face in New York, from a tax 9 perspective, is, in fact, the real-property taxes. 10 And to that end, I really wanted to thank the 11 Legislature, the Senate's Leadership, the Assembly's 12 Leadership, in passing the agricultural-assessment 13 valuation change, which will really help us correct 14 a systemic flaw in how the State's been valuing 15 farmland over the years. 16 So we just wanted to thank you for your work 17 this past session on that important topic. 18 New York Farm Bureau, as I said, has a very 19 long history in the state of New York, having just 20 recent celebrated our 100th anniversary. 21 As such, we are perhaps uniquely concerned 22 about the viability of our state's agricultural 23 land, but almost even more importantly, the 24 viability of our state's farmers themselves as 25 people who are able to maintain the land which we 1 need to grow local food for all New Yorkers. 2 USDA statistics, in 2011, are painting some 3 very interesting trends in New York State, and we're 4 quite concerned about them. 5 While over the past 40 or 50 decades, you can 6 look at agricultural statistics and very easily say 7 numbers of farmers declined through time as we've 8 gotten more efficient. Ever since World War II, 9 every year, we seem to lose numbers of farmers. 10 What's new in the 2011 statistics, however, 11 is that, for the first time, we're seeing a loss in 12 the actual farmland used in New York State 13 specifically for food production. 14 We've seen losses in every category of farms, 15 both small, medium, and large, but, again, most 16 significantly, is the fact that we're actually 17 starting to lose farmland. 18 While statistics don't tell us the cause, 19 given our organization's long involvement in 20 agriculture in New York, we can point to: 21 New York State's high cost of farming, what 22 I would refer to as a very robust regulatory 23 structure in New York State; 24 Trends in land investment that started with 25 the event of 9/11, and continued with the global 1 financial meltdown, when we saw a lot of people in 2 the city try to park their money, particularly in 3 Long Island and Hudson Valley farmland, and take 4 that land out of production; 5 Global market forces; 6 And, of course, what we would point to as a 7 primary concern of ours, and the topic that I wanted 8 to talk about today, is the average age of the 9 New York State farmer. 10 And what we've seen through the statistics, 11 is that the increase in the age of farmer, from 12 about 55 to, now, 57, is having a dramatic impact, 13 and we would say probably influencing some of the 14 gloomier news that we've seen in 2011. 15 While it may seem strange to say we're going 16 to talk about tax policies that relates to the 17 average age of our farmers, tax policy is vitally 18 important if we're going to echo, and what 19 Senator Marcellino had said earlier, if we're going 20 to make sure that we're capturing the next 21 generation and having them stay in New York. 22 As you alluded to earlier, Senator, we have, 23 you know, excellent colleges in agriculture in 24 New York State, from Morrisville, Cobleskill, and 25 our Cornell land grant, but we have to make sure 1 that we capture those educated farmers, and give 2 them the tools to actually stay on their land and 3 take over that family farm. 4 To that end, in going to my testimony, we 5 wanted to again make four points: 6 The first point we wanted to make is that, of 7 course, nothing is certain in this life but death 8 and taxes, as the saying goes. 9 And in New York, what's different about our 10 family farms, is that we have the $1 million 11 exemption from the state level. At the federal 12 level, the exemption from the estate taxes is 13 5 million. 14 But at the state level, when you're counting 15 the value of a farm estate, it's not just the land 16 and your buildings; it's also the value of your 17 livestock. It's the value of your dairy cow. It's 18 the value of your actual bees, if you're a honeybee 19 or an agriculturist farmer. 20 So when we assess, and try to figure out what 21 the impact is of the estate tax in New York on our 22 family farms' ability to transition to the next 23 generation, we're talking about valuing a lot of 24 assets, when our farmers frequently don't have the 25 actual ability to pay those estate taxes. 1 To give you a snapshot: 2 Farm Credit, which is the largest lending 3 institution to New York farmers, recently released a 4 report that indicated that, of farmers with an 5 estate valued at 2 million or more, about half of 6 them would actually have to sell the family farm in 7 order to afford the tax liability at a $1 million 8 threshold. 9 So that's a very strong concern to us in 10 New York agriculture. 11 One of the points that we wanted to make, is 12 that we certainly agree with E.J., and his point 13 about completely eliminating the estate tax would be 14 great, from a farm perspective, but from a realistic 15 perspective we also, Senator DeFrancisco, strongly 16 support your legislation which would make 17 New York State's estate tax threshold, from 18 1 million, to 5 million, again, consistent with the 19 federal level. 20 Senator Ritchie as well has legislation which 21 would do the same thing, but for farms only. 22 So those are two pieces of legislation that 23 we, as an organization, strongly feel should be 24 adopted and acted upon as we go forward with our 25 concerns about tax policy. 1 We've seen our neighboring competitors in the 2 states of Pennsylvania and Illinois recently acting 3 to address inheritance-tax issues on farms, and 4 other businesses. 5 So, again, we'd urge the State of New York to 6 follow suit. 7 The second point I wanted to make, that also 8 impacts -- or, gets at the transitional issues that 9 our farmers are facing right now, and that average 10 age of New York's farmers, is that the fees that 11 New York State assesses on farmers and businesses 12 can be quite extensive. 13 And while it may seem like a small thing, one 14 of the issues that our members are very strongly 15 concerned with is the LLC filing fee. 16 For our members, while a lot of people in the 17 media, and others, don't like to think about the 18 term "corporate farm," it has a very negative 19 connotation in the media, but from our perspective, 20 encouraging our members to form corporations is 21 probably going to be one of the best ways to 22 actually make sure that that farm is able to 23 transition to the next generation of either family 24 or non-family in ownership. 25 So many of our farms are using an LLC or a 1 C corp form of ownership. 2 The fee schedule for that can be anywhere 3 between 15,000 -- excuse me, 1,500 a year or 3,000 a 4 year, depending upon the gross income of the LLC. 5 What's very difficult, from a farm 6 perspective, is that, frequently, farmers' income 7 fluctuates dramatically from year to year. 8 So in one year, if you're an apple farmer, 9 and you had the disastrous apple year we had last 10 year, you may have to pay that fee, based -- in 11 large part, when the fee is calculated, based on 12 your income level of the previous year. 13 So those fees become very difficult for our 14 members, and we don't often know or have a true 15 sense of whether or not you're going to be paying a 16 $1,500 fee or a $3,000 fee, from year to year. 17 And that is a barrier to business planning, 18 and a barrier to our members actually forming that 19 incorporation. 20 The other point about the LLC fees that 21 I would like to make, is that many of our farms are 22 very diversified. This is a great point about 23 New York agriculture, and it sets us aside from some 24 of the traditional crop farms out in the midwest. 25 And, so, if you have an apple farm -- I don't 1 know why I keep picking on apple farms today -- but 2 if you have an apple farm, with the father and the 3 mother owning the bulk of the apple orchard, then 4 you have a daughter running a farm distillery, you 5 have a son-in-law who's doing the farm-market part 6 of the operation, all those entities would have 7 different LLCs. 8 So from a farm perspective, we're talking, 9 not just about paying one fee of either 1,500 or 10 3,000 a year, but multiple fees, depending upon the 11 structure of the farm. 12 So when you add those together, that LLC fee 13 really places a significant burden on our members. 14 What we would recommend is that, from a farm 15 perspective, you base that LLC fee on the net income 16 from farming, or, what they have to file federally, 17 their Schedule F. 18 That would be a far fairer way, in our 19 opinion, of addressing that issue, and helping to 20 encourage our members to form those LLCs, because, 21 again, when we look at the average age of the 22 farmer, we need to make sure our farmers have all 23 the tools that they need in order to better plan, 24 for transitional purposes. 25 The third point that I wanted to make, and 1 it's not necessarily correlated to retirement issues 2 faced by many of our farms, but as our members see, 3 and this is probably unique to agriculture, an 4 ongoing -- we would like to see an ongoing and 5 conscious effort for tax-policy tools to recognize 6 today's means and methods of farming. 7 New York Farm Bureau has found it necessary, 8 and we really appreciate the Legislature and the 9 Governor's support for this over the years, but we 10 found it necessary to request legislation to 11 redirect tax-policy interpretation of statute, or 12 internal guidance of the Department of Tax and 13 Finance, as to what actually constitutes a 14 "family farm" today. 15 An example of this would be the legislation 16 in 2011 that recognized commercial equine 17 operations, and maple production, as legitimate 18 farming businesses; and, therefore, eligible to 19 receive the agricultural assessment. 20 Right now, we're going through an issue in 21 the Southern Tier of New York State, where we have 22 farmers who would like to do a practice called 23 "silvopasturing," which may sound, again, this is 24 probably a little bit obscure, when other speakers 25 have been talking about flat tax, but it's very 1 important to our members, which is, we have farmers 2 who want to adopt a different practice of pasturing 3 animals in a wooded or marginal-land area. 4 Tax Department decided, in an opinion of 5 counsel a few years ago, that that was not a valid 6 agricultural practice; and, therefore, that land 7 would not be eligible -- fully eligible for 8 agricultural assessment. 9 Again, that's an example of something that 10 we're trying to correct through legislation, but 11 it's something that, quite frankly, we think that 12 the Department of Agricultural Markets would 13 probably be better suited today to make those types 14 of determinations, because they're more up to date 15 about what constitutes "modern farming operations" 16 today. 17 The fourth point that I wanted to make, is 18 that the more time that our farms spend filling out 19 our paperwork, the less time they spend in their 20 fields producing food. 21 And, again, this may seem like a small point, 22 but simple actions, as it relates to tax policy, 23 like streamlining and consolidating our tax forms 24 and deadlines, can really translate into thousands 25 of dollars saved at the farm level, in terms of the 1 farmer's time, the accountant's time, and 2 recordkeeping requirements. 3 Just as a concrete example: Farmers utilize 4 three separate forms to receive the allowable tax 5 refund for the purchase of diesel fuel used in farm 6 production. 7 Those three forms are the FT-946, the AU-630 8 and the FT-500. 9 So if you can imagine, you're trying to run 10 your business, and take advantage of a tax exemption 11 which you're allowed to have, and have been allowed 12 to have since the 1950s, you have to fill out 13 three separate pieces of paperwork in order to 14 achieve that goal. 15 So this is a point that we would like to see 16 addressed, and would really encourage the Committee 17 to consider, some of these very simple streamlining 18 effects that would be important for our members, and 19 for our other businesses across the state as well. 20 And just in conclusion, I wanted to thank you 21 again for giving us the opportunity to offer some 22 remarks. 23 And, again, thank you for all your work this 24 year in regard to the agricultural-assessment issue. 25 1 SENATOR DeFRANCISCO: Senator Krueger. 2 SENATOR KRUEGER: Thank you, Julie, 3 appreciate your testimony. 4 In the past, we've talked about the farm 5 property-tax assessments being an issue, but you 6 didn't testify about that today. 7 JULIE SUAREZ: Actually, that was my 8 beginning of my remarks, when I talked about the 9 passage of the agricultural-assessment valuation cap 10 today: very important. 11 And I thank you for your support. 12 SENATOR KRUEGER: Okay. 13 JULIE SUAREZ: That formula is set at the 14 state level, so we needed to adjust it, and we hope 15 the Governor signs it. 16 SENATOR KRUEGER: And you think that will 17 then, in fact, address the concerns that the farmers 18 have had? 19 JULIE SUAREZ: Our tax rates will still be 20 significantly higher than those in other states, but 21 it will help slow the escalation. 22 To give you an example: In New York State, 23 our farmers, in 2012, I believe it is, I'll have to 24 double-check the year, paid an average of $26 per 25 acre for farmland. 1 In property taxes, our neighboring state of 2 Ohio paid $11 in real-property taxes for their 3 farmland. 4 So while we believe that this legislation 5 will help slow that increase, because it does cap 6 the assessment valuation, certainly, we still have 7 very high property taxes in New York State. 8 SENATOR KRUEGER: Thank you. 9 JULIE SUAREZ: Thank you. 10 SENATOR DeFRANCISCO: As far as the estate 11 tax, you mentioned various things. 12 The estate consists of the high value of the 13 property, the cows, the machinery, everything else 14 you have. 15 That also applies to small businesses in 16 other areas too, whether it's farming, or anything 17 else. 18 So, with that said, you definitely prefer my 19 bill over Senator Ritchie's bill, because it applies 20 to everybody? 21 [Laughter.] 22 JULIE SUAREZ: I would never answer that 23 question, Senator. 24 SENATOR DeFRANCISCO: Okay. 25 All right, okay. 1 JULIE SUAREZ: We prefer any relief. 2 SENATOR DeFRANCISCO: I didn't think you 3 would, but thank you very much. 4 Thank you. 5 JULIE SUAREZ: Thank you. 6 SENATOR DeFRANCISCO: Josh Reap, Empire State 7 director of government affairs, Associated Builders 8 and Contractors. 9 JOSH REAP: Good afternoon, and thank you, 10 Senators, for the opportunity to come down today and 11 talk about the construction industry. 12 I'll try to keep my -- my remarks are on 13 paper, I know you already have those, so I'll try to 14 keep it brief today in the interest of time. 15 But, the Associated Builders and Contractors 16 is a trade association representing hundreds of 17 construction companies and related -- 18 industry-related farms across New York State. 19 There's several hundred members. 20 And I talked to many of our contractors, to 21 kind of get a general feeling from the ABC 22 membership about the taxes we pay, and where we can 23 look at reforms to, perhaps, spend our tax dollars 24 more wisely, and, perhaps, streamline things on the 25 front end of it in terms of tax collection. 1 Chief among our concerns for the state tax 2 structure is the taxes we pay on diesel and 3 gasoline. 4 Their original purpose was to supply funds to 5 build and maintain the state's safe infrastructure; 6 however, now they are absorbed into the General Fund 7 to pay for many other programs. 8 Without a properly funded plan to repair and 9 replace New York's aging road network, it's going be 10 very difficult to support growing sectors of the 11 economy, such as the expanding nanotechnology 12 manufacturing here in New York State, as well as our 13 blossoming agritourism and wine and beer industries. 14 So, really, in short, a lot of the tax 15 policies I'm going to talk about today are 16 applicable in such a way that they're going to 17 affect all other sectors of the economy. 18 I suspect, in relation to the diesel and 19 gasoline tax, many motorists probably already feel 20 like they're paying that money and it's going toward 21 our infrastructure system. 22 So what I'm encouraging you today, is to look 23 at, let's align reality with perception. 24 As the Empire State, we need infrastructure 25 systems to be in a position to support growth. 1 For a perfect example of how much of a 2 challenge this is, I point to Route 28 in the 3 North Country, in the Adirondacks, that connects 4 Long Lake with Newcomb, New York. 5 This road is in such disrepair, it hasn't 6 been refilled since 1973. 7 I haven't been on this earth that long, I'll 8 admit. 9 So, to go that long is very, very much 10 something that -- that I was brought together -- it 11 wasn't brought to light until, really, there's a 12 viral YouTube video campaign that brought attention 13 to this problem. 14 And I point this out, because it's the sort 15 of problem that's growing and becoming more 16 commonplace across New York State. 17 The longer we defer the proper repair work, 18 the more expensive it's going to become to fix the 19 roads and bridges that we travel over today. 20 If this thoroughfare, and many others like it 21 in the state, do not receive the adequate attention 22 they need, our economy simply can't grow. 23 So, again, the current practice of raiding 24 this infrastructure fund has left little of the 25 financial resources for the people of the 1 Department of Transportation and some of the other 2 infrastructure authorities to work with. 3 I applaud them for the work that they're 4 doing, but what we really need is a dedicated fund. 5 Incidentally, a lot of this problem is 6 exacerbated by the all-too-frequent use of 7 government-mandated project labor agreements, which 8 have been, study after study, proven that the costs 9 drive up costs on public-work jobs and decrease 10 competition. 11 So I'm asking you to really look at 12 redirecting 100 percent of these field taxes back 13 into a general fund. 14 I realize doing that overnight is probably 15 very impractical, and we have to look in reality, 16 but looking at a way to perhaps roll that back into 17 the -- that dedicated lockbox, for lack of better 18 term, is something that I would highly recommend 19 that we do. 20 Another tax I would like to bring to your 21 attention also relates to highway again: the highway 22 use tax here in New York State. 23 Basically, it's dedicated for vehicles over a 24 certain weight and size. 25 The idea is, that they do more impact to our 1 highway system, so they're taxed to help offset that 2 additional costs. 3 New York is only one of four states, that I'm 4 aware of, in this country that actually charges this 5 tax. 6 For many years, the contractors and trucking 7 firms have been paying for the highway-use tax, with 8 the revenue pledged for paying for past borrowing. 9 New York, again, with this tax, it's very 10 burdensome recordkeeping for many of the 11 contractors. You're talking countless hours for 12 accountants, accountability with guys in the shop to 13 maintain their records and their logs. This adds up 14 in terms of manhours, lost wages, going into simple 15 compliance; 16 Whereas, if you looked at alternatives here, 17 to maybe increasing certain assessments elsewhere to 18 offset that revenue loss, that might be something to 19 consider. 20 But, in general, this tax has not been 21 studied since it's been implemented, so I would 22 encourage you today to, perhaps, look at that tax in 23 more detail, and try to find a way to, perhaps, 24 phase that out or look for alternative sources of 25 revenue. 1 There are additional tax reforms that could 2 provide relief, I feel, for a lot of our 3 construction companies. 4 Specifically, I would suggest that you look 5 at the income-tax system. 6 A vast majority of our construction companies 7 today are structured as limited-liability 8 corporations or S corporations. 9 I know we've heard a lot about these today, 10 so I'll just keep it brief. 11 But, basically, what I would suggest, is you 12 look at the way that these are structured. 13 A lot of these people who run these 14 construction companies, they're paying an extra on 15 their personal income-tax return because of the 16 structure of the company today as an LLC or S corp; 17 but, yet, they don't -- they may not take anything 18 directly out of the business. 19 So when you look at that, along with our 20 progressive tax bracket, and the big jump, 21 specifically, from Tier 5 to Tier 6, it takes a big 22 hit on the taxing liability of these companies, 23 which is a disincentive for a lot of our 24 construction companies to hire more employees, to 25 reinvestment in the company, which is what affords 1 the opportunity and potential for job creation in 2 the state. 3 So, those are the three biggest things that 4 my contractors have relayed to me, and I hope that 5 they will provide some starting point for you in 6 your endeavor here to look for reforming tax policy. 7 And I, again, would like to thank every one 8 of you, Senators, for taking the time, and inviting 9 us to speak today. 10 SENATOR DeFRANCISCO: Thank you. 11 One question. 12 SENATOR MARCELLINO: In your written 13 statement, you point out the fact that most 14 construction companies are structured as LLCs or 15 S corporations. 16 Why, if they can get a better return? 17 JOSH REAP: Sure. 18 I know some people might think that they're, 19 perhaps, sole proprietors, but that's an old system. 20 LLCs have provided the best affordable tax 21 structure in New York State to capitalize upon to be 22 an effective business for our construction 23 companies. 24 When I'm talking about LLCs or S corps, 25 we're talking very small operations; primarily, a 1 handful of owners, or perhaps just a handful of 2 employees, right up to your companies that employ 3 several dozen people across the state. 4 SENATOR DeFRANCISCO: Okay, thank you. 5 JOSH REAP: Thank you. 6 SENATOR DeFRANCISCO: For those who are 7 keeping score, the last speaker, on behalf of 8 Manufacturers Alliance, had another appointment. 9 He had submitted -- he has submitted written 10 testimony, that we all have, at least everybody here 11 at the front desk. 12 The next speaker is, Deb Warner, 13 vice president of public policy and governmental -- 14 government relations for the CenterState of -- for 15 CenterState. 16 DEB WARNER: Thank you, Senator. 17 SENATOR DeFRANCISCO: You're welcome. 18 DEB WARNER: Thank you for the opportunity to 19 be here, and I'm glad -- we're very glad that you're 20 holding the hearings, so we get the chance to have 21 input into what may be some important tax policy in 22 the year ahead. 23 CenterState CEO is a regional business and 24 economic-development organization, with 25 2,000 members in an area of 12 counties, from -- in 1 central and northern New York, almost to the 2 Pennsylvania border. 3 New York has made important strides in the 4 last few years to improve our business climate. 5 And, we give credit to the Governor, to you, 6 Senators, for work that you have done, 7 legislatively, to help with this. 8 We've seen some pension reform come through 9 that's going to help relieve the burden on local 10 governments and property owners. 11 We've seen reforms coming on workers' comp 12 and unemployment insurance, and we've seen the 13 success of the regional economic development council 14 investments taking root throughout the state. 15 We also saw, in 2012, that the vast majority 16 of taxpayers, middle-income households, in New York 17 are seeing lower personal income-tax rates than 18 they've seen in decades. 19 The property-tax cap is helping too. 20 And, we've actually seen now that New York 21 has the highest level of private-sector employment 22 it's had in a long time. 23 On our future, and more immediately, the 24 progress on Innovation Hot-Spots and the 25 opportunities that Start-Up NY may bring are 1 promising, and unprecedented new initiatives. 2 And, on-time budgets, with budget restraints, 3 thank you again, Senators, has certainly made room 4 for some of these tax reductions. 5 Recently, you probably saw last week, that 6 Moody's raised its outlook to "positive" for 7 New York State, and, clearly, all of these things 8 have contributed to that. 9 But the reason we're here today is because we 10 need to do more, and more can be done, and we need 11 to make changes so that we can legitimately change 12 our reputation away from being the highest-taxed 13 state. 14 We know that we have been successful in doing 15 that, together, when we've changed the minds of site 16 selectors and corporate real-estate executives and 17 business owners who know us all too well as the 18 highest-taxed state. 19 In my testimony -- in our testimony, you'll 20 see that there -- some of the problems that are 21 still lingering with our high property-tax rates. 22 And one of the initiatives that we need to 23 take a look at, is keeping our promises. 24 We've seen some things happen with policy, 25 where things that were to be sunset, things that 1 were short-term gap-fillers, or one-shots, have not 2 met their natural demise, and have been continued. 3 So, those things only hurt our credibility; 4 they increase the business communities and business 5 owners uncertainty. And when business owners are 6 uncertain, they hesitate to make capital 7 investments, and what happens, the worst-case 8 scenario, is they hang on to that revenue, they 9 don't make investments, they don't expand their 10 businesses, and they may even, potentially, shut 11 down their businesses in New York. 12 So, we know what -- New York State will never 13 be the lowest-taxed nation -- or, state in the 14 nation, and we don't want to be. It's not about a 15 race to the bottom. 16 We have great assets, and in order to really 17 capitalize on those assets, we need to improve our 18 policies. 19 So, we need to be more competitive; it's 20 about being competitive, particularly with the other 21 states in the northeast that are near us. 22 So, what would we ask you to do? 23 We'd ask you to think of some basic ground 24 rules as you form policy on taxes. 25 "Simplicity." 1 Businesses need to be able to understand tax 2 policy and regulation, and they need to calculate 3 their taxes. 4 As I talked to our members, and I talked to 5 accountants and attorneys who represent them in 6 their tax works, it's amazing how much that they 7 have to spend just trying to comply with 8 New York State laws. 9 And that lack of clarity costs the taxpayers; 10 it costs the businesses the time and the effort that 11 they have to put in, and the consultants that they 12 have to hire; and it costs the State, because it's 13 more complicated to administer. 14 So a more simplified, straightforward tax 15 policy is a lot easier, and it's better savings for 16 the businesses in the state. 17 Transparency is important too. 18 Tax legislation should make sense, it should 19 be open, it should be based on real data, on 20 verified information, with reasonable assumptions. 21 "A more open process." 22 Perhaps more hearings, such as this, would 23 find a way to clarify, and make more transparency 24 come to the system. 25 Also, predictability. 1 This is sort of referring back to some of the 2 issues with things that have not sunset. 3 But, again, that uncertainty really 4 undermines our opportunities for economic growth. 5 It makes it hard for businesses to plan from 6 year to year, it's hard for the State to plan, and, 7 it also makes it difficult for businesses looking at 8 New York State, to calculate what their tax exposure 9 would be in New York State, or what the value of 10 economic incentives would be, because they keep 11 changing. 12 So, a broad-based tax, that we would ask you 13 to take a look at, again. 14 And I know that there was something that was 15 under consideration earlier this year, is, 16 eliminating the 18-A assessment on energy. 17 That was one of those things that was due to 18 sunset, has got a three-year extension. 19 We would urge you, when you return to session 20 at the beginning of the year, to take a look at 21 that, and make it sunset, so that it's gone on 22 April 1st of 2014. 23 That will leave $3 billion more circulating 24 in our economy over the next three years. 25 And since it affects energy costs, and we 1 still have some of the highest energy costs in the 2 nation, so, I think we'd get a double value for 3 getting rid of that. 4 So we would ask you to really champion 5 eliminating that assessment. 6 You've heard a lot about small businesses 7 today. 8 And, most of our members are small 9 businesses. You know that they're the net-job 10 generators. 11 There's statistics in the written testimony, 12 I won't go over. 13 And you did, earlier this year, produce a 14 package of proposals really targeting small 15 businesses. 16 And we applaud you for that, and hope that 17 you will take a look at that again in 2014. 18 Echoing, again, this issue of personal income 19 tax and unincorporated businesses. 20 Our top rate of 8.82 percent is a problem for 21 unincorporated businesses. They hit that higher tax 22 rate because the business profits are treated as if 23 they are wages, so they are then subject to that 24 higher rate. 25 So we would urge you to find a way for them 1 to escape that; to look at that income, separate 2 from wages, treat it differently, so it doesn't bump 3 businesses into that higher tax rate and it's not 4 removing more revenue from the businesses. 5 Investing in our innovation economy, we 6 believe, is incredibly important to the future of 7 New York State, and to our region. 8 And we believe that there's much more the 9 State can do to reward innovation and invest in our 10 entrepreneurial ecosystem. 11 We need effective programs that provide us 12 with a pipeline of good companies, smart 13 entrepreneurs, but we have to have an appropriate 14 support system for them, and access to capital is an 15 important part of that. 16 We know, Senator DeFrancisco, that you well 17 understand that. 18 We appreciate your support for Grants For 19 Growth, which is one of CenterState's programs to 20 support innovative-applied research projects that 21 are between universities and industries. 22 Just to recap a little bit of how effective 23 that program has been: 24 Grants For Growth has awarded 41 grants and 25 investments of over more than $2 million, which has 1 leveraged matching funds of over 5 million in 2 follow-on funding of over 38 million. 3 Industry partners expect that to generate 4 679 jobs, with the potential to generate over 5 46 million in new revenue for our region. 6 The Technology Garden is another asset that 7 we have in the CenterState. It's a physical place 8 and a programmatic place, and we believe that our 9 experience running that for the last few years has 10 given us some experience, where we can suggest some 11 further successful programs and policies that you 12 might think about. 13 That -- it's a building, it has 14 33,000 square feet. There's 35 early-stage 15 businesses there, with 150 employees and a payroll 16 of about 5 million, but it's a lot more than a 17 physical space. 18 We have assisted more than 500 entrepreneurs, 19 and more than 9,000 people have attended the 20 Technology Garden, to participate in a very broad 21 range of programs that we've had. 22 So, our experience is leading us to make some 23 suggestions to you today. 24 Angel tax credit, which you have heard 25 mentioned earlier, and we would again ask you to 1 take a look at that. We think it's such a important 2 step that New York State can take to help our 3 innovation economy. 4 And thank you, Senator DeFrancisco, for 5 your leadership in sponsoring that bill in the 6 Senate. 7 This is really based on a program that exists 8 in many other states. It's been very successful in 9 other states, and it has really been critical in 10 those states, in helping businesses through that 11 very dangerous time, from when you've got an idea 12 and you're trying to launch a business, to the point 13 of where you're actually commercial and generating 14 revenue. 15 And many businesses fail because they don't 16 have support throughout that system. 17 So, in our testimony, we're suggesting how 18 that program might be structured, based on the 19 success and best practices we've seen in other 20 states, of a $7 million cap for the year. 21 Investments, ranging from $100,000 to a 22 million per investor, with a 35 percent refundable 23 tax credit. 24 Wisconsin, in particular, has had great 25 success with that. And when they put -- since their 1 program has been put in place in 2005, they have 2 increased their investments fourfold, and have 3 actually tripled the number of deals within their 4 state. 5 So we know this is a program that really 6 works. 7 Venture funding is another issue that is 8 critical for early-stage and startup businesses. 9 In our region, and across upstate, venture 10 and early-stage funding is very, very scarce, and 11 very inadequate. 12 A startling number that we would share with 13 you today, is that the national average, per capita, 14 for venture funding and investment is $933 per 15 person, per capita. 16 In upstate, that number is only $27. It is 17 just shockingly -- a shockingly desperate number. 18 So startups need this funding, but startups 19 also follow the funding. 20 So what happens is, when a startup company 21 gets investment, they get venture capital. The 22 venture capitalists want to keep an eye on the 23 company, they want a hand on the board, they want to 24 be involved in managing the company. 25 So, frequently, they then require the 1 company, in exchange for that investment, they go to 2 wherever the investment is made, and it's usually 3 not coming from Upstate New York, so, we lose them 4 to New York City or California. 5 So, we've got lots of startups in our state, 6 and we've got a lot of startups in our region. 7 We've been able to build a pipeline, build 8 bridges with our universities, and take advantage of 9 the research capacity we have, but we really need 10 this fund in place. 11 So, we're actually working with a group of 12 investors in our region to launch a $30 million 13 fund, and the goal of this fund is to attract 14 private investment, develop early-stage companies, 15 and create the next generation of industries in our 16 region. 17 In looking at economic-development 18 incentives, there are also some things that we would 19 like to mention to you today. 20 Some of that is based on work that we're 21 doing with the Brookings Institute. We have two 22 major projects: 23 One is a metropolitan export initiative, to 24 double the number of exports in our region, from 25 3.3 billion, to 6.6 billion, which should grow us 1 18,000 new jobs; 2 And, also, a metropolitan business plan, 3 we've been working with them for three years on this 4 very intensive collaboration. 5 So, I'd like to pass along some suggestions 6 based on that. 7 New York State can do more to encourage 8 strategic risk promotion. We could make special tax 9 benefits available for people who are leaving 10 existing jobs to start businesses. 11 Economic incentives reshaped to embrace that 12 operational intellectual capital and marking needs 13 of high-tech companies could bring significant 14 economic activity to our state. 15 Some quick bullets: 16 Create a tax credit for venture capital 17 investment. 18 Allow for bond and public venture capital. 19 Grow an export-directed culture. This is 20 based on our Metropolitan Export Initiative. 21 Reduce obstacles and barriers to entry for 22 all companies. 23 Support globally-oriented companies that are 24 making strides to enter new markets or grow within 25 their existing international markets. 1 Please note, that statistics show that 2 export-based jobs, actually, are higher-paying jobs 3 than non-export jobs. 4 And we believe New York needs a tax code to 5 incentivize companies to be more globally engaged. 6 And perhaps the way to do that would be to 7 have some stipulation or connection to Excelsior tax 8 credits. 9 Extending or expanding currently productive 10 and viable programs makes a lot of sense. 11 For example, one of the things that was 12 allowed to sunset, was the facilities operations and 13 training credit for the Qualified Emerging 14 Technology Companies. 15 We would hope that you could take a look at 16 that, and bring that back next year. 17 IDAs in our region are very effective. 18 We've got a great track record. 19 And we would ask that you reconsider bringing 20 back the ability to finance civic-facilities 21 projects to the IDAs. 22 We'd also ask that you take a look at the 23 Excelsior tax credit program, so that we can 24 prioritize some of those credits to go to more 25 urbanized areas, to central cores, and disinvested 1 cities and villages. 2 Also, another echo, you're going to hear 3 about wealth and people leaving New York. 4 And in the 2000s, New York State had one of 5 the largest exoduses of people with wealth, second 6 only to California, so, this is a real need that 7 needs to be addressed. 8 Estate-tax reductions, I know others, you 9 heard -- have heard -- have spoken to you today 10 about estate-tax reduction. 11 And, I took a look at what the policies were 12 in other states. 13 30 states have no estate tax at all, and only 14 8 states begin to tax at a million dollars. 15 So, we would ask you to raise that threshold 16 to reflect the federal level of 5.25 million. 17 And there's two reasons for doing that: 18 Family-owned businesses are a major 19 constituent of estates that might be subject to that 20 tax, And, in order to keep those businesses alive, 21 from generation to generation, we need them to have 22 a lesser tax reduction, and not be forced to have to 23 liquidate the business to comply with estate-tax 24 law. 25 So, it does drive wealth away. 1 We know that we have more and more retirees 2 in New York, and we don't want to hear their 3 accountants telling them that they need to do estate 4 planning outside of New York. 5 This also applies to the top tier income-tax 6 level that we have, of 8.82 percent. 7 I think, if the State might take a look at 8 lowering that, but -- because, again, we're 9 uncompetitive, and it is driving people and their 10 funds out of New York State. 11 So, bringing down that top rate would be a 12 good thing for New York State to do. 13 Thank you again for your efforts to improve 14 our business environment, through taxes and tax 15 policy. 16 And, we look forward to working with you in 17 2014. 18 SENATOR MARCELLINO: In your testimony -- 19 thank you for coming, by the way. 20 In your testimony, written, you talk about 21 the fact that most of the small businesses have 22 the -- they're Chapter S corporations, LLCs. 23 DEB WARNER: Partnerships. 24 Yeah. 25 SENATOR MARCELLINO: I asked the same 1 question of the person before you: 2 Do you want us to find a way to treat their 3 income separately, or differently, than just mere 4 wages? 5 They should be given a special -- 6 DEB WARNER: Right, don't treat the business 7 income as if it was wages, because now it's treated 8 as wages. 9 SENATOR MARCELLINO: Why not just 10 incorporate? 11 Isn't that a way of avoiding -- 12 DEB WARNER: I'm not an accountant or a tax 13 attorney, but I'm sure that there are reasons why, 14 when they formed their businesses, and they went to 15 their attorneys and they went to their accountants, 16 and said, "Tell me what to do," that was what they 17 were told to do. 18 I can get back -- that's a good question, and 19 I can -- I don't know a clear technical answer -- 20 SENATOR MARCELLINO: Just a curiosity. 21 DEB WARNER: No, it's a good answer -- that's 22 a good question. 23 SENATOR MARCELLINO: Okay. 24 Brownfield tax credits, what's your position 25 on that? 1 DEB WARNER: I'm sorry? 2 SENATOR MARCELLINO: Brownfield tax credits, 3 the extension thereof, what's your position? 4 DEB WARNER: I believe that the tax -- the 5 brownfield tax credits should be expanded and 6 continued. 7 We have so many brownfields in upstate, 8 especially in our metro areas. You know, they're a 9 heritage of our industrial history, and the credits 10 need to make sense so the developers will address 11 the projects. 12 SENATOR MARCELLINO: Thank you. 13 SENATOR DeFRANCISCO: Thank you, Deb. 14 I appreciate it. 15 DEB WARNER: Thank you, Senator. 16 SENATOR DeFRANCISCO: Safe trip back to the 17 promised land. 18 Next speaker, Brian Sampson, 19 Unshackle Upstate. 20 BRIAN SAMPSON: Good afternoon, Senators, and 21 thank you for the opportunity to sit here before you 22 today. 23 As you heard, my name is Brian Sampson. I'm 24 the executive director of Unshackle Upstate. 25 We're a pro-business, pro-taxpayer, education 1 advocacy organization dedicated to the 2 revitalization of the upstate economy. 3 You have our testimony before you, and 4 I certainly won't go through that. I think it 5 explains itself, so I'll just go through some of the 6 highlights. 7 But as you've heard here today, 8 New York State has a long reputation of being the 9 nation's highest-taxed state; and, unfortunately, 10 it's a reputation that is well deserved. 11 New York residents pay some of the highest 12 property, income, and sales taxes in the 13 United States. 14 The State also imposes a host of other taxes 15 and fees that other states do not, one of which 16 you've heard today is the 18-A energy assessment. 17 Because these taxes also impact businesses, 18 whether directly or indirectly, New York is 19 regularly identified as having one of the worst 20 business-tax climates in the nation. 21 Despite our high tax burden, many companies, 22 especially large ones, are attracted to the 23 New York City metropolitan area, due to such factors 24 as its large population and its proximity to 25 Wall Street. 1 But while the wealth-creating activities in 2 New York City's financial, business services, media, 3 and entertainment industries appear to bear the 4 burden of that high tax structure, the less 5 profitable manufacturing, agricultural, industries 6 that have long been the economic lifeblood of 7 Upstate New York, cannot. 8 In contrast, many large companies located in 9 Upstate New York have simply been unable to compete 10 in the global economy, and as such, have left the 11 state altogether. 12 The good news is that, this summer, there's 13 been a great deal of attention paid to the upstate 14 economy. Everyone agrees to -- seems to agree on 15 one fundamental point: The upstate economy is 16 lagging, and it continues to struggle. 17 We appreciate Governor Cuomo and the 18 Legislature's attention to the problem, and your 19 commitment to making it one of the highest 20 priorities. 21 We're also supportive of the initiatives that 22 many of you have put into place. 23 The State's regional approach to economic 24 development has benefited upstate, so has the focus 25 on upstate tourism, as well as initiatives to help 1 the yogurt, beer, and wine industries, and we're 2 optimistic that the Start-Up NY program will also 3 bear fruit in the future. 4 But what upstate really needs is to thrive -- 5 to thrive is simply more fundamental: we need to be 6 economically competitive once again. 7 We need to acknowledge from all -- an 8 acknowledgment from Albany that upstate is different 9 than the New York City metropolitan area. 10 We have two economies in the state of 11 New York. It's a reality. 12 Upstate New York needs broad-based tax 13 relief, and we need it today, not at some point in 14 the future, whether that be 12, 24, or 36 months. 15 We need it today. 16 That's why we are proposing the "New Era For 17 Upstate" plan. 18 The heart of the New Era program is 19 broad-based tax relief that will directly address 20 the problems of high taxes in Upstate New York. 21 We're calling for four simple points: 22 A 25 percent reduction in the income tax for 23 upstate residents making less than $50,000 a year; 24 The elimination of the corporate franchise 25 tax in upstate communities, to be phased in over 1 four years; 2 A 50 percent reduction in the State's share 3 of the sales tax for certain counties, and those 4 counties are based on the 2010 census, that shows 5 the greatest population loss, as well as the 6 May 2013 unemployment-insurance rankings; 7 And, finally, the elimination of the 8 18-A energy assessment for our manufacturers in 9 upstate. 10 This is not about providing tax relief for 11 the wealthy; it's about providing tax relief for 12 working New Yorkers in those parts of the state that 13 have not been able to grow and create jobs. 14 This is not about tax breaks that are 15 designed to lure a particular company, such as a 16 chip-fab company, to a site -- or, to a sited 17 facility in the state of New York; 18 Nor does this plan offer industry-specific 19 tax breaks that are designed to grow a particular 20 segment of the economy, such as the film tax 21 credits. 22 It offers broad-based tax relief for current 23 employers and current taxpayers. 24 Our proposal is multi-faceted, comprehensive, 25 and a bold tax-relief plan. 1 New Era For Upstate includes nearly a 2 billion dollars a year in targeted tax relief for 3 upstate taxpayers and businesses that desperately 4 need it. 5 It is our hope that throughout this next 6 year's budget process, both the Governor and the 7 Legislature will give serious consideration to the 8 New Era plan. 9 I want to thank you for the opportunity to 10 speak with you today, and I would be happy to answer 11 any questions. 12 SENATOR DeFRANCISCO: Any questions? 13 SENATOR MARCELLINO: No. 14 SENATOR KRUEGER: Yes. 15 SENATOR DeFRANCISCO: Oh, you've got one. 16 SENATOR KRUEGER: Good afternoon. 17 BRIAN SAMPSON: Good afternoon. 18 SENATOR KRUEGER: Thank you for your 19 testimony. 20 Define "upstate" for your tax proposals. 21 BRIAN SAMPSON: Everything outside the MTA; 22 so, it's 48 counties, about 40,000 square miles. 23 SENATOR KRUEGER: Since you're proposing a 24 phase out of the corporate franchise tax, and we've 25 heard quite a bit during the day from other people 1 who testified, about the complications between 2 whether you're an S corp, a C corp, an LLC; whether 3 you're paying your corporate taxes through your PIT, 4 or not -- 5 BRIAN SAMPSON: Sure. 6 SENATOR KRUEGER: -- what do you think would 7 be the impact of phasing out taxes for businesses 8 outside of the 12-county region that are 9 incorporated under a 9-A, but, you would be applying 10 the same current tax rate to all the other 11 businesses? 12 BRIAN SAMPSON: Right, we're looking at it 13 from the 9-A perspective, and I think it's 14 encapsulated in a pretty simple approach. 15 Wall Street is [unintelligible] thriving, 16 main street is not. 17 Upstate New York is "main street." 18 And you look at our businesses in 19 Upstate New York, they tend to be on the smaller 20 side; 10-, 15-, 25-employee firms. They need the 21 help. Those companies are basically, as you heard 22 today, driven by entrepreneurs; people who want to 23 grow a business. They're there to make profit, 24 they're there to employ people, and help their 25 communities. 1 If we could roll back their corporate 2 franchise tax, we'll be able to give them more 3 assets that they can invest in more jobs, maybe 4 increase wages and benefits for their employees, or, 5 go out and compete with a new piece of technology 6 that will draw in more work for them, and creating 7 more jobs. 8 SENATOR KRUEGER: So you -- so I do 9 understand, you're right, your proposal is to phase 10 out the tax for the larger companies who tend to be 11 the corporate 9-A franchises; not the smaller 12 businesses -- 13 BRIAN SAMPSON: It can -- 14 SENATOR KRUEGER: -- that tend to be the 15 other categories? 16 BRIAN SAMPSON: It can also be those smaller 17 ones. 18 It depends on how they were incorporated. 19 And, again, as you heard from Deb Warner, it 20 depends on what they were told -- 21 SENATOR KRUEGER: So, again, just to make 22 sure I understand: 23 At least in this proposal, for the phasing 24 out of the tax, we have 62 counties in the state. 25 So fifty would, within a few years, have no 1 corporate franchise tax, and the remaining twelve 2 would have whatever their current tax rate is. 3 How are you replacing the state revenue? 4 BRIAN SAMPSON: Well, one of the things we 5 think the State should do is develop the 6 Marcellus Shale. We do believe that New York State 7 can do a safe development of hydraulic fracturing. 8 That will bring immense amounts of tax revenue to an 9 area of the state that desperately needs it, that 10 being the Southern Tier, but it will also bring 11 incredible amounts of revenue to the State as well. 12 That would be one of the things we think the 13 State should do. 14 SENATOR KRUEGER: And your -- it's the same 15 scenario for the income tax, that it's the 16 50 counties that are not the 12 counties? 17 BRIAN SAMPSON: Correct. 18 SENATOR KRUEGER: So you're -- if you have 19 income below 50,000 and you live in one of the 20 12 counties, you are somehow less deserving of a tax 21 cut as a under-50,000-a-year New Yorker? 22 BRIAN SAMPSON: No, I don't think it's you're 23 less deserving. 24 I think it's a -- it's understanding the 25 realty that, when you look at medium income in the 1 state of New York, upstate has some of the lowest 2 rates. 3 Consider, you know, when you look at 4 Manhattan, Manhattan's median income is 67,000. 5 Nassau County is 92,000. 6 When you look at Chautauqua County, it's 7 forty-two. 8 When you look at St. Lawrence, it's 42,000. 9 We have a different economy. We have less 10 income to pay a high tax burden. 11 It's giving those people that need it, a 12 break, until they can get on their feet. 13 And at some point in the future, we may come 14 back and say, This plan can be phased out. We've 15 recovered, we've created more jobs, we're keeping 16 our population, our young people are coming back. 17 But right now, Upstate New York is not 18 thriving. 19 SENATOR KRUEGER: But if your income is below 20 50,000, because that's the number you used as your 21 cutoff, you're not less -- hmm, let me try to make 22 sure I say it right, because I'm not going to define 23 50,000 and below as poor. 24 But, if your income is below 50,000, you are, 25 actually, probably poorer if you're in 1 New York City, because of the housing costs, than 2 you are in Chautauqua County. 3 So what would be the State's justification 4 for saying, people with X income are not treated 5 equally under our income-tax law; it's a geographic 6 question, not an income question, on an income tax? 7 BRIAN SAMPSON: Yeah, and, Senator, I'll be 8 honest with you. 9 When we -- we didn't enter into this plan 10 lightly. We struggled with, how do you balance that 11 argument? 12 But, I think this is an instance where it 13 will benefit the New York City metropolitan area to 14 have a vibrant Upstate New York. Less of the money 15 from New York City will be spent in Upstate New York 16 to balance budgets. 17 When that happens, the money can stay in 18 New York City to benefit those residents there. 19 Right now, they're subsidizing the upstate 20 economy, and I think if you ask them if they'd like 21 that, they'd say, no, they wouldn't. 22 A good upstate is healthy for a vibrant 23 New York City. 24 SENATOR KRUEGER: I completely agree, a good 25 upstate is healthy for the whole state, and for the 1 New York 12-county region. 2 But, I can't agree with a concept of having a 3 different set of tax policies for different counties 4 in the state, under state law, just for the record. 5 BRIAN SAMPSON: Well, under state law, we 6 currently have different thresholds, even when you 7 look at it from the perspective of the WIC's law. 8 The WIC's law has three different levels, of 9 500,000, 1 1/2 million, and 3 million. 10 So the State, in some instances, already has 11 a policy where it is tiered. 12 SENATOR KRUEGER: Do you have any precedent 13 for tax policy, at the state level, varying based on 14 the county? 15 BRIAN SAMPSON: No, but the Start-Up NY 16 program just, in essence, created that, by having no 17 income tax for the people that are credited with 18 being in a startup zone. 19 SENATOR KRUEGER: And does Unshackle New York 20 support the special tax-incentive programs, such as 21 that new one, as a model that you support? 22 BRIAN SAMPSON: Yeah, we did support the 23 Start-Up program. We do believe it will be helpful. 24 One of the points we did argue, though, is we 25 didn't think having a disparity in the income tax 1 was appropriate at the time; but it's passed now, 2 so, it exists. 3 SENATOR KRUEGER: Well, I actually didn't 4 support that one either, just for the record. 5 If you're reducing the sales-tax collection, 6 again, only in certain counties, are you also 7 proposing the counties match that with a reduction 8 in their own sales tax? 9 BRIAN SAMPSON: No. 10 No, the counties are [unintelligible], held 11 completely harmless in this approach. 12 This would be the State forgoing its 13 sales-tax collections, not the counties. 14 SENATOR KRUEGER: And have you done an 15 estimate on what the revenue and total loss to the 16 State would be if your plan was implemented? 17 BRIAN SAMPSON: It's about -- for 2014-2015, 18 it would be about $860 million. 19 But, again, we believe some of that could be 20 offset by the development of the Marcellus Shale, 21 and the revenues that would bring. 22 SENATOR KRUEGER: And I see you have a 23 Marcellus Shale revenue proposal. 24 Is that a new tax you're proposing? 25 BRIAN SAMPSON: No, it would just based on 1 the jobs that are created, and the sales tax that 2 are collected on the development of the shale area. 3 SENATOR KRUEGER: Sales tax on the gas? 4 BRIAN SAMPSON: No, sales tax on hotel rooms, 5 different things -- food -- as the workers would be 6 there, investing in those communities. 7 SENATOR KRUEGER: So you're proposing a plan 8 that reduces state revenue by, you said, 9 approximately 800 million? Did I hear you right? 10 BRIAN SAMPSON: 860 million, yes. 11 SENATOR KRUEGER: 860 million? 12 BRIAN SAMPSON: Yes. 13 SENATOR KRUEGER: Okay, so -- so it would 14 reduce state revenue by 860 million, but you're 15 proposing that opening up fracking in the entire 16 Marcellus Shale area would generate $78 million in 17 new economic activity, not that that would actually 18 be money to the State? 19 BRIAN SAMPSON: It would just in this year; 20 just in 2014-2015. 21 But, if you look at the Manhattan Institute 22 and study that they did on the development of the 23 Marcellus Shale, if you fully implemented it, it 24 would be somewhere between 15,000 and 18,000 jobs. 25 Those are people that are now paying higher 1 income taxes, because they're earning more revenue. 2 They would be people frequenting the grocery stores, 3 the restaurants, the hardware stores; reinvesting 4 that money back into the community. 5 That's the economic boom that we think can 6 exist with the Marcellus Shale. 7 SENATOR KRUEGER: We might need another 8 hearing on fracking -- 9 BRIAN SAMPSON: I'm sure we do. 10 SENATOR KRUEGER: -- although, we've got 11 several, to actually disagree on the economic 12 analysis of the Manhattan Institute report. 13 BRIAN SAMPSON: Sure. 14 SENATOR KRUEGER: I thank you for your 15 testimony. 16 BRIAN SAMPSON: Thank you. 17 SENATOR DeFRANCISCO: Senator Valesky. 18 SENATOR VALESKY: Thank you, 19 Senator DeFrancisco. 20 Thank you, Brian, for your presentation 21 today. It certainly gives us some ideas to consider 22 as we head into the budget process on the 2014 23 legislative session. 24 One thing, I did want to follow up to a point 25 that Senator Krueger was making. 1 And I look at that chart, and it relates 2 specifically to your proposal in regard to sales-tax 3 relief? 4 BRIAN SAMPSON: Yes. 5 SENATOR VALESKY: And, I'll just take the 6 area of the state that I represent. I represent 7 parts of three counties. 8 One county is in both columns, 9 Madison County; the other two counties are not, 10 Onondaga and Oneida county. 11 And my concern, I guess would be, that, are 12 we not pitting counties in competition with each 13 other, at a time when the general trend, both in 14 government, in terms of the decisions that we've 15 been making over the last several years? 16 You look at the economic development 17 councils, under the Governor's leadership, have been 18 formed regionally. 19 I think if you look at the things that 20 private organizations, Center State CEO, for 21 example, based in Syracuse, covers, I don't know, 22 17, 18 counties. 23 BRIAN SAMPSON: Sure. 24 SENATOR VALESKY: -- and I think that concept 25 has been to develop, and to do economic development 1 on a regional basis. Tourism, for example, we 2 talk -- as opposed to county offices of tourism, 3 we're now talking, the Adirondack, North Country, 4 and some of the things the Governor has taken 5 leadership there. 6 So, maybe it's not so much a question, but 7 just a concern, that, by focusing on a county level, 8 is that -- I'm not sure that competition is 9 necessarily what you want to see, is it? 10 BRIAN SAMPSON: Well, first of all, I don't 11 think it's competition. 12 Second point is, I would love to have put all 13 48 counties up there, in Upstate New York -- what we 14 consider "Upstate New York." 15 That's just -- that's too expensive. 16 So we went to an approach that looked at 17 population loss and unemployment, and those are the 18 counties that, arguably, need the most support right 19 now. 20 And, again, we're not proposing that this be 21 a plan that's done forever. It's the shot in the 22 arm, it's the tax relief, that Upstate New York 23 needs now, while we continue to get on our feet. 24 And once we're there, then it's a different 25 approach. 1 SENATOR VALESKY: Yeah, and I agree with you, 2 I think all counties, to one degree or another, 3 certainly need assistance. 4 I'm just concerned that we not, in effect, 5 penalize the counties that are doing better than the 6 ones that are on that -- on that chart. 7 That's my only concern. 8 BRIAN SAMPSON: Well, I can -- my home 9 county's not on the chart, so I'm sure I'm not going 10 make a lot of people back home all that happy. 11 But, I understand your point, and we -- 12 again, as I shared with Senator Krueger, we didn't 13 enter into this plan lightly. We put a lot of 14 thought behind it. 15 You don't want to pit counties against each 16 other, you don't even want to pit an upstate region 17 against a downstate region, because we are all 18 New Yorkers, but, the economic realities are, some 19 of our counties are struggling more than others. 20 SENATOR VALESKY: Okay, thank you. 21 SENATOR MARCELLINO: I have just one 22 question. 23 The -- 24 BRIAN SAMPSON: To answer your question, I do 25 like the brownfield tax credits. 1 [Laughter.] 2 SENATOR MARCELLINO: I'm getting predictable. 3 That's not a good thing. 4 [Laughter.] 5 SENATOR MARCELLINO: Okay, that is my 6 question, so I appreciate your answer. 7 BRIAN SAMPSON: Back, when we originally 8 formed in 2006, one of first things we took on was 9 brownfield redevelopment. 10 You know, as Deb Warner, from CenterState, 11 acknowledged, we have a number of brownfields in 12 Upstate New York, based on our manufacturing 13 legacies. 14 So, the more that we can do to help develop 15 those brownfields, the better it will be for 16 everybody. 17 SENATOR MARCELLINO: Thank you. 18 SENATOR DeFRANCISCO: Have you gotten any 19 legal opinion as to whether or not the state of 20 New York Legislature could actually do this 21 proposal, about different taxes for different 22 regions? 23 I'm talking about sales tax. 24 BRIAN SAMPSON: No, we haven't. 25 I mean, it's certainly a point that we can 1 research. 2 SENATOR DeFRANCISCO: Well, all I'm 3 suggesting is, I know you gave some examples, where 4 different regions have different rules. 5 And, I'm not so sure I agree with those cases 6 either. 7 But, I just think, if to enhance this, my 8 first -- enhance your proposal, my first question 9 is: Can we legally do it? 10 I kind of doubt it, but I would think that 11 you might want to check that out, because that's a 12 question that's gonna come up. 13 All right? 14 BRIAN SAMPSON: Sure, happy to do so. 15 SENATOR DeFRANCISCO: And, good. 16 Thank you very much. I appreciate it. 17 BRIAN SAMPSON: Thank you. 18 SENATOR DeFRANCISCO: The last speaker, 19 Jessica Crawford, president of MedTech. 20 As I mentioned before, Manufacturers Alliance 21 of New York State has another meeting. He'll 22 submit -- he has submitted already. 23 Thank you for waiting patiently. 24 JESSICA CRAWFORD: Thank you. 25 SENATOR DeFRANCISCO: We saved the featured 1 speaker to the end. 2 JESSICA CRAWFORD: I'm know I'm last, so I 3 will try to be brief and efficient here. 4 SENATOR MARCELLINO: You can save time by 5 answering the "brownfields" question. 6 [Laughter.] 7 SENATOR DeFRANCISCO: Yes, this is a -- this 8 has become a brownfield hearing. 9 JESSICA CRAWFORD: So I -- I just, first, 10 want to thank you for the opportunity to speak to 11 you on behalf of MedTech Association. 12 For those of you who do not -- or are not 13 familiar with MedTech Association, it's a biomedical 14 trade association in New York State. 15 My name is Jessica Crawford, and I am the 16 president of MedTech Association. 17 We were initially established as an 18 Upstate New York industry resource for the 19 biomedical community, founded by Welch Allyn, 20 Bristol-Meyers Squibb, ConMed Corporation. 21 I think Senators DeFrancisco and Valesky 22 are very familiar with those companies. 23 And, we are now in our 10th year of 24 operation, and a statewide association with member 25 companies -- nearly 100 member companies all over 1 New York State. 2 So, I think the key thing to note here, 3 though, is that our industry is growing, and it is 4 one of the few industries growing in New York State, 5 and I think it has the potential to really return 6 economic relevance to Upstate New York, as well as 7 providing a strong boost to the statewide economy. 8 While not immune from the recession, our 9 industry has certainly faired much better than the 10 overall economy, growing jobs over the past decade 11 at a pace well above the national average. 12 And in a snapshot, for New York State, the 13 biomed industry employs nearly 75,000 New York State 14 residents. These are knowledge-based jobs with an 15 average salary of over $72,000. That's well above 16 the state and national average. 17 Our member companies spend, annually, about 18 $2.7 billion a year; invest more than $1 billion a 19 year in research and development; and we export 20 products and services in excess of $1.1 billion a 21 year. 22 While we are unique, we have our own unique 23 set of challenges, our startup companies require 24 multi-million-dollar investments with long 25 maturation periods. 1 And, also, this dynamic regulatory 2 environment, nationally, globally, this, combined 3 with a new device tax, is really stifling innovation 4 and forcing job cuts in many parts of the state. 5 The difficult business climate is really only 6 amplified here in New York State, as we've been 7 coined, and it's been found, that we're the worst -- 8 has the worst tax climate in the country. 9 So, I do have a couple of policy 10 recommendations that I wanted to highlight, but 11 before I get to that, I think it's really important 12 to make you aware of what New York State -- 13 New York State's competition is, what we're up 14 against. 15 Within the last year alone, one of our member 16 companies, a large member company, more than 17 500 jobs, they relocated their corporate function, 18 corporate headquarters, to Texas. 19 Another member company, currently, is looking 20 to expand and grow 170 jobs; average salary, $60,000 21 a year; full benefits. And, they're looking -- 22 they're being courted heavily by Massachusetts. 23 So, other companies, they're looking at 24 expanding their operations in Ireland and-the U.K. 25 So, like I said, our companies are growing, 1 and the companies that I just mentioned are all 2 Upstate New York companies. 3 So they're growing, but they're all looking 4 at growing outside of New York, and outside of 5 Upstate New York. 6 So the bad news is, the competition is 7 fierce. It's national, it's global. 8 The good news, though, is that New York State 9 has all of necessary assets to continue to grow 10 innovation and help support these companies. 11 We have world-class academic institutions, A 12 significant amount of academic R&D. I think most of 13 you know, second in -- second to California, in the 14 country; 15 A considerable patents per capital; 16 And a significant number of Ph.D.s. 17 So, we have all of those assets. 18 Unfortunately, traditional tax incentives 19 that have been put in place to mitigate this 20 difficult business climate, like the Excelsior Jobs 21 Program, or the new Innovation Hot-Spots Initiative, 22 they're misaligned with our industry and they're 23 tethered to job growth. 24 And like I mentioned before, some of our 25 companies, they have very large -- very long 1 maturation periods. 2 And to give you two examples, and they're two 3 extremes, but: 4 SmartPill, a company that was based in 5 Buffalo, New York, medical-device company, 6 $60 million of investment over 9 years. They only 7 grew to 14 jobs. 8 They came across some reimbursement hurdles, 9 couldn't raise more money. They were acquired by an 10 Israeli company, and those jobs moved, and those 11 potential jobs that could have happened, if it were 12 to stay in New York, were moved to Israel. 13 The other extreme, but another good example, 14 is Regeneron, which is very -- you'll probably hear 15 more about Regeneron than SmartPill -- it took them 16 20 years, but after two decades, kind of hit a home 17 run with a drug therapy, an eye-drug therapy. They 18 went from 600 jobs to over 2100 jobs in 19 New York State. 20 So, that's the potential, and you'd like to 21 see companies like SmartPill get to that potential 22 and keep those jobs here in New York. 23 Tax incentives that would help spur 24 innovation and help our companies in New York State 25 include a refundable R&D tax credit available to 1 companies operating at a loss; 2 As well as an angel tax credit, to support 3 seed funding, and help some of our promising biomed 4 startups attract more venture capital. 5 With respect to the refundable 6 research-and-development tax credit, this would 7 specifically target the biomedical industry. 8 Potential models for a credit like this, 9 something similar to the federal model that's being 10 used today, a refundable R&D tax credit; 11 Or, there's a unique model in Massachusetts 12 that ties tax credits to the FDA user fees, and 13 that's been very successful in Massachusetts. 14 An angel tax credit is a really smart 15 investment -- a smart state investment, since more 16 than 10 percent of private-sector jobs come from 17 venture-backed companies, and venture-backed revenue 18 accounts for 20 percent -- 21 percent of U.S. GDP. 19 So, Arizona has a really great program. It's 20 a state-backed program. It covers 35 percent of 21 investment for 3 years in companies with fewer than 22 $10 million in assets. 23 So the key here is, our industry is growing; 24 however, I think true success will be measured by 25 whether we can keep that growth here in 1 New York State and avoid some of those jobs leaving, 2 whether it's to Massachusetts or Texas or Arizona, 3 or another country. And that's happening today. 4 That growth is real, and the growth is -- 5 it's -- you know, the growth is at our fingertips in 6 New York State, and I feel like this industry is 7 really the key -- key to that. 8 So if you can support that, we would 9 appreciate it. 10 I look forward to working with you on any of 11 those policy recommendations, or others. I'm open 12 to continuing that dialogue. 13 SENATOR DeFRANCISCO: Questions? 14 SENATOR KRUEGER: One. 15 SENATOR DeFRANCISCO: Senator Krueger. 16 SENATOR KRUEGER: Thank you. 17 Thanks for your testimony. 18 I will start off by saying, I actually don't 19 think we should take taxpayers' money and do 20 venture-fund or angel-fund investing, the 21 private-sector model. 22 But, in the private-sector, if somebody 23 invests, either in a venture fund or in an 24 angel-type fund, they get a return, if, and when, 25 there's success. 1 In the proposals you're making, would the 2 state's taxpayers be shareholders in the business 3 and get the return? 4 JESSICA CRAWFORD: You know, that's an 5 interesting model. 6 That's not the model I'm proposing, but I 7 would be interested in looking at something like 8 that. But, I haven't -- that wasn't what I was 9 initially proposing, but that's an interesting way 10 to look at it, and it's something I would look more 11 into. 12 SENATOR KRUEGER: So in your proposal, we tax 13 people, and then we invest, in some percent, some 14 small percentage of companies who are out there on 15 the -- looking for investors? 16 JESSICA CRAWFORD: It would be a tax credit 17 for, you know, an investor who's looking at, you 18 know, investing in a small biomedical company. 19 And what happens is, right now, because of a 20 lot of economic uncertainties, the regulatory 21 environment, it's really stifling invest- -- it's 22 cutting back on investments in the biomedical 23 community. 24 The life-science industry itself, because of 25 the amount of money it takes to invest -- like I 1 said, $60 million over 9 years, and the company 2 still didn't survive -- it takes a lot of money to 3 bring, you know, whether it's a drug therapy or a 4 device to market, and it could take, 20, 20-plus 5 years. 6 So, that's -- the goal is to provide an 7 incentive for more people to invest in that startup, 8 those startup technologies. 9 And in doing so, what we've seen in our other 10 states across the country, those types of credits, 11 those incentives, that helps attract more capital, 12 more investment, into companies, and to the state. 13 Our companies, typically, the monies appear 14 to dry up somewhat in New York State, they go to 15 California, they go to Massachusetts, to look for 16 investments. 17 And then what happens is, those investors are 18 in Massachusetts and California, and those jobs go 19 to Massachusetts, California, other states. 20 So you'd like to see those companies grow 21 here. You'd like to see the investments happen 22 here. 23 SENATOR KRUEGER: And is there any research 24 that shows they go to California and Massachusetts 25 because of tax incentives for the investors? 1 JESSICA CRAWFORD: Investors? Yeah, there 2 are -- I mean, there's certainly some data I can 3 share with you, to back that up. 4 SENATOR KRUEGER: I would appreciate that. 5 Thank you. 6 Thank you. 7 SENATOR DeFRANCISCO: Thank you. 8 And, again, the lack of questions has nothing 9 to do with the lack of interest in what you had to 10 say. It's just that everyone is, pretty much, wiped 11 out at this point in time. 12 JESSICA CRAWFORD: It's a long day. 13 No, I appreciate your time. 14 SENATOR DeFRANCISCO: But, thank you very 15 much for appearing. 16 JESSICA CRAWFORD: Thank you. 17 SENATOR DeFRANCISCO: And this now closes the 18 first of five of our hearings. 19 Thank you all. 20 (Whereupon, at approximately 2:01 p.m., 21 the public hearing held before the New York State 22 Senate Standing Committee on Finance and the 23 New York State Senate Standing Committee on 24 Investigations and Government Operations 25 concluded, and adjourned.)