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 6 DISCUSS REFORM INITIATIVES 7 ----------------------------------------------------- 8 Syracuse City Hall

233 East Washington Street 9 Common Council Chambers, 3rd Floor

Syracuse, New York 13202 10

September 5, 2013 11 10:00 a.m. to 1:30 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 Thomas F. O'Mara 21

Senator David J. Valesky 22 23 24 25 1

SPEAKERS:PAGE QUESTIONS 2

Michael Falcone 6 15 3 Chairman and CEO

Pioneer Companies 4

Nathan Andrews 23 32 5 President

Morse Manufacturing Company 6

J. Kemper Matt 35 39 7 President

Dupli Envelopes & Graphics 8

Nancy Hourigan 43 53 9 Owner

Hourigan Dairy Farm 10

Louis J. Steigerwald III 58 65 11 President

Cathedral Candle Company 12

Dan Soules 68 82 13 Partner

Soules & Dunn 14

Anthony Dannible 90 104 15 Managing Partner 105 116

Dannible & McKee 16 17 18 19 20 21 22 23 24 25 1 SENATOR DEFRANCISCO: This is the second of 2 five public hearings that we're having throughout 3 the state of New York, held jointly by the 4 Finance Committee and the Committee on 5 Investigations and Government Operations, and 6 Carl Marcellino chairs that Committee, and I chair 7 Finance. 8 We also have Dave Valesky, a local favorite 9 here today; and we also have Tom O'Mara, a favorite 10 of the Southern Tier, all to hear testimony. 11 We had a meeting yesterday, a similar meeting 12 in Albany, that went extremely well. 13 And we're going to continue these meetings 14 next week in Buffalo, and the beginning of October 15 in Long Island and New York City. 16 Now, we've made some strides in improving the 17 economic climate in the state of New York, and that 18 is good. We've cut spending substantially, we've 19 provided some tax relief, and we're trying to turn 20 the corner, with the assistance of the Governor. 21 But I think what the difficulty is, is that 22 we are in a position that we've got to do much more. 23 Yesterday, we had testimony from the 24 Tax Foundation from Washington, confirming that 25 we're number 50 of all the states, as far as 1 business climate is concerned. 2 That's all of the states: 50. 3 And we don't have 52 states, despite what 4 someone said once, but, of all the 50 states, we're 5 the lowest. 6 We're number one as far as migration out of 7 the state. That's why we lost so many congressional 8 seats. And, that's totally unacceptable. 9 There was a statistic brought up yesterday by 10 the Tax Foundation, that we've lost $41.8 billion, 11 "billion dollars," in income over the last 10 years, 12 and that's all income levels. 13 Well, there's a reason for that: if you don't 14 have a good business climate, you are not going 15 create jobs. 16 So, I have a list of all kinds of examples of 17 the problems we have, but that's -- there's no 18 reason to describe those. You wouldn't be here 19 unless you had some opinions on that -- on this 20 topic. 21 So, Carl, do you have any other things to 22 add? 23 And, if you want to just add, as co-chair, 24 anything that you want, then we'll get started with 25 the hearing. 1 SENATOR MARCELLINO: Yes, John, thank you, 2 and I do. 3 Yesterday I asked the people who spoke, and 4 I'll repeat that statement here today, that we're 5 looking for ideas, we're looking for creative ideas, 6 on how to do just this: reform our tax system in 7 this state. 8 We all know we're taxed too much. We all 9 know that taxes are a burden on everybody, 10 businesses, and individuals as well. 11 As John said, we're losing huge amounts of 12 money, and that's because we're losing population. 13 And it's not just the rich that are leaving, and 14 they are leaving, but it's all ranges of population, 15 all economic income brackets, are leaving the state 16 of New York. 17 That's why we're first in outward migration. 18 That's not a place you want to be first in. 19 So, we want to keep people here. 20 The only way to keep them here, is make this 21 state more competitive, so that we create jobs, to 22 hold our young people here. Not part-time jobs, not 23 half-pay jobs, not temporary jobs, but really good 24 career-type jobs. 25 And we can't do that unless we attract the 1 businesses to come here and create jobs here, and do 2 the right thing. 3 So, we want to hold our people. 4 So we're looking forward to the testimony 5 today, and we're looking forward, as I said before, 6 with creative ideas. 7 "Creative ideas," I'll repeat that again. 8 Thank you very much, and we appreciate it, 9 and I look forward to hearing your testimony. 10 SENATOR DEFRANCISCO: Our first speaker is 11 Michael Falcone, chairman and CEO of 12 Pioneer Companies. 13 And if you'd come up to this desk here, we'd 14 appreciate it. 15 And if you happen to have written testimony 16 as well, just, the young lady that's raising her 17 hand there, please give it to her and she'll make 18 copies, so everybody can get copies here at the 19 podium. 20 MICHAEL FALCONE: Is this thing working? 21 Yeah. 22 SENATOR DEFRANCISCO: It is working, yep. 23 MICHAEL FALCONE: Well, I'm happy to be here. 24 Just a quick resume of Pioneer, which is my 25 company: 1 Born and brought up in Syracuse. 2 Actually, my children are the fourth 3 generation in the real estate 4 development-construction business. 5 We are a multi-faceted real-estate company. 6 We do every type of real estate that there is. 7 Most of my competitors are very specific; 8 they do one thing. 9 But we do office buildings, we do 10 assisted-living, we do hotels. We even have 11 single-family home development, mixed-use 12 development. 13 And New York State's been very good to me. 14 We've done very well here, but we also found it 15 necessary to go outside of the state. And we have 16 an office in Denver, we have an office in Phoenix, 17 and we've developed in 10 different states. 18 The tax system, as it relates to our specific 19 industry, is not onerous. I mean, it's no more 20 onerous than it is in general for everyone. 21 The only time that we had a real problem 22 specific to the real-estate industry was under the 23 Mario Cuomo Administration, when he passed a 24 surcharge on every real-estate transaction over a 25 million dollars. 1 That, thank God, was removed after Pataki 2 took office. 3 And, I'll never forget, Pataki came to see me 4 and was looking for support, and I said: The first 5 thing you have to do is get rid of that stupid tax, 6 because it's counterproductive. You'll collect a 7 lot of money this year, and next, but after that, 8 why should I do business in New York and have a 9 10 percent partner when I don't have to do that 10 anyplace else in the country? 11 So it was removed. 12 It has been a -- a good place to do business, 13 much of it due to the State's recognition that, in 14 order to create economic development, they had 15 programs available to help developers like myself do 16 it. 17 Having said that, this is a difficult place 18 to do business, and it was necessary to have those 19 kinds of subsidies because, the tax load, or the 20 expense load, because of high real-estate taxes, and 21 energy expenses, which are very high, other than for 22 manufacturing, probably put us in a position where 23 our expense basis was 30 percent higher than 24 anyplace else that we're doing business. 25 In other words, just to give you an example: 1 If I'm getting $25 a square foot in an office 2 rental, and I'm paying all of the expenses, it's not 3 a net deal, but a gross deal, I end up with, maybe, 4 15 or 16 dollars a square foot, net, here, because 5 of the tax load and because of energy costs. 6 If I were doing that same deal in Denver, 7 I'd end up with 18 to 20 dollars a square foot out 8 of the same rent. 9 So when you think about it, what it does is, 10 really, it suppresses the net operating income, 11 which suppresses value, which makes it more 12 difficult to build and finance. 13 As far as I'm concerned, the biggest, most 14 important thing that we have to overcome is what was 15 alluded to by Senator Marcellino, and that's 16 population decline. 17 The problem that we have in this area, 18 especially in Upstate New York, is we're losing 19 population. 20 In Denver, in Phoenix, in other parts of the 21 country, in Massachusetts, they're gaining in 22 population. Even some of the northeastern states. 23 We are losing population for exactly the 24 reason that you pointed out: people are going 25 someplace else, because the jobs aren't here; and 1 because the jobs aren't here because of this 2 high-tax atmosphere that we have in the state of 3 New York. 4 So what are the solutions? 5 Well, the first solution would be to grow our 6 population. 7 How do we grow our population? We obviously 8 need more jobs. 9 One of the first things that comes to mind to 10 me, is we ought to do something about the exodus of 11 people like myself, my age group. 12 I have very, very few friends, who are 13 successful and wealthy, who haven't left the state 14 of New York. They're residents of other states, 15 Florida being the most obvious one. 16 I haven't done that, and I will never do it, 17 but, we need to do something about that. It's so 18 counterproductive. 19 We're driving these people out, the people 20 that have the most spendable income, and they're 21 spending 6 months and 10 days someplace else, rather 22 than spending, let's say, 3 months down south, or 23 4 months, because they're forced to stay there 24 because of our tax laws. 25 My suggestion is, I think you ought to 1 eliminate the income tax for everybody over 65. 2 I think it would have a tremendous impact. 3 Number one, these people would continue to 4 keep their homes here. 5 The friends that I have, who are now 6 residents, let's say, of Florida or other states 7 where there is no income tax, they're even afraid to 8 support charities now, for fear that they will be -- 9 it will be construed to be they're still involved in 10 New York State. 11 I mean, I've had -- I've had, probably, 12 three or four people who I have gone to recently, 13 who have always been very generous, say to me, 14 "I can't, I can't make a contribution. I'm afraid 15 it will come back to bite me." 16 So we need to do something. That's -- it's 17 so counterproductive, and it is -- it really -- 18 I believe can easily be accomplished. 19 I'd love to have someone do an analysis, and 20 just to pick a name, a guy like Golisano, who became 21 a resident of Florida, okay, how much did we lose 22 because he no longer is paying taxes here in 23 New York State? 24 I'd like to put together a study of the 25 high-income tax people that have left the state -- 1 we must have some records of it -- do an analysis, 2 and find out, What would have happened had we kept 3 them here? 4 Or reduced; even if you want to charge some 5 taxes, but make a very substantial reduction. 6 And, also, we ought to eliminate the 7 "death tax," as it relates to this category of 8 person. 9 And then you have -- you have a much better 10 chance, I believe, of keeping these people here. 11 And they're the people you want. You know, they 12 have tremendous spendable income. 13 And, it's disruptive even to families. 14 You know, they -- we all want to keep our 15 family around us. 16 And if -- if, you know, if the patriarch of 17 the family is going to spend a substantial amount of 18 his time outside of the state, that's more difficult 19 to do. 20 So I guess, in conclusion, what I would say 21 is, obviously, we need to do two things: We need to 22 raise more revenue, and we need to cut expenses. 23 You know, everybody says the same thing, 24 "That's what has to be done." 25 Cutting the expense part of it could be 1 accomplished, I think, practically overnight, if we 2 forced consolidation. 3 Why do we have so many layers of government? 4 Our system of government delivering services 5 is so expensive: villages, towns, county, city. 6 I recently spent some time in Jacksonville, 7 Florida. It's the largest city, geographically, in 8 the United States. 9 You know why? 10 Because the City of Jacksonville took over 11 the county. There is no county now. It's just a 12 city, and, geographically, it's huge. 13 Now, that's one thing I think that just has 14 to be done. It needs to be done. 15 And "you" can force it. 16 Instead of leaving it up to the 17 municipalities, I think that somebody ought to 18 introduce a bill and say, Over a period of years, 19 you're gonna have to do this. 20 Now, I'm not saying get rid of the city of 21 Syracuse, but what I'm saying is, force 22 consolidation. 23 We made a start. We own an office building 24 downtown: 333 West Washington Street. 25 The city and county economic development are 1 sharing office space. That's a very -- you know, 2 it's a significant savings. 3 The second thing that I think we need to do, 4 is recognize the asset that we have in natural gas. 5 When people talk, this debate that's been 6 going on about fracking, is -- it -- as far as I'm 7 concerned, it's incomprehensible. 8 The downside of fracking might be a couple 9 poisoned wells, and you know something? You can 10 compensate people for that. 11 But the upside is an enormous economic 12 benefit to this area. 13 Look at what happened in Pennsylvania. 14 In addition to everything else, it's one way 15 to become energy-independent. This state could 16 support -- we wouldn't have to import a bit of 17 energy if we tapped into all of the natural gas that 18 we have available in New York State. 19 And I'm not talking about just in the 20 Southern Tier. 21 We have natural gas deposits here in 22 Central New York. 23 I own a farm in Elbridge. There's natural 24 gas on that farm. 25 So, I would suggest that we get this debate 1 about natural gas off of the table, and vote the 2 damn thing one way or the other. Force it to 3 happen. Force people to be held responsible. 4 I -- I can't -- I mean, it's billions and 5 billions of dollars worth of income to an area of 6 the state that needs it desperately. 7 Now, I know, politically, David, and I speak 8 to you, it's a hot potato, but you know something? 9 Sometimes we've got to step up to the plate and grab 10 the potato. 11 That's all I have to say. 12 If anybody's got a question, shoot. 13 SENATOR O'MARA: I just want to say thank you 14 for your comments on natural gas. 15 Coming from the Southern Tier, it is 16 certainly a huge opportunity that we have. And we 17 do have the concerns of the environment in mind, and 18 making sure that it's done responsibly and safely. 19 I believe that this debate has become a 20 political debate, not a scientific debate, that we 21 need to move forward on for the betterment of the 22 entire state, and our energy supply. 23 Getting to your issues on your differential 24 in rent, and what your net is -- 25 MICHAEL FALCONE: Yeah. 1 SENATOR O'MARA: -- in other states: 2 How many states do you do business in? 3 MICHAEL FALCONE: Ten. 4 SENATOR O'MARA: And in those states where 5 that differential exists of what your net is, are 6 there any specific taxes that you can identify we 7 have here in New York, that you don't have in the 8 other states; or, those that we have in New York 9 that are in other states, that are much higher as a 10 percentage -- 11 MICHAEL FALCONE: Well, our school tax here 12 is much, much higher than anyplace else. 13 SENATOR O'MARA: The property tax? 14 MICHAEL FALCONE: Yeah. That -- I mean, 15 I'm talking about school tax, that element of 16 property tax, okay? 17 You know, property tax is made up of, you 18 know, several different things, but, the school-tax 19 part of it is substantially higher here. 20 They're delivering services in schools in 21 other states much, much less expensive than we're 22 doing it here. 23 And I don't -- I don't honestly feel that our 24 educational system is a lot better than many of the 25 states that I've done business in. 1 I would specifically talk about Colorado. 2 They have a very good school system. 3 SENATOR O'MARA: Thank you. 4 SENATOR VALESKY: Mr. Falcone, thank you 5 for sharing your thoughts with us. 6 Just a couple of questions. 7 One, I think of a technical nature, just so 8 I'm clear: You referred to the "death tax." 9 Are you referring to the estate tax? 10 MICHAEL FALCONE: Yes. 11 SENATOR VALESKY: You are, okay. All right. 12 From your experience -- well, let me back up 13 for a minute. 14 We have, over the last several years, as you 15 know, approached tax relief, for the most part, from 16 the perspective of targeted tax breaks -- 17 MICHAEL FALCONE: Yes. 18 SENATOR VALESKY: -- certain industries, in 19 return for job creation. 20 And, certainly, the most recently -- and most 21 recent, and most highest profile, has been the 22 Start-Up NY program that is targeted specifically at 23 State-university facilities. 24 MICHAEL FALCONE: Yes. 25 SENATOR VALESKY: In your opinion, should we 1 be, and, certainly, Senator DeFrancisco in his 2 comments, in terms of chairing and hosting these 3 hearings, has put on the table the notion of 4 broad-based tax relief, perhaps as a refocus to 5 targeted tax relief. 6 Is that something -- 7 MICHAEL FALCONE: I agree completely. 8 I agree completely. 9 I think some of the things that we've done, 10 including some of the tax -- some of relief that has 11 benefited people like myself, they've been abused. 12 I do not believe that -- in the long run, 13 they're Band-Aids. 14 We have to deliver services less expensively. 15 We have to deliver our services less 16 expensively. 17 We have to get rid of layers and layers of 18 jobs. 19 Okay? 20 We do not need a village attorney, a town 21 attorney. We don't need planning boards at the 22 village and town level. 23 You know, nobody wants to give up their 24 domains, but think about, just the waste of money, 25 the expenses that we have, these layers of 1 government. 2 Our system is so counterproductive. 3 And I don't believe that we're ever going to 4 be able to bring this thing under control if we 5 don't have consolidation. 6 SENATOR VALESKY: Okay, thank you. 7 SENATOR MARCELLINO: Mr. Falcone -- 8 MICHAEL FALCONE: Yes, Carl. 9 SENATOR MARCELLINO: -- I used to be town 10 clerk in the town of Oyster Bay. 11 MICHAEL FALCONE: Town of, where, Carl? 12 SENATOR MARCELLINO: Oyster Bay -- 13 MICHAEL FALCONE: Yes. 14 SENATOR MARCELLINO: -- on Long Island. 15 MICHAEL FALCONE: Yeah. 16 SENATOR MARCELLINO: How long does it take 17 you, as a developer, to get a project through a 18 local municipality, say, a town? 19 MICHAEL FALCONE: I'm going to give you an 20 answer that you don't expect. 21 [Laughter.] 22 MICHAEL FALCONE: No longer here in New York 23 than anyplace else. 24 Now, maybe in Oyster Bay it's different, but 25 in Upstate New York, where I've done business -- 1 Rochester, Albany, Syracuse, Utica, all the small 2 towns, Poughkeepsie, Sidney, you know, I can name so 3 many places, Oneonta, that we've done business -- it 4 really is not an onerous process. 5 And, it may be different in Long Island, 6 I haven't done business there, but I will say, a lot 7 of people think that that's a major issue in our 8 business. 9 It really isn't, as far as I'm concerned. 10 Now, maybe we know how to do it better than 11 most. We've had a lot of experience, and we have 12 the benefit of having been doing business in this 13 area for 50 years, but I have not found that to be a 14 major issue. 15 SENATOR MARCELLINO: I'm interested in the 16 timeline. 17 How many years? How many months? 18 MICHAEL FALCONE: Pardon me? 19 SENATOR MARCELLINO: How many months does it 20 take? 21 MICHAEL FALCONE: Well -- 22 SENATOR MARCELLINO: Or how many years does 23 it take? 24 MICHAEL FALCONE: Well, it usually takes, 25 probably, I would say between 10 and 14 months, from 1 start to finish. 2 SENATOR MARCELLINO: Including an 3 environmental impact statement? 4 MICHAEL FALCONE: Yes. 5 If you know you need it, okay, before you 6 start, you get it. 7 If I option a piece of property, I know that 8 I'm going to need an environmental impact statement, 9 so I do it immediately, and that shortens the 10 process. 11 Now, what happens is, you may have spent some 12 money that's wasted, okay, but, we're more concerned 13 about the time than we are trying to save a few 14 bucks. 15 SENATOR MARCELLINO: Thank you. 16 SENATOR DEFRANCISCO: Thank you for 17 testifying with such passion, because a lot of us up 18 here have that same passion. 19 The problem is, we need the votes. 20 And as to the migration out of the state, 21 there's two areas that we've been hearing from other 22 people on as well, are the estate tax, for the 23 reasons you discussed, and you've confirmed what my 24 beliefs have been; 25 And, secondly, we just -- we imposed, a while 1 back, a millionaire's -- a so-called 2 "millionaire's tax" that does exactly opposite of 3 what you're suggesting, on the theory that they can 4 afford it, but, people are, in fact, very mobile if 5 you're wealthy. 6 MICHAEL FALCONE: Exactly. 7 SENATOR DEFRANCISCO: And, so -- and one of 8 the issues is, whether -- you know, whether we got 9 the votes, and we're going to do our darndest, 10 I think, to revisit that so-called 11 "millionaire's tax." 12 As to consolidation, I just want to mention 13 one thing. 14 I think, probably, the biggest factor in 15 forcing consolidation is a 2 percent property-tax 16 cap. 17 MICHAEL FALCONE: Yes, that helps. 18 SENATOR DEFRANCISCO: Because, for the first 19 time, you're seeing it starting to happen out of 20 necessity, because there are turf battles, and the 21 like. 22 MICHAEL FALCONE: Yeah. 23 SENATOR DEFRANCISCO: And, hopefully, that 24 will continue, because you're right on the money as 25 far as that's concerned. 1 So, I really appreciate your testimony. 2 It's consistent with what we've been hearing. 3 And from an individual with your success, and 4 your stature in the community, it's very helpful to 5 have you here today. 6 Thank you. 7 MICHAEL FALCONE: Thank you very much. 8 SENATOR O'MARA: Thank you to your commitment 9 to New York State, and staying here. 10 MICHAEL FALCONE: This is my home. 11 SENATOR DEFRANCISCO: The next speaker is 12 Nate Andrews, president of Morse Manufacturing. 13 NATHAN ANDREWS: How you doing? 14 SENATOR DEFRANCISCO: Whenever you're ready. 15 NATHAN ANDREWS: Thank you all very much for 16 the opportunity be here. It's quite a privilege. 17 I am president of Morse Manufacturing Company 18 in East Syracuse, New York. It is a 90-year-old 19 company, founded in 1923. 20 My grandfather bought the company from the 21 original owner, whose name was Morse. That's the 22 name. 23 And I am currently third generation, 24 family-owned business. 25 We are a manufacturer of drum and barrel 1 handling equipment. 2 If you think of a steel drum, we make 3 equipment that properly lifts, moves, handles, and 4 transports it. 5 Products that my grandfather and father 6 invented, from the '60s through the '80s, are 7 now coming in from low-cost companies, such as China 8 or India, at very low prices. 9 We do not compete as well on that volume-type 10 business, and it's forced us to change, like a lot 11 of other successful manufacturers that are still 12 here in the states. 13 We don't rely on a couple dozen products 14 making them in vast quantities now. We do 15 highly-specialized equipment that focuses on 16 specific end-user requirements. 17 We recently had a handle design that was 18 patented. 19 We do a lot of stainless-steel-type 20 applications for pharmaceutical food-grade-type 21 applications, washdown environments. 22 We do spark-resistent-type products for 23 explosion-proof-type environments. 24 We do automotive -- or, excuse me, automation 25 systems that integrate into larger manufacturing 1 systems. 2 The majority of the products that we ship out 3 are made for one specific user, based on their 4 unique application. 5 And I say all this to put it -- you in the 6 context of what we do here in Central New York. 7 Approximately 30 percent of everything that 8 we ship goes to international destinations outside, 9 not only New York State, but outside of the country. 10 Of that revenues that we received, 11 approximately 80 percent is spent right here, in 12 taxes and payroll, and purchasing things from local 13 suppliers we like to source. 14 That means, roughly, 25 cents of every dollar 15 that we spend is money that is coming from outside 16 of this country; not only outside of New York State, 17 but outside of the country, and it's being spent 18 right here in Central New York. 19 Manufacturing companies and service 20 organizations, such as us, that are 21 revenue-generating companies are such a beacon to 22 New York State and Central New York to create 23 revenue here, and need to be supported. 24 I'd suggest that manufacturers and other 25 service-based companies that are revenue-creating, 1 eliminate the taxes for them. We're bringing money 2 into this community. 3 To try to continue to tax, or tax at higher 4 levels, those type of companies, it encourages us to 5 look elsewhere. 6 I get calls on a monthly basis from 7 economic-development people in Tennessee, in 8 Virginia, in Illinois, throughout Texas, calling, 9 saying, Hey, come look at our states. 10 And the surprising thing is, that they don't 11 put a package together and say, Hey, come here, you 12 know, we'll give you this special deal. 13 They say, Look at the savings you're going to 14 get, year in, year out, by coming here, versus 15 New York State. 16 It isn't a one-package deal for Empire Zone, 17 or this or that, which are good, healthy programs as 18 long as they're not abused. 19 I'd like to reiterate what Mr. Falcone was 20 saying about consolidation. 21 Just a couple of months ago, I was at the 22 Village of East Syracuse Board of Trustees meeting. 23 They raised the tax levy 22 percent on everybody 24 throughout the village. Not our assessment, but the 25 levy was raised 22 percent. 1 The -- I believe a lot of it had to do with, 2 Bristol-Myers Squibb tore down a lot of their 3 buildings to be current, and got rid of some of the 4 tax base. 5 But, the government did not rightsize itself 6 based on the population decline. 7 You know, consolidation is the only way to 8 deal with it, and it isn't being forced. It's just 9 pushing it. 10 I mean, we're hoping that, you know, this 11 consolidation is being forced, but the East Syracuse 12 example is -- it's not happening. They're just 13 pushing it back and back, further and further, onto 14 businesses, onto homeowners, who, in turn, are going 15 to face a decision, Do I stay here or do I leave? 16 We do less than 2 percent of our business in 17 New York State. We have no reason to stay here, 18 besides the legacy that we have in my family in 19 New York State, and the employees that we have. 20 I'd encourage you also to look at 21 unemployment and worker's compensation. 22 Unemployment costs for us have gone through 23 the roof recently, and, yet, we do not have a single 24 unemployment claim that has been successful since 25 I've been in the business for 10 years. 1 We have very low turnover, yet our 2 unemployment costs have gone through the roof. 3 I think it was last year, there was the 4 interest surcharge that was just assessed. It just 5 came out of nowhere, and, all of a sudden, you got 6 to pay additional fees for unemployment. 7 I'd like to share, as well, our experience 8 recently on one of the programs, that is a 9 well-intended program. It's put in place to 10 encourage manufacturers, other businesses, and the 11 promises were not followed through. 12 And it has to do with the "QETC"; 13 Qualified Emerging Tax Credit. 14 We applied and filed amended returns in 2011, 15 for tax years 2007 through 2010. 16 At the time, the guidance was that, to 17 qualify, you had to meet the R&D threshold, which 18 was 6 percent, or, you had to have primary products 19 or services which were classified as 20 "emerging technologies." 21 I note the "or" there; the "R&D or the 22 products and services" test. 23 Because we do such specialized equipment 24 within drum handling, our R&D expenditures far 25 exceed the 6 percent, and we easily qualified for 1 the tax credit. 2 We applied, and we believe we easily 3 qualified for it. 4 Over a year later, in September of 2012, the 5 Department of Taxation revised its guidance, saying, 6 that you have to meet the R&D threshold and you have 7 to be in one of the products-and-services tests. 8 The revised guidance applied to all new 9 claims, as well as all claims that had been filed 10 but had not been processed. 11 But the real kicker, is that the revised 12 guidance did not apply to claims that were already 13 processed. 14 Because -- we received a notification, 15 October, the next month, that our claim was denied, 16 because of the revised guidance. 17 Had our returns been processed in a timely 18 manner, we would have received our credit, of 19 significant value to us. 20 But, because it was retroactively disallowed, 21 and because our credit sat on somebody's desk while 22 another one was processed in a timely manner, our 23 credit was denied. 24 We have since protested, and had a 25 conciliation conference June of this past year. 1 I personally drove to Albany for an 11 a.m. 2 meeting, to meet with this moderator, and, 3 individuals, representatives, from the 4 New York State Department of Taxation. 5 And it was, approximately, a two-hour 6 meeting. We sat down, expressing concerns, sharing 7 sides. 8 At the end of the meeting, the moderators 9 said, "Can we reach some kind of understanding or 10 agreement in this process?" 11 At which point, the representative from the 12 New York State Tax Department said, "Oh, I don't 13 have authority to make that decision. That has to 14 be" -- and I quote -- 'my boss's boss to make that 15 decision.'" 16 And I sat there, Why did I waste an entire 17 day, driving out to Albany, to go through this? 18 Perhaps it goes without saying, but, 19 I thought that I could drive to Albany and get 20 something done. 21 But, hopefully you guys can. 22 I couldn't. 23 We're still awaiting findings on the 24 reconciliation conference. We're hoping to get some 25 kind of result from this. 1 You know, the credit, the program, was -- is 2 a great idea. It's a great example. 3 The follow-through just is not there, and 4 it's terribly frustrating. 5 That money that we would receive would go to 6 new equipment. It would go towards hiring 7 additional employees. 8 But, right now, we don't know what happens. 9 It's very difficult, as a business owner, to 10 strategically plan, when you count on a tax levy and 11 it's either -- you get additional taxes thrown at 12 you later on, or credits that you rightfully earned 13 disappear. 14 With that, I included some notes along those 15 lines in here. 16 I guess to consolidate -- or, to summarize: 17 I would encourage you to really think -- 18 consider the taxes on revenue-generating companies, 19 both manufacturers and service industries; 20 Follow through on the promises of some of 21 these programs that are put in place, that are 22 beneficial, but somehow die; 23 And, consolidation in government. 24 What we've experienced in East Syracuse is 25 really a tragedy. 22 percent increase, it's just, 1 it's absurd. 2 Thank you. 3 Any questions? 4 SENATOR O'MARA: Thank you. 5 Want me to start again? 6 First of all, thank you for continuing 7 manufacturing in New York State. 8 I think that manufacturing is, and needs to 9 be, the core and the base of our entire economy; not 10 just in this state, but in this country. 11 We've had a decline in manufacturing in 12 recent decades, internationally, and I think we're 13 in a position now to regain some of our strength in 14 manufacturing in this country, and in this state. 15 With the devalued dollar, globally, that we 16 have, makes it more cost-effective to do 17 manufacturing in this country. 18 And with the abundance of natural gas, as was 19 mentioned by Mr. Falcone, our prior speaker, leading 20 to lower energy prices and electrical prices, 21 particularly for high-load-user manufacturers. 22 So, I want to thank you for that effort, and 23 let you know that I'm with you 100 percent. 24 I do a lot of work on manufacturing issues in 25 the Senate. 1 We did, in this last year's budget, get an 2 agreement to reduce the corporate franchise tax on 3 manufacturers by 25 percent, but phased in over 4 four years. 5 My goal is to eliminate that completely in 6 that effort, to eliminate that from manufacturing in 7 particular, because I think that's where we need to 8 foster our economy most to get things going in 9 New York State, because you provide the jobs, the 10 good-paying jobs, family-wage jobs, that support the 11 rest of the economy, and the rest of the service 12 industries that we have in this state, that, if we 13 don't have those types of jobs and those types of 14 businesses, we don't have any of the service in this 15 state. 16 So I think that needs to be the base, and our 17 first and foremost concern. 18 So, that's more of a statement than a 19 question, but, thank you. 20 SENATOR DEFRANCISCO: And, thank you. 21 As far as East Syracuse is concerned, as you 22 know, the issue of consolidating police departments 23 went to the voters. 24 NATHAN ANDREWS: Yes. 25 SENATOR DEFRANCISCO: And the, voters in 1 their infinite wisdom, even being told that the 2 property taxes were going to be increased by that 3 amount by the then-mayor, voted against 4 consolidation. 5 Apparently, they're having second thoughts at 6 this moment, and that may be on the ballot this 7 coming November. 8 So you're absolutely right, but, if you can't 9 get the voters to support you on a logical solution, 10 I guess they were taught, and are now going to go 11 back and vote again. 12 With respect to your dealings with the 13 Tax Department, you know, it's so unbelievably 14 outrageous. 15 If you have a program that you qualify for, 16 and you provide all the necessary documentation, and 17 then they change their rules retroactively, and 18 worse than that, if you happen to be one of the 19 lucky ones that had already been processed, you get 20 the benefits, and because of their lax processing, 21 companies like you don't get it. 22 It's totally outrageous. 23 And I know we've talked about it before, and, 24 hopefully, they'll see fit to straighten this 25 situation out, and, hopefully, I can help in some 1 way. 2 But, again, I appreciate your being here. 3 Manufacturing is important, and your 4 perspective is very important to our hearing. 5 Thank you again. 6 NATHAN ANDREWS: Thank you. 7 SENATOR DEFRANCISCO: Next speaker is 8 J. Kemper Matt, president of Dupli Envelopes & 9 Graphics. 10 J. KEMPER MATT: Thank you, gentlemen. 11 Kind of giving a little bit of a background 12 to the out-of-towners about me: 13 I'm part of a family that has been in 14 manufacturing in Central New York for 15 three generations. 16 We've now got a fourth and fifth generation 17 working on that. 18 The brewery is 125 years old. 19 Our company, Dupli, is about 50 years old. 20 I came here 30 years ago, and started with a 21 little small company, and now we've grown pretty 22 good. 23 I think we produce more envelopes than 24 anybody else in New York State, and we pay sales tax 25 in 50 states. 1 We have three plants outside of 2 New York State, and we are existing just fine. 3 On Sunday, in Syracuse, we had the 4 "Post-Standard" article about IBM, and it said that 5 IBM had left -- was at, one time, 10,000 jobs in 6 New York State -- or, in the Endicott area, sir, and 7 they're now down to 700, according to the paper. 8 We have a familiar story all over 9 Central New York. We have Carrier, 10 General Electric, Xerox, Niagara Mohawk; companies 11 that leave because their ownership leaves the state. 12 Locally-owned companies are more valuable to 13 their communities, I believe. 14 New York State government wastes a lot of 15 revenue recruiting the new guy, forgetting their 16 native son. 17 The special targeted tax breaks for 18 university startups is another example. 19 A report from a 2010 study from the 20 State Comptroller states, and I quote, "Indeed, the 21 research suggests that a 'grow our own' strategy may 22 be the most effective approach in spurring high-tech 23 industrialization upstate." 24 The businesses that are leading this growth 25 are already located here, and their employees and 1 families live and have ties to our community. 2 Virtually, all manufacturing industries have 3 become high-skilled industries. 4 In Dupli's case, we have approximately the 5 same number of employees in New York State that we 6 had 10 years ago; however, our employees are more 7 educated, and, on average, 40 percent more pay. 8 They get 40 percent more pay than they did 9 10 years ago for the same number of employees. 10 The printing industry -- printing and mailing 11 industry -- and this is surprising -- the printing 12 and mailing industry in New York State employs 13 539,000 people. 14 That's kind of surprising. 15 And, it produces revenue of $102 billion. 16 The State could make some effort to support 17 their own by buying its needs from its 18 New York State printers. 19 And we don't find much of that going on. 20 The state also has many breweries, including 21 Budweiser, America's largest brewery; and, Saranac, 22 America's best brewery. 23 However, in New York State facilities, 24 Saratoga, the State Fair, state parks, generally, 25 the beers featured are those from out of state. 1 As stated earlier, the ownership change often 2 moves companies. 3 The "death tax," or, the inheritance tax, 4 New York State is one of only 18 states left that 5 have an inheritance tax, and is responsible for 6 1.7 percent of the 2012 tax collections; however, it 7 contributes to force the sale of businesses, and 8 chases New York's most affluent citizens out. 9 It's estimated that repealing the inheritance 10 tax would be a revenue-neutral event, considering 11 the wealthy citizens who have left do not buy major 12 capital goods here in New York State, therefore, 13 paying no sales tax. They don't pay income tax, or 14 do they contribute to charities. 15 As Mr. Falcone suggested, that going to see 16 some of these people, they just -- they have to be 17 out of New York State, and they don't -- they aren't 18 as good contributors as they were at one time. 19 This group is the most capable of supplying 20 capital for new business startups. 21 Government, traditionally, does a poor job at 22 this. 23 In summary: 24 New York has lost almost 40 percent of its 25 manufacturing jobs since 2000. 1 While the remaining jobs are better paying, 2 the job loss must be halted. 3 We must retain and support the jobs we have. 4 We must retain our wealthiest citizens. 5 We must have capital available to develop new 6 jobs from the wealthiest citizens. 7 Removal of the inheritance tax is not 8 expensive, and will help accomplish the objectives 9 stated. 10 Thank you. 11 SENATOR DEFRANCISCO: Thank you. 12 Any questions? 13 SENATOR MARCELLINO: Just one. 14 We've heard a series of speakers, and 15 I haven't asked too many questions. There's a 16 reason: I was trying to listen. 17 The theme has been to not to tax people 18 over 65, take away this tax on somebody, take away 19 this tax on this one...take away. 20 I've heard some answers, but I want to hear 21 what you might be thinking about. 22 How do you replace that lost revenue? 23 "Don't tax people over 65," that means 24 there's revenue that was coming in that won't come 25 in anymore. 1 If you don't tax certain manufacturers: They 2 were paying a tax. That was revenue coming into the 3 state that paid bills. That revenue won't be coming 4 in anymore. 5 Where do we make up that? 6 You can just cut so much. 7 And, you know, after a while, the old saying, 8 you know, "Do more with less," there comes a 9 point -- and I think anybody in business will say 10 the same thing, there comes a point where you do 11 less with less. 12 How do we make that up? 13 What's your thought on that? 14 J. KEMPER MATT: Well, the -- as I suggested 15 here, there are studies that suggest that the 16 inheritance tax is relatively -- is revenue-neutral. 17 In other words, all the people that are in 18 Florida, the wealthiest families in the 19 Central New York area, or, Golisano, or whatever, 20 none of these people buy anything anymore. 21 Some of the wealthiest families here don't 22 buy cars in New York State anymore. 23 That's sales tax that's gone, because they're 24 buying it some other place. 25 A lot of these people, as Mr. Falcone 1 suggested earlier, they stay 6 months and 10 days. 2 If they stayed four months, they would spend 3 more money in New York State, and we'd collect from 4 the sales tax, we'd collect from lots of things. 5 The inheritance tax itself, and I think Ohio 6 just reduced -- or, just eliminated their 7 inheritance tax, and their studies were, that it 8 would be a revenue-neutral affair. 9 So, it wouldn't cost us anything. 10 I mean, just, it's a very, very foolish tax 11 to chase the wealthiest people out of town, and they 12 can move. 13 SENATOR MARCELLINO: Thank you. 14 J. KEMPER MATT: Thank you. 15 SENATOR DEFRANCISCO: But as far as replacing 16 revenues, I think Mr. Falcone addressed this, 17 there's other sources of revenue if we decided on 18 new industries coming in; for example, the 19 natural-gas industry. 20 Secondly, I would assume, that if you make it 21 more profitable to do business in the state, the 22 existing companies will be more profitable; they 23 hire more people, they pay more taxes. 24 In fact, you've been around at least as long 25 as I have, and if you remember when George Pataki 1 cut income taxes, so, we went from the worst-taxed 2 state in the country to somewhere around the middle, 3 everybody said the same thing, "Where's the revenue 4 going to come from?" 5 And, miraculously, it was generated, probably 6 by the profitability, at least one of the factors. 7 So, do you agree with that summary? 8 J. KEMPER MATT: I do agree with that. 9 I think that, you know, we definitely have to 10 keep more people here. 11 And I think that, you know, the inheritance 12 tax has some real problems, because if you run a 13 business anyplace, one of the most difficult things 14 we have, is to transfer that business, or be able to 15 keep the ownership, in the "death" areas. 16 Now, the government has put the $5 million 17 exemption in, which helps. 18 But anything you do to make it difficult to 19 transfer that business and transfer that ownership, 20 now if you're a business person and you have to 21 figure this out, the easiest thing to do is to sell 22 the business, because then you have cash to do it. 23 And once you sell that business, I can 24 guarantee you, that if we sold our business, we're 25 here in New York -- I have a son that's here, 1 running the business, pretty much, now -- if we sell 2 that business, we'd be gone from here, and we'd be 3 out of New York State in less than a year, because 4 it just is -- so -- you know, the inheritance tax, 5 I don't think it's -- I think you'd get more 6 revenue. 7 And I can't speak to the other things. 8 SENATOR DEFRANCISCO: Thank you. 9 J. KEMPER MATT: Thank you. 10 SENATOR DEFRANCISCO: Thank you very much for 11 being here. 12 Next speaker is Nancy Hourigan, the owner of 13 Hourigan Dairy Farm. 14 And by the way, those who are keeping score 15 on their scorecards, as far as who's testifying, 16 we're just noted -- we are informed there was a 17 family emergency for the 12:00 speaker, so, he will 18 not be here. 19 Thank you. 20 Whenever you're ready. 21 NANCY HOURIGAN: Good morning, gentlemen. 22 Thank you for asking me here today. 23 My husband, John, and my son Matt, and I have 24 a dairy and crop farm in Elbridge, and our main 25 source of income is milk, and we sell all of our 1 milk to Byrne Dairy, a very well-established and 2 well-run business here in New York State. 3 I also represent Onondaga County Farm Bureau 4 and its many diverse farms, including dairy, equine, 5 honey, fruit, and vegetable production, and other 6 commodities. 7 As a family farmer, I am uniquely concerned 8 about the viability of our state's farmlands, as 9 well as the people involved in farming. 10 We can have the best soil, abundant water 11 resources, a diversity of production, and access to 12 robust markets, but without the farms themselves, we 13 will not have local food production or an 14 agricultural industry in New York State. 15 It's really hard to pick up thousands of 16 acres and move them someplace else, or hundreds of 17 heads of cattle, so, agriculture is vested in this 18 state. It's very hard to leave it. 19 So I want to -- I'm very concerned about 20 having a healthy agriculture business. 21 Through Onondaga County Farm Bureau and 22 New York Farm Bureau, family farms like mine have 23 been working on a favorable business climate and 24 policies that will keep farmers farming. 25 The 2011 USDA statistics paint a disturbing 1 picture of declining farm numbers right here in 2 New York State. 3 As the number of farms has declined, so have 4 the number of acres in farming, thus pointing to the 5 conclusion that this isn't simple consolidation in 6 the marketplace, but an overall trend of decreased 7 farm numbers. 8 It isn't possible to infer it is the 9 smallest-sized farms or the medium-size farms that 10 are being squeezed, when the statistics reveal an 11 overall decline of farm numbers by several hundred 12 in all size categories of New York farms. 13 While the statistics don't tell us the cause, 14 it isn't necessary for an economist to document that 15 the most likely causes of these alarming drops in 16 farm numbers are overall global market forces and 17 the non-competitive nature of New York's business 18 climate for agriculture in certain key cost sectors. 19 Bringing down our state's high tax and fee 20 environment that makes our farmers so noncompetitive 21 with farmers in other states is one of those key 22 components to combat this trend and keep family 23 farms in New York State. 24 In light of this reality, the focus of this 25 hearing, "state-tax reform," is an excellent 1 question to be asked by these Committees. 2 I thank you for your concern and your 3 interest. 4 If we are to keep people involved in the 5 wonderful and very frustrating business of farming, 6 it's clear we have to do a better job to ensure that 7 our farmers have the ability to stay on the land. 8 With that in mind, I have the following 9 recommendations: 10 While nobody likes to talk about their own 11 mortality, there's nothing certain in life like 12 death and taxes, which leads me to my first point: 13 estate tax. 14 We've all talked about this before. The 15 previous speakers have mentioned it. 16 New York's estate-tax exemption currently 17 stands at $1 million, and the tax applies to 18 property transferred after the death of the owner 19 when the value of the property exceeds the 20 exemption. 21 The value of a farm is usually tied to its 22 assets, such as farmland, buildings and equipment, 23 and cattle, which can force families to sell these 24 assets to pay the tax. 25 In 2007, according to the U.S. Ag census, 1 New York had over 3,000 farms that exceeded 2 $1 million in value. 3 Given land appreciation in the past 4 five years, particularly on Long Island and the 5 Hudson Valley, New York Farm Bureau anticipates that 6 there are far more farms today that exceed that 7 $1 million mark. 8 Farm owners and their families are the 9 epitome of being real-estate-rich and cash-poor. 10 Farm owners typically invest their earnings 11 into increasing and improving their farm property 12 and operation, and as a result, they have much less 13 liquid or cash assets in comparison to the farm 14 owner's numerous real-estate assets. 15 While this business model is essential for 16 profitability, it places family members in a poor 17 position to pay off any estate-tax liability with 18 little cash assets to do so. 19 Farm Credit's recent economic analysis of 20 this situation is frightening. 21 Given the advanced ages, right here, of our 22 principal farm operators in New York, Farm Credit 23 estimates that most farm families with a $2 million 24 estate, or greater, would be forced to sell their 25 assets to meet the estate-tax liability with only 1 a-million-dollar estate-tax exemption. 2 New York State should act to increase the 3 estate-tax exemption for family farms in order to 4 enable the next generation to farm the land. 5 Where are you all going to get your food 6 from? 7 The states of Pennsylvania and Illinois have 8 recently acted to improve their own inheritance 9 taxes assessed on farms, and New York should join 10 these states. 11 Secondly, the high cost associated with state 12 regulation, and the associated fee and tax 13 compliance, makes it extremely difficult to maximize 14 our competitive advantage of being close to 15 New York City and its large nexus of consumers. 16 For example, the majority of New York's farms 17 utilize LLCs, S Corps, and C Corps as part of 18 their transition plan to the next generation. 19 In the eyes of the farm community, the 20 LLC fee is a necessary business tax required for 21 incorporation, which feeds into the state's 22 General Fund. 23 If we are to continue to have farms in 24 New York, we have to make it easier for our farmers 25 to form LLCs, and, in particularly, restructure 1 existing public policy to assess the LLC fee based 2 on net farm income as opposed to the current 3 protocol of using gross farm income. 4 LLCs are now assessed a fee based on gross, 5 not net, and in farming, that difference can be 6 vast. 7 A farm can easily gross over $1 million, but 8 earn less than several thousands in profits, 9 depending upon how expensive the input costs were 10 for the year, such as school taxes; the rise in feed 11 prices, machinery, fuel, and utilities, or how bad 12 that year was as far as the weather goes. 13 Either a flat fee for farm corporations -- 14 for LLCs, S Corps, and C Corps -- we need to 15 establish a flat fee, or, a mechanism to put in 16 place that allows a farmer to provide a Schedule F, 17 a federal tax income form for farmers, to establish 18 net income, and pay the fee on its verified 19 net-income amount. 20 Additionally, submission of the LLC 21 application with the associated fee is due by 22 January 31st. 23 It would be easier, and a good step forward, 24 to see the State talking within itself to different 25 agencies, if the associated fee could be due on 1 March 1st with its farmer's tax return, as opposed 2 to submitting them on a separate deadline. 3 Similarly, the publishing requirements for 4 the public notice of the formation of an LLC seems, 5 in this day and age, to be very antiquated. 6 These may seem to be trivial changes, but 7 it's important to recognize that minor public-policy 8 change is very important, given the wide range of 9 tax compliance the farm family must contend with. 10 Third, there needs to be an ongoing and 11 conscious effort for tax-policy tools to recognize 12 today's means and methods of farming. 13 I don't think the State has kept up in the 14 advancements in farming. 15 New York Farm Bureau has found it necessary 16 to request legislation to redirect tax-policy 17 interpretation, a statute, or internal agency 18 guidance that made an incorrect assumption or 19 exclusion of valid farm practices from agricultural 20 tax treatments. 21 For example, a commercial equine operation or 22 maple-production operation had to be defined as a 23 legitimate farm practice by way of special 24 legislation, at the urging of New York Farm Bureau, 25 in order to be recognized by the New York State 1 Department of Taxation and Finance as an eligible 2 farm practice. 3 Farm Bureau believes that when a question of 4 eligibility for an ag tax treatment is in question, 5 the Department of Ag and Markets should make that 6 treatment, and not the New York State Department of 7 Taxation and Finance. 8 Ag and Market needs to say what is legitimate 9 operation, not Taxation and Finance. 10 The law has no regard for the natural 11 evolution of agriculture as it embraces innovative 12 and environmentally sensitive methods of farming. 13 There's one minor tax that really irks the 14 heck out of me. 15 Every single solitary year, for a charge of 16 $9, I'm asked by the State of New York, who just 17 correctly mailed me a piece of mail, if this is the 18 correct address. 19 Every single solitary year, I have to take my 20 time to send $9 in, and say, Yes, you sent that 21 letter to the correct address. 22 That is very annoying. 23 It's just trivial, but it's annoying. 24 Fourth, farmers navigate a significant number 25 of federal and state taxes, and the red tape that 1 goes with them. 2 Simple actions, like streamlining and 3 consolidating tax forms, and deadlines, translate 4 into thousands of dollars saved at the farm level, 5 in terms of staff hours, recordkeeping, and 6 financial services. 7 Farmers utilize three forms to receive the 8 allowable tax refund for purchase of diesel fuel 9 used in their farm operation. 10 I must submit three separate forms to receive 11 the tax refund from the motor diesel-fuel excise 12 tax, petroleum business tax, and state or local 13 retail sales and use tax. 14 Maybe these are trivial to you, but I can use 15 my time in a better manner to help run my business. 16 Thank you very much for this opportunity to 17 speak, and if you have any questions, I'm happy to 18 answer them. 19 And, lastly, I want to say that, many times, 20 agriculture has been left out of opportunities that 21 take advantage of economic-development programs, and 22 I'd like to see that corrected by you gentlemen. 23 Thank you. 24 25 1 SENATOR O'MARA: Thank you for being here, 2 and thank you for having those specific and concrete 3 examples of areas that we can look at focusing on 4 making change. 5 NANCY HOURIGAN: Thank you. 6 SENATOR O'MARA: We really appreciate that, 7 because, you know, we so often get "lower our 8 taxes," with no explanations as to how to do it, or 9 why to do it, or what the repercussions are. 10 So, some of those concrete examples you gave 11 us are very good. 12 And I certainly understand the estate-tax 13 consequences of the farm, even the small farm. 14 Down in the Southern Tier, where I am, to get 15 back to natural gas again, you know, the 16 farm bureaus are very supportive of pursuing natural 17 gas on their farms. 18 The farmers are the largest landowners that 19 we have. They have been stewards of our land for 20 generations, and are concerned about doing it 21 properly and safely. 22 But, with the value of that gas underneath it 23 that you can't get at now, adds to the value of that 24 farm, for estate-tax purposes. 25 NANCY HOURIGAN: Yes. 1 SENATOR O'MARA: And, certainly, a 100-acre 2 farm, which isn't all that large, well exceeds 3 $1 million just in land value alone, when you factor 4 that in. 5 So, that is an area that we need to continue 6 to pursue, and the support of the Farm Bureau has 7 been very helpful in that regard. 8 One area that we did make an improvement on 9 this year, has to do with the ag assessments, in 10 capping that growth at 2 percent annually, because 11 some areas had seen much larger percentage grosses 12 to the land value. 13 So, that's an area that we have made some 14 progress on. 15 And, I thank you for testifying today, and we 16 will look into those issues that you've brought up. 17 NANCY HOURIGAN: Thank you. 18 SENATOR MARCELLINO: Ms. Hourigan -- 19 NANCY HOURIGAN: Yes? 20 SENATOR MARCELLINO: -- I'm sure you're 21 familiar that Senator DeFrancisco has a bill on the 22 estate tax, to lift it to the federal level, so you 23 might help us by supporting that, and help John to 24 get that through. 25 NANCY HOURIGAN: I've always supported John. 1 SENATOR MARCELLINO: You're a wise woman. 2 I'd also like a copy, if possible, of that 3 testimony -- 4 NANCY HOURIGAN: Certainly. 5 SENATOR MARCELLINO: -- because you went 6 through a whole series of things relative, when you 7 talked about the LLC business. 8 And my notes are sketchy, at best, so if you 9 could get us a copy of that, and if you give it 10 John, he will circulate it. 11 NANCY HOURIGAN: Be happy to do that. 12 Right now, that tax is based on gross income, 13 which can, to the normal person, look exceedingly 14 high. 15 But when you take out all the expenses of 16 agriculture and get it down to the net number, 17 that's a much more realistic number to use in 18 assessing that fee for those LLCs. 19 SENATOR MARCELLINO: If you could just get a 20 copy to John's Office, we would appreciate it. 21 NANCY HOURIGAN: Be glad to. 22 SENATOR MARCELLINO: Thank you. 23 SENATOR VALESKY: Nancy, it's good to see 24 you. 25 And thank you, also, for the specificity of 1 your testimony. That is very helpful. 2 NANCY HOURIGAN: I do tend to talk fast. 3 Sorry. 4 SENATOR VALESKY: I want to just ask on an 5 issue that you didn't touch on. 6 I'm participating in these hearings from the 7 perspective of the Chairman of the Commerce, 8 Small Business, and Economic Development Committee 9 in the Senate. 10 And one of the areas where we -- as I'm sure 11 you full well are aware, one of the areas, in a 12 relatively recent amount of time have done extremely 13 well, has been in the Greek yogurt business. 14 NANCY HOURIGAN: Yes. 15 SENATOR VALESKY: As you undoubtedly know. 16 In fact, we may be number one in Greek-yogurt 17 production here in New York State. 18 You had mentioned that you're selling all of 19 your milk to Byrne Dairy. 20 NANCY HOURIGAN: Uh-huh. 21 SENATOR VALESKY: Have you had any direct -- 22 have you seen any direct benefit to your family farm 23 as a result of the Greek yogurt? 24 NANCY HOURIGAN: Yeah, it's definitely, the 25 price of milk has stayed up unusually steady. 1 The price of milk has stayed very steady, 2 which has been a big relief to all of us. 3 The last, probably five years, the price of 4 milk has been -- it has had such terrible swings, 5 that, directing cash flow over those years was 6 extremely difficult. 7 You'd have milk at $11, and, right now, milk 8 is up around $20. And then it would be just up and 9 down, to the point of, you couldn't budget, you 10 couldn't plan. You had to rob Peter to pay Paul, so 11 to speak. 12 So, it has remained fairly steady. 13 Now, I certainly hope that remains the case 14 for the next 5 or 10 years. 15 It's been very helpful. 16 SENATOR VALESKY: Great, thank you. 17 NANCY HOURIGAN: Thank you. 18 SENATOR DEFRANCISCO: Thank you for your 19 testimony. 20 Just for the record, one of the first, if not 21 the first time, that I mounted farm equipment was 22 about 22 years ago at Nancy's farm. And, we both 23 look exactly the same as we did then. 24 So, thank you, Nancy. 25 Always a pleasure to see you. 1 NANCY HOURIGAN: Thank you, John. 2 SENATOR DEFRANCISCO: The next speaker is 3 Louis J. Steigerwald III, the president of the 4 Cathedral Candle Company. 5 LOUIS J. STEIGERWALD III: Good morning. 6 SENATOR DEFRANCISCO: Good morning. 7 LOUIS J. STEIGERWALD III: To start, I'd like 8 to thank you for asking me to speak today, and, 9 also, for recognizing the immediate need to address 10 the significant and increasing tax burdens affecting 11 New York State residents and businesses. 12 My name is Louis Steigerwald, and I'm here 13 today, speaking on behalf of the 14 Cathedral Candle Company. 15 Cathedral Candle Company was founded by my 16 great-grandfather, Jacob Steigerwald, in 1897, right 17 here in Syracuse, New York, as a manufacturer of 18 church candles. 19 We continue to be a family-owned-and-operated 20 company after all these years. 21 I personally have worked full-time at 22 Cathedral since graduating from college in 1976. 23 And, of course, being a family business, 24 I spent many part-time hours at the factory, 25 working, as I was growing up. 1 You could call that an internship, I guess. 2 The original factory on Kirkpatrick Street 3 remains our core manufacturing facility, and we are 4 a vital exporter for our communities and our state's 5 manufacturing sector. 6 92 percent of our sales come from outside of 7 New York State. Our primary market is 8 North America. 9 We do also ship some around the world -- some 10 products around the world, but the primary market is 11 North America. 12 We currently employ over 70 people in 13 full-time manufacturing jobs. 14 They are represented by the United Steel 15 Workers, and they enjoy benefits, including pension, 16 and Blue Cross and Blue Shield family health-care 17 coverage. 18 We're proud to say that nine years is the 19 average length of service, and we have second-, 20 third-, and fourth-generations of families, 21 including married couples, working there. 22 We invest in training and promote from 23 within. 24 We feel our greatest contribution to our 25 community is providing stable employment for our 1 employees. 2 We also view as our neighbors. 3 Over 50 percent of our employees live within 4 walking distance of our facility on the north side 5 of the city. 6 When I was asked to come and testify on the 7 need for tax reform in New York State, at first 8 I was hesitant. 9 That is because I'm by no means an expert on 10 tax policy in New York State. 11 I am unable to tell you how taxes are 12 allocated, the history or the intent of taxes, or 13 where they should be appropriated in lieu of the way 14 they are now being spent. 15 I think you folks are the expert on that. 16 In my business, if there is an inequality 17 between income and expenses, there's no one better 18 than myself to figure out where we can make it 19 balance. 20 And you folks probably have a better handle 21 than anybody on how to keep things in balance. 22 However, I still decided to present 23 testimony, because I am, just like all other 24 business owners in New York, an expert on paying 25 taxes in New York State. 1 I have done so since starting at Cathedral in 2 1976, and continue to do so today. 3 With that, what I can tell you is, 4 New York State manufacturers, just like 5 Cathedral Candle, are at a loss. 6 Not only are we dealing with the 7 ramifications of an increasingly competitive global 8 climate, but we are also being hit every day with 9 progressively increasing business costs imposed by 10 Albany and by Washington. 11 What the business community, the 12 manufacturing sector in particular, needs, is 13 reassurance from the State Legislature and the 14 Administration that we truly are valued in our great 15 state of New York. 16 As we continue to endure this difficult 17 recession and financial fiscal crisis, it's more 18 critical now than ever to do everything you can in 19 your power to make the climate in New York State as 20 easy as possible for all businesses to simply 21 weather the storm and remain in business, and to 22 grow. 23 Broad-based tax cuts, cuts in assessments and 24 fees, which include workers' comp, unemployment, and 25 I would include in that, the estate tax that we're 1 talking about, that has been brought up several 2 times here -- 3 And, obviously, that's particularly important 4 to a family business, and the transition. I do hope 5 to keep the business within the family for the next 6 generation. 7 -- again, the broad-based tax cuts, and the 8 cuts in assessment and fees imposed on businesses is 9 the best, and it's the most efficient way, to help 10 all businesses, large and small, and to improve 11 their health. 12 Again, if you can allow me to speak from 13 experience rather than expertise, I would like to 14 discuss with you policymakers, one program, and the 15 many benefits we at Cathedral receive from its 16 existence, and that is the Empire Zone Program. 17 Unfortunately, the Empire Zone Program 18 received a plethora of bad publicity surrounding a 19 few companies and recipients who abused the 20 privileges that were given under the program. 21 What unfortunately was overshadowed by this 22 handful of examples were companies like 23 Cathedral Candle Company, who not only utilized the 24 program, but grew because of it. 25 When Cathedral started in the 1 Empire Zone Program in 2002, we promised to make 2 investments in our company, and to add a minimum of 3 one job, and that our untent was to create a stable 4 company with stable employment. 5 When we entered the program, we had 6 approximately 50 employees. 7 Since then, however, we have invested 8 millions of dollars into our facility and equipment, 9 and our current employment has grown to over 70. 10 This illustrates what relief can do. 11 It was the tax benefits, the 12 Linked To Deposit Program which were the 13 low-interest loans, and energy cost-savings offered 14 to us through the Empire Zone Program that helped to 15 give us to wherewithal, and encouraged us to make 16 those investments here in New York State, right on 17 the site where we were founded 116 years ago. 18 In 2002, we also had the opportunity to look 19 elsewhere for the growth that we knew we had to make 20 in order to stay in business. 21 And it was the Empire Zone, I think, that 22 probably helped the most, and that -- the benefits 23 derived from that. 24 In my experience, the best way to help our 25 business and manufacturing sector is to simply 1 reduce and cut taxes, assessments, and fees. 2 Providing this relief to all of the 3 businesses in the state, this is paramount, but 4 there is also a need for the availability of proper 5 economic-development tools. 6 As a realist, I understand this cannot be 7 done overnight and must be done over time, and 8 properly. 9 However, it is my belief that the 10 Empire Zone Program itself, when utilized properly, 11 could serve as a model for an effective 12 economic-development tool. 13 The formula is simple: Tax breaks, 14 low-interest loans, and energy savings are provided 15 to those companies who promise, and follow through 16 on their promise, to sustain or create jobs and 17 provide investment, and investment on the 18 participant's part that is commensurate with the 19 program benefit received. 20 Based on our experience, this program was the 21 most effective tool we have seen yet from Albany. 22 I want to thank you for your time today, and 23 I hope the information that I am providing is 24 helpful for your continued efforts to get 25 New York State back on track. 1 If I can answer any questions, I'd be more 2 than happy to. 3 SENATOR VALESKY: Thank you. 4 SENATOR MARCELLINO: Mr. Steigerwald, 5 I appreciate your willingness to come here and 6 testify. 7 I also appreciate the business model that 8 you've described to us: the family business that 9 promoted from within and kept it. 10 Now, we've heard that before with other 11 businesses that have stayed here, that are family 12 businesses that have grown successfully because of 13 hard work and stick-to-itiveness. 14 You talk about the Empire Zone model. 15 It got a bad rap, I agree with you, because a 16 few greedy souls didn't keep their word, basically, 17 and took it for a ride; who tried to take the money 18 and didn't do what they promised to do. 19 So, it got a bad rap. 20 What would you suggest, how would you modify 21 that program, so that we might want to bring it back 22 in some other form? 23 But how would you modify it to -- I know you 24 can't guarantee honesty. We've both lived long 25 enough for that, to know that's not going to happen, 1 but, how would you modify it? 2 LOUIS J. STEIGERWALD III: Well, again, 3 I couldn't be an expert on that, but I think the 4 failure was, benefits were received without 5 following through on promises. 6 And I think if there's accountability, the 7 program could be effective. 8 SENATOR MARCELLINO: How would you make a 9 business accountable? 10 LOUIS J. STEIGERWALD III: Well, I know we 11 have to file annually, to follow through on what our 12 employment is. 13 And to be honest with you, I don't know how 14 some of the other companies remained in the program 15 when they didn't follow through on their promise. 16 SENATOR MARCELLINO: Neither do I. 17 Thank you. 18 Appreciate you coming, and your honesty. 19 SENATOR O'MARA: I would reiterate Carl's 20 comments, and I've been a big supporter of the 21 Empire Zone Program for those projects where it has 22 been utilized and been effective. 23 In the Southern Tier, it was extremely 24 effective for industrial projects. 25 Since the demise of the Empire Zone Program, 1 we haven't cited a major industrial project in the 2 Southern Tier. 3 So, it has been very effective. 4 There were abuses. Those loopholes were 5 closed, by and large, over the years of its 6 implementation. And I think that it was thrown out 7 unnecessarily, and should be a model that we should 8 look at. 9 While I wish we didn't have to provide these 10 types of incentives at all, and broad-based 11 approaches are better for all, I think, until we get 12 there, these types of programs are necessary to 13 encourage growth in New York State. 14 And, I thank you for your comments in showing 15 that the Empire Zone did provide some success, 16 particularly in your case. 17 Thank you. 18 SENATOR DEFRANCISCO: So what I'm hearing 19 from your testimony is, basically, the best approach 20 is broad-based tax cuts, but until we're there, 21 specialized programs may still be necessary in order 22 to provide the economic development that you have 23 shown by the proper use of Empire Zone. 24 Is that what you're saying? 25 LOUIS J. STEIGERWALD III: That's correct. 1 Even with the reduction in taxes, there are 2 other, at least for us, some incentives, which were 3 the energy reductions that were extremely helpful. 4 SENATOR DEFRANCISCO: Thank you. 5 Thank you, Mr. Steigerwald. 6 I appreciate it very much. 7 The next speaker -- 8 And by the way, we're only two minutes off on 9 time. 10 Yesterday, in Albany, we were two hours 11 behind, because we have succinct speakers here, and 12 to the point. 13 Thank you. 14 -- Mr. Dan Soules, who's a partner in 15 Soules & Dunn, is our next speaker. 16 And thank you for coming. 17 DAN SOULES: Well, thank you for having me. 18 Again, my name is Dan Soules, and I'll take a 19 couple of minutes and kind of tell you who I am, and 20 where I come from. And, I may have a little bit 21 different spin on some of my questions. 22 It's kind of interesting, I was thinking 23 about sitting here, a couple weeks ago, and said, 24 you know, I have all the answers when I'm out with 25 my friends having a beer, but when you have to come 1 in front of a panel, you wonder if you really can 2 answer the questions. 3 But, anyways, let me tell you a little bit 4 about myself, first of all. 5 I've been in business for 38 years. I'm a 6 first-generation business person. 7 I grew up in a migrant town, with no father. 8 I'm kind of a throwback of what this state 9 used to be many, many, many years ago. 10 I own nine different companies in 11 four different states. We employ a little over 12 700 employees. 13 Our businesses are in the restaurants, 14 franchises, land development, medical development; 15 We build pharmacies; 16 Kind of array of different types of business 17 development and real-estate development. 18 Out of our nine companies, 70 percent of our 19 employees are employed outside of New York State. 20 Also, on that same note, 82 percent of our 21 growth is outside of New York State. 22 So you can imagine, only 18 percent of our 23 growth is now happening in New York State, which is 24 a bit troublesome for us. 25 So that tells a little bit about who I am. 1 I wanted to talk about four different areas 2 today, and I'm just going to kind of highlight them, 3 first of all, and then I'll go through them one by 4 one. 5 I want to talk about pilots, putting money 6 back into the taxpayers' hands, employment at entry 7 level, and wean government off pensions. 8 So my first one is about the pilots. 9 And I think -- I think pilots, as a whole, 10 have been very helpful to New York State, as a 11 whole. 12 I personally don't think it's the best 13 program that's out there. 14 I think some very wise man or woman presented 15 this pilot program many years ago, and decided they 16 could -- they could draw people from other areas to 17 their marketplace, and they would kind of own them. 18 Then what happened was, everyone else says, 19 If I'm going to play ball, I have to have a pilot 20 also. 21 And then, if you take your negative tax 22 situations and the cost of living in different 23 states, that even forces that hand to play harder. 24 So I think, in a lot of ways, New York State 25 has been forced into a pretty tough hand to have to 1 do pilots. 2 I personally, even though I've done the 3 Empire Zone, and I'm doing an IDA pilot right now, 4 if I had my druthers, I wouldn't -- I would rather 5 not do that, and do it on a very fair playing field 6 [inaudible] as a business person. 7 But, again, I might be kind of a throwback. 8 So the -- one of the examples I wanted to 9 give to you is, why I don't like pilots, is one I'm 10 dealing with right now, which might give you a 11 pretty good example of why they don't work in some 12 cases. 13 I have an IDA pilot program for Auburn. 14 We're building a $4 million multi-use 15 building in downtown Auburn, which will house our -- 16 we're consolidating our corporate offices, and, 17 we're going to also have a medical center and 18 several restaurants and a pharmacy in there. 19 And in the process, we were able to get a 20 15-year pilot program, a 5-year tax-neutral position 21 on the base taxes from the previous property. 22 The problem I'm finding here is, it's taken 23 over a year to get the program really underway, 24 working with the city, working with the government, 25 working with the attorneys. 1 So, basically, I'm paying on a tax-neutral 2 position, which has cost me almost 18,000 a year for 3 a property that I haven't even been able to take 4 advantage of. 5 The second part of it is, I just received 6 yesterday the closing statements, which we closed on 7 the pilot this morning at 9:00, and the City gets a 8 half a point on the project total. 9 In our case, to break it down, roughly, it's 10 $1 million in land; $2 1/2 million, plus soft costs, 11 into the building. 12 So, basically, they round it out at 13 $3 million, so I have to pay $15,000 in fees to the 14 City. 15 Third, the attorney who represents the City 16 had absolutely no control on him whatsoever. 17 I don't know if he had more than 10 hours in 18 this application, but charged $12,000. 19 So if you take the year of taxes I paid at 20 the tax-neutral, and you take the attorneys fees, 21 and if you take the City's piece of the action, and 22 you take the cost of money, it may have cost me in 23 the area of maybe $40,000. 24 So that's 3 1/2 years of that pilot that I've 25 had to come up with up front, basically, in money, 1 before I can even get the value of the pilot. 2 So I ask you, Is the pilot really working? 3 And then, in the next 10 years, it does go 4 into a 10 percent reduction -- or I should say, over 5 a fixed amount. 6 The problem with that is, and this gets kind 7 of very convoluted here, so bear with me, is that 8 they have chosen a number, the City of Auburn in 9 this case, is what they think the assessed value of 10 the building is. 11 But just because it costs 3 1/2 or 4 million 12 to build the building, when you put that back into 13 the tax form, it doesn't mean that the building is 14 worth that much money. 15 You could build a house for $4 million, but 16 on comparable values, it may only be worth $200,000, 17 and that's where it needs to be taxed at. 18 So the same problem's gonna happen down the 19 road here, and in the sixth and seventh and 20 eighth year this program, we're going to find out 21 that the pilot doesn't work, because they're going 22 to have this escalated valuation, and I'm gonna go 23 back to them and say, No, look at the comparable 24 values of other buildings on the street, in the same 25 size and the same footage. 1 So I think there's some real flaws with the 2 pilot programs, and they need some harder work. 3 I think, in situations where they're in very 4 specific areas, where you have technology or 5 progressive education, I can see that, but in a city 6 like Auburn, where you have only a community 7 college, if we do pilots and tax-exemption programs, 8 it won't help our community at all, because we have 9 a community college sitting in the middle of a 10 residential area. 11 So that's my little discussion on pilots. 12 Big one for me, is to put the money back into 13 the taxpayers' hands. 14 And I guess that's everyone's ambition 15 everywhere we go. 16 And I want to make a couple of interesting 17 points to you. 18 We've studied the demographics between 19 Virginia, that's our largest market, and New York. 20 We have found, that if dual-family income is 21 $100,000, that they will be able to obtain or save 22 or keep between 15 and 20 percent of their income, 23 versus New York. 24 The interesting part is, it's not about the 25 taxes -- the state taxes. They're pretty close to 1 being the same. 2 It's the cost of everything else. 3 It's the other taxes, it's the other fees, 4 it's the cost of utilities and fees on utilities. 5 We call them "controllable costs"; things 6 such as maintaining your home, snow plowing, 7 everything that we have, school taxes, which is 8 indirect of state income tax, county taxes, 9 school taxes. 10 So the thing is, when you think about it, if 11 you make the $100,000 in New York, and you make 12 $100,000 in Virginia, let's say that you were 13 fortunate enough to have 15 percent disposable 14 income after your income, that's $15,000 you have to 15 spend out in the economy. 16 In Virginia you can have $30,000; double the 17 money. 18 Now, let's take that another -- a next step. 19 If I gave you an extra $15,000 a year, which 20 is $300 a week, where would that money go? 21 It would go into Walmart and Lowe's, and 22 Arby's restaurants which I own. It would go into 23 real estate. It would go into mortgages. 24 And the interesting thing is, by putting that 25 money back into the hands of the people would allow 1 us to raise other values. 2 For example, if you could afford an extra 3 $400-a-month payment on a house, versus what you 4 have now, the house is going to go for more value 5 when you do a resale. 6 If the house goes for more value as a resale, 7 basically, there's taxes involved with it: mortgage 8 taxes. 9 It's going to increase the inflationary 10 value, which we need to increase the inflationary 11 value. 12 That's going to put the money back into the 13 economy. 14 And that's where I am a staunch believer of 15 getting the money out of the government's hand and 16 let the people handle it. 17 They can handle it better. 18 And, you know, even on the shortfall of it, 19 if they go out and spend that money, whether it be a 20 private-sector employee or a public employee, we're 21 better to have them out there spending that money. 22 We need that money back into the economies, 23 whether it be in the buying of milk or buying 24 real estate. 25 And the other thing that I like about it is, 1 with Mr. Falcone and myself who are 2 real-estate-based companies, if I turn around and 3 have a building that's worth $1 million, and the 4 taxes, let's say, the taxes could drop, so we could 5 take in Auburn, which is $40 per 1,000, and we could 6 lower the tax rate to 20, there's a pretty good 7 chance that the value of that building is going to 8 go up, because it's a cost-and-expense ratio. 9 So if the value of the building goes up, it's 10 good for the economy, it's good for the profits that 11 we can make to reinvest back into our brands, and 12 from the tax side of it. 13 So, I believe that keeping the money in the 14 taxpayers' hand is extremely important. 15 This is another area that I wanted -- 16 Grabbing my water here. 17 This is another area that I'm very passionate 18 about, that it's been a topic of conversation 19 lately, with the minimum-wage employees in 20 McDonald's and such. 21 I happen to own Arby's restaurants, 22 Tim Horton's, and Domino's, as part of our 23 companies. 24 And I think the one point that's missing 25 here, is that these people are coming in at entry 1 level. 2 "At entry level," they're not supposed to be 3 supporting a home -- in a full home and a family on 4 it. They're supposed to be coming in and getting 5 experience. 6 They're probably getting more experience 7 today working in an Arby's than they probably got in 8 most of the households. 9 It's amazing how many 16-year-olds have never 10 had a broom in their hand in their entire life. 11 So the thing is, we have to keep in mind it's 12 an entry level. 13 I was speaking to my senior vice president of 14 operations last week, and this is going to floor you 15 when I tell you this, he said, "We need 125 new 16 employees in New York State right now, and we can't 17 find them." 18 We cannot find them because, basically, we 19 have put a system in that people do not have to 20 work. 21 So I'm saying, bring these people back into 22 entry level, set the programs up so they'll come in 23 and work there, let us educate them, at our cost, 24 not at the government's cost, and let us -- let's 25 let us monitor these people. 1 I believe that's probably the biggest thing 2 that needs to be done in the change in government 3 with taxes. 4 And a little addition, and this is kind of my 5 "having the beer over the bar" thing that I like, is 6 that I'm saying, for example, if I hire you at 7 $10 an hour, and you are on government subsidy 8 making a value of $30 an hour, which, if you added 9 all your values together, it probably would be 10 pretty close to that, why cant I pay the $10 an hour 11 as a private business, and then the government 12 subsidize the $20 an hour? 13 And I'll even do a favor for you. 14 I'll monitor the employer -- the employee. 15 I'll monitor them. I'll educate them. 16 I'll send in the records to the 17 New York State. 18 We can do a three-strike rule; that if the 19 employee doesn't show up on time, and doesn't have 20 good hygiene, and doesn't wear the uniform, or 21 doesn't participate the way they've been taught, 22 then, basically, you can handle how you want to 23 handle them for the next part of their $20 per hour. 24 But the thing is, we have to come back to the 25 reality, there are thousands and thousands and 1 thousands of jobs available in New York State, but 2 either people don't want the jobs, they're not being 3 forced to have to take these entry-level jobs, and 4 we need to get back to that. 5 So as an owner, I'd like to co-share in that 6 with you, and participate, and we'll do all the 7 work. 8 And my final thing is government pensions. 9 And, this is a pretty tough area to talk 10 about, as I know, but I have -- my wife is the 11 president of the board of education in Auburn, so, 12 obviously, I'm an ear for her on a lot of occasions. 13 She's been in that position for six years, 14 she's done a great job. 15 But it's amazing, when I ask her little 16 questions, like, "What's your labor percentage at 17 the school?" and she tells me it's 82 percent. 18 And then I say, "My labor percentage of my 19 business is 32 percent." 20 I don't think there has to be a lot more 21 discussion that there's obviously an issue there. 22 Now, don't get me wrong, we're talking about 23 a little bit different types of brands. 24 But the thing that I would maybe recommend to 25 the State, is that we start to wean people off the 1 pension program, and maybe one of the ways to do it, 2 is to put more pay back into the employees' hands. 3 And I think it's a fair way to do it because 4 it would take care of a couple of issues here. 5 One was, it will get us off that dependence 6 of pension, long-term, which we know we're trying to 7 do. You're trying to do it, and we're trying to do 8 it. 9 But, also, it would put some of that money, 10 if a teacher's making $60,000, and we have to give 11 them a 10,000-a-year raise, it's a short-term 12 investment, but if we can make up, long-term, on the 13 pension side of it, that would promote our economy 14 immediately. 15 Let's be honest about it, no different than 16 I said in the beginning of this conversation, in 17 Virginia, if you have an extra 15,000 a year, you're 18 spending it. 19 And you need it now. 20 You don't need it -- this -- the government 21 employees, respectfully, and private employees, they 22 need money more today than they need down the road 23 when they're retiring. 24 When they're going to get 70 percent of their 25 final pay, and they have Social Security and, 1 hopefully, some savings, and sold their home, they 2 should do all right if they prepared themself. 3 When they really need money is today, when 4 they have children going to school, when they need 5 to support a lifestyle, when they want to buy a 6 home, when they want to go out and have a nice 7 dinner. 8 So I'm a strong believer that, if we have to 9 review some of the positions, that if we're gonna -- 10 if we're gonna cut some of the pensions, weigh, 11 where we can put it back in their hands today and 12 allow that money to go back into the economy. 13 So those are my four areas that I wanted to 14 share with you, and I appreciate the time. 15 And if you have any questions for me, I'm all 16 yours. 17 SENATOR MARCELLINO: Yeah, I just have one. 18 Have any of your businesses applied for any 19 of the targeted tax credits? 20 DAN SOULES: Such as...? 21 SENATOR MARCELLINO: Anything that the State 22 offers with respect to energy [inaudible]? 23 DAN SOULES: No, we haven't. 24 The only thing we've done is, like, through 25 NYSERDA, programs like that. 1 We have done no -- you know, I find, by the 2 time that we get done, and I'll even go back to -- 3 this is kind of a round-about answer to your 4 point -- but the thing is, with this IDA application 5 that we did, we felt we had $30,000 worth of 6 manhours doing it, by the time we do it and monitor 7 it. 8 I'm not even talking about -- it's so much 9 work, and there's such a long delay. 10 So we have found -- we're a very 11 entrepreneurial company, and we have found that we 12 don't have time for it. We're busy working. We're 13 working seven days a week. 14 So, we really are not one that uses a lot of 15 government programs. We haven't in the past. I've 16 used three or four over my entire 38 years. 17 SENATOR MARCELLINO: I just wondered, because 18 you said 82 percent of your businesses were out of 19 state, if any of these tax credits would have 20 enticed you to bring businesses back into the state, 21 because that's their purpose. 22 DAN SOULES: Well, I think maybe they could. 23 I think the other problem that we may have, 24 and, again, I -- you know, as an entrepreneurial 25 company, maybe we don't have the time or the energy 1 to find out what a lot of this is, and do the 2 research on it, when we're out there working. 3 It's hard. 4 It's not like a 40-hour-a-week job, where you 5 go to work and you get paid 8 to 5. 6 We're scrambling every day, and we're -- we 7 wish there were 10 more hours in a day and 3 more 8 days in a week. 9 So for us, and I know it's a pretty crappy 10 answer, but the thing is, we just don't have time to 11 investigate them, and to pledge a lot of our 12 people's secretaries' times and key people's time to 13 look at programs, unless it's something that someone 14 may bring to us and educate us on up front a little 15 bit. 16 SENATOR MARCELLINO: Thank you. 17 SENATOR O'MARA: I mean, I would suggest, in 18 that regard, that you reach out to your local 19 economic development groups, because that's what 20 they're there for, and to put those packages 21 together for you. 22 And in regards to your pilot discussion that 23 you talked about, and I'm an attorney, and don't get 24 me wrong, nobody likes to pay attorney's fees, 25 whether they're $12,000 or $2,000 for a pilot deal, 1 but I got to assume, in your pilot deal that you 2 just closed on this morning, you got more than just 3 a pilot, or you be wouldn't have done it. 4 You got a mortgage-recording tax abatement, 5 you got sales-tax abatement on all your purchases, 6 that adds up to a lot more than; otherwise, you just 7 would have just gone, I assume, on most of your 8 projects, with a straight 485-b exemption, and you 9 phase in over the first 10 years. 10 So, there's more to it than just a pilot. 11 And pilots through an IDA, right now, are 12 really the only economic-development tool that our 13 local areas have, whether it's a village, a city, a 14 county, however it's structured across the state. 15 And there have been criticisms IDAs. 16 I'm a believer in IDAs, and think that they 17 do allow a community to provide an incentive package 18 that, right now, isn't available out there with the 19 demise of the Empire Zone programs that we've talked 20 about. 21 But with the, uhm -- with 82 percent of your 22 growth outside of New York State, why is that? 23 Is that because other areas are growing and 24 New York is not? 25 Is it because the cost of doing business is 1 lower elsewhere? 2 What are the major factors in why you're 3 growing out of state? 4 DAN SOULES: Right, well, let me go back to 5 your first thing in regards to the IDA, and I agree 6 with you, there are other advantages and benefits of 7 the program. 8 The problem, when you're a small business, 9 I still consider ourselves a small business, is that 10 cash-flow period, no different than the farmers, 11 that we have to get ahead of the curve here, with 12 the cost of banking and everything else. 13 So, a lot of these programs take a long time 14 to kind of come through their final part where we 15 can get the advantage of it. 16 But, it's a good point you're making. 17 But, the reason that we're doing it outside 18 of the state is several things: 19 Number one, it's the disposable income. 20 It's very difficult for me to develop a 21 program here because, if I open a restaurant here, 22 for example, and our margins are going to -- you 23 know, I'm going to do less than -- 15, 20 percent 24 less profit on the same investment, or maybe a 25 little bit more investment, I can build an Arby's in 1 Virginia for, let's say, a million-three, that might 2 cost me a million-five, and down there, if it net 3 forty here, I maybe will net sixty there. 4 So from an investment standpoint, it just 5 makes sense. 6 The other thing that's -- it's so amazing, 7 when you think about the disposable-income factor, 8 if you took the city of Auburn, and you went back 9 and put this 15 percent back into their hands, it 10 would take a city of 28,000 people and give them the 11 buying ability of almost 56,000 people. 12 Okay? 13 So what happens is, not only are we going do 14 have the advantage in the cost down there, but we 15 also have the advantage in the sales, because 16 that -- down there, we have people standing in line 17 to get in every restaurant. 18 Why? Because they have the money in their 19 hands. 20 Up here, the people don't have the money in 21 their hands. 22 So, basically, we got higher sales, we got 23 lower costs. 24 And I have to say, as Mr. Falcone had 25 mentioned earlier, as far as government is 1 concerned, going through the process isn't much 2 different in Pennsylvania, North Carolina, Virginia, 3 Florida, than it is in New York. 4 I'd say that part of the state has done a 5 pretty good job, where they've streamlined the 6 process. 7 I think they don't understand how to draw 8 businesses, and we don't do a very good job of 9 marketing at the local level, because, when I go to 10 Virginia, they're waiting with a town car, and a 11 hotel and food, and showing me four sights, and show 12 me a total package. 13 I come back to Albany, New York, I'm walking 14 through the city hall, and every door is shut and 15 locked because they've cut the budget so much. 16 Well, you know, it's great to balance the 17 budget, and I get that, but you also have to have a 18 sales team out there. 19 SENATOR O'MARA: I agree. 20 And I also agree we need to do more than say 21 "We're open for business." 22 Thank you for being here. 23 DAN SOULES: You bet. 24 SENATOR DEFRANCISCO: Let me -- these are 25 hearings concerning taxes. 1 When you hone in on disposable income, as one 2 of the reasons that there's more disposable income 3 in these other states, is because they're taxed to a 4 lesser degree, the average Joe? 5 And if that's the case, are you saying, 6 between the lines, that one of the ways that the 7 State of New York can help provide that disposable 8 income, was to give more -- have people save more of 9 their dollars, and one way to do that is broad-based 10 tax cuts? 11 DAN SOULES: Absolutely. That's exactly 12 where you have to go with it, and -- you know, and 13 that's where it ends up at the end at the time of 14 day. 15 Whether it be purchasing and add more sales 16 tax, higher mortgage taxes, you know, the fees that 17 they have, and you can call them "fees," you can 18 call them "taxes," but by the time you get done here 19 in New York, we all know, there's a lot of taxes, a 20 lot of fees, for everything. 21 And in other states, they just don't have it. 22 They have the state income-tax fee, but when 23 you get beyond that, the taxes really fall off 24 quickly. 25 And, you know, I get part of it, because part 1 of it is, we've been around for a long time, and 2 we've built this machine we have here. 3 And so, if you're 40 years younger, then you 4 have 40-years-younger of experience of having that 5 bureaucracy and the machine going. 6 New York has -- I get that, they have to 7 build it in. 8 But somewhere, sometime, we've got to cut 9 these taxes out to have the people compete, because, 10 I'm having a terrible time, you know, staying here 11 in New York. People are begging me to leave. 12 SENATOR DEFRANCISCO: So how about if, 13 somewhere, and sometime, is here and now, does that 14 sound good? 15 DAN SOULES: Sounds better than good. 16 SENATOR DEFRANCISCO: Okay. 17 Thank you -- 18 DAN SOULES: Thank you. 19 SENATOR DEFRANCISCO: -- very much for your 20 testimony. 21 DAN SOULES: You bet. 22 Thanks. 23 SENATOR DEFRANCISCO: All right, the last 24 speaker, as I mentioned, the 12:00 speaker, had a 25 family emergency. 1 The last speaker, who's seen it all, being an 2 accountant, Anthony Dannible, the managing partner 3 of Dannible & McKee, a certified public accounting 4 firm, who will have a broad knowledge of this issue. 5 ANTHONY DANNIBLE: Thank you, Senators. 6 I appreciate the opportunity to speak to the 7 group, and, hopefully, give some insights from a 8 practitioner's standpoint. 9 I deal with the complexities of many of the 10 laws that are passed by the State of New York. 11 I think one of the important things, is to 12 realize that New York, since 2000, through 2009, 13 actually lost 3.4 million New Yorkers. 14 And I was part of some of those decisions of 15 people that owned businesses, and, where they asked: 16 Should I move to Florida? 17 Should I move to Texas? 18 Should I move to Nevada? 19 Should I move to Arizona? 20 And the 3.4 million in New Yorkers that we 21 lost from 2000 through 2009, that was a loss of 22 $119 million. 23 600,000 New Yorkers, of which I had 24 150 clients move to Florida, because of no income 25 tax and no estate tax. 1 We talk about the "death tax"; the 2 inheritance tax. 3 I think that's a tax that's long overdue with 4 that million-dollar exemption. It makes absolutely 5 no sense, I believe, in New York State. 6 Right now, we have a $5.2 million -- 7 $5,250,000 federal exemption. 8 And, before the permanent extension in 9 Congress, I spent last fall making gifts, because it 10 behooved my clients, who were still New York State 11 residents, to gift $5.2 million, husband, and 12 $5.2 million for a wife, and it completely escapes 13 New York State tax, because it's not a taxable 14 federal gift. 15 So the million-dollar exemption we have 16 really doesn't have much teeth in it. 17 And I think that's something that the State 18 should really take a look at, is the "death" 19 inheritance tax. 20 I think a lot of my clients, and I mentioned 21 over 100 clients, we sat down and we made decisions 22 to consciously move from New York State to eliminate 23 the "death tax." 24 I'd like to also talk about the new program 25 we have, the Tax-Free NY Program. 1 I think it's a great program that probably 2 gets a lot of headlines in the paper, but do you 3 know something? It is a program that really doesn't 4 offer to New Yorkers the broad base that it should. 5 It's geared to nanotechnology companies that 6 are very limited. 7 My fear, what's going to happen, is what 8 happened in North Carolina. 9 North Carolina, in 2004, gave Dell 10 $240 million in incentives to locate there. 11 After Dell took advantage of the $240 million 12 in incentives, they moved out of North Carolina. 13 Many of the nano companies, the startup 14 companies, that we've already had, in the connective 15 quarter, have been clients of mine. And when they 16 developed, they were sold to a company outside the 17 state, and they moved. 18 Also, to develop companies is not limited to 19 nanotechnology companies, they are also clients that 20 I have. 21 I have a manufacturing company up in the 22 Hancock air base, which is an Empire Zone and an 23 Empowerment Zone. They manufacture industrial 24 washers. 25 They invest a tremendous amount of time and 1 dollars in research and development. 2 But here we have a program, Tax-Free NY, 3 where companies, literally, will pay no real-estate 4 tax, will pay no income tax, and the workers, 5 potentially, up to 10 years, will pay no income tax. 6 Somebody will pick up that burden. 7 That's the problem in a program like that. 8 And what happens is, and it's been mentioned 9 before, we need a broad-based tax; not special 10 interests with special benefits. 11 I have clients that are manufacturers in 12 New York State, in the Southern Tier, Cortland, 13 Elmira. 14 We have the investment tax credit, which has 15 been around for New York State for over 40 years, 16 and we pick up an investment credit of 5 percent, 17 sometimes 10 percent, depending on the employment 18 during their next subsequent three years, and, if 19 it's put into property, plant, equipment, including 20 building used in the manufacturing, processing, and 21 assembling, we get tax credits; and it sounds great, 22 it sounds wonderful. 23 I counted up, I have 50 clients with over 24 $2 million of unused credits that are beginning to 25 expire. 1 The credits, many times, that are passed 2 sound great, but it's, like, we just mentioned to 3 the individual before, Did you think about hiring 4 somebody because you're going to get a credit? 5 From the practical business standpoint, 6 I don't hire a person because of a credit I'm going 7 to get. 8 If I can't afford the salary, forget about 9 the credit. 10 And I had a client, when I was speaking to 11 him before my testimony today, I said, "Did you ever 12 avail yourself of the targeted jobs credit? If you 13 hire certain people, economically-disadvantaged 14 people, you'll pick up a 40 percent credit of their 15 wages." 16 He said to me, "Tony, what good is a credit 17 if I can't generate the income?" 18 A broad-based tax is what we need, where, 19 rather, these incentives that we have that nobody 20 really takes advantage of. 21 One prior speaker mentioned the Q Tech. 22 I've got 10 clients that would claim the 23 Q-Tech credit. 24 I have spent more time trying to demonstrate 25 to the State that we qualify. 1 And all it does is, it creates a bureaucracy, 2 that someone has to pay a professional, like 3 Dannible & McKee, and I've got 85 people in my firm, 4 25 full-time tax people, and we have to work, and 5 charge clients, to avail ourselves of these credits. 6 Much like the credits we have on the 7 individual side, follow through the credits: We 8 have tuition credits. We have all kinds of 9 individual credits. 10 I don't have a client that gets advantage of 11 it. They're phased out based on income. 12 So it sounds great, and it might look great 13 in the "Post-Standard," every third day when we get 14 a copy of it, to take a look at it, but there's no 15 people that really get benefit of it. 16 Why is Florida, no income tax? 17 Why is Texas, no income tax? 18 Why are they on the growing list of states 19 that lead the country in terms of economic growth? 20 Why, unfortunately, with the Tax Foundation, 21 has New York consistently ranked last? 22 I work with clients coming into the state. 23 I work with clients expanding. 24 I have a manufacturer in the Southern Tier. 25 We were looking to expand in New York State, or, we 1 could expand to Virginia. 2 We expanded to Virginia, because of the tax 3 base down there, and the opportunities that were 4 there because of the tax base. 5 One thing that we have to look at right now, 6 and I know when we talk, in theory, it's very 7 difficult to make changes. 8 I mean, obviously, one thing I would suggest 9 is, many states decouple from federal depreciation 10 expense. 11 Well, it's very complex. 12 We have to charge clients extra to run 13 another depreciation system. 14 We also lose immediate deductions because of 15 the 50 or 100 percent federal bonus depreciation 16 that New York State doesn't allow. 17 So, we lose those deductions. We have to do 18 complex depreciation schedules to comply with it. 19 I would like to see that conformity. 20 However, I also realize that, as the State 21 plans on revenue, because Congress passes these laws 22 very late, it's difficult to plan on your finances 23 accordingly. 24 So I would suggest, one difficult thing has 25 been the complexities with decoupling. 1 Another thing has been the complexities to 2 comply with these credits that are passed, because 3 very few people get benefit of it. 4 A broad-based tax cut is what makes sense. 5 However, the corporate franchise tax has a 6 serious inequity, and that's what I really wanted to 7 hone in on today, because this is something that 8 should be fixed, and it needs to be fixed, because 9 this has precipitated many of my clients leaving 10 New York State and organizing themselves outside 11 New York State. 12 We have a franchise tax that is 7.1 percent 13 of your corporate net income. That's also reduced 14 to 6.5 percent if, in fact, you're a manufacturer. 15 And if you're a special manufacturer in 16 New York State, where all your property is in 17 New York State, or, you have less than $1 million 18 worth of capital, the rate falls down to 19 3.25 percent. 20 That's great, that's a broad-based tax. 21 And that is an incentive that we have in the 22 state for C corporations. 23 And I emphasize "C corporations." 24 "1986"...1986, when Rostenkowski streamlined 25 the tax code. 1 And by the way, I tracked, when he 2 streamlined the tax code, he simplified the tax 3 code, and my business went up 35 percent in 1987, 4 and again in 1988, to comply with the complexities 5 of the simplification. 6 [Laughter.] 7 ANTHONY DANNIBLE: However, in 1986, they 8 repealed the "Notable" section of the tax law. 9 There was a section in the federal code, 10 Section 337, that was known as "General Utilities." 11 General Utilities allowed a small businessman 12 to elect to sell his assets, and he would pay no 13 corporate tax, no corporate gain, at the corporate 14 level, only on the liquidation of his company. 15 So most small businesses would operate as a 16 C corporation. 17 337 said: If I'm selling my business, and 18 I'm selling it, most acquirers don't want to buy 19 stock. They want to buy assets, because they're 20 allowed to write off the assets, they'll pick up 21 investment credits in New York State for that, and, 22 they don't want to inherit the histories of 23 potential exposures from sales tax and income tax. 24 So, most acquirers will acquire assets of a 25 small business. 1 Section 337 allowed the seller to make an 2 election. 3 If he or she liquidated their company within 4 12 months, there was no corporate gain, only capital 5 gains at the individual level. It eliminated 6 double-taxation. 7 That was repealed in 1986. 8 1986, 24 percent of the corporations that 9 filed tax returns were S corporations. 10 After 1986, and I burned the midnight oil in 11 1986, electing, under Section 1361, S corporations, 12 because an S corporation, there was a special rule, 13 under Section 1374(c), that you did not pay the 14 built-in gain tax, which was a double-tax for a 15 10-year period when you went from a C to an 16 S corporation, that you would not have 17 double-taxation. 18 1988, 56 percent of the corporations filed as 19 S corporations, rather than 24 percent the year 20 before. 21 Because of General Utilities, what we've seen 22 now, 82 percent of the entities that file tax 23 returns are either proprietorships; "LLCs," limited 24 liability corporations; partnerships; or 25 S corporations. 1 Now, here's where the law runs afoul in 2 New York State. 3 Where we have a corporation right now, a 4 corporation, as I indicate in the handout that 5 I handed you Senators, pays 7.1 percent, or, 6 6.5 percent if it's a manufacturer, or, even lower, 7 3.25 if it's a special qualified manufacturer, that 8 is for a C corporation. 9 If, in fact, and this is something that has 10 been very positive with business, we used to have an 11 allocation, that you had to allocate with and 12 without New York State, based on, revenue, with and 13 without the state; property, with and without the 14 state; and, payroll, without and without the state. 15 It was a three-part formula. 16 That has been changed, that it's a simple 17 allocation only based on sales. 18 So, if I'm a C corporation in New York State, 19 let's assume that I have $2 million worth of income, 20 and let's assume, as I have a client up in 21 Booneville that deals with the federal government, 22 that 90 percent of that company's sales, a 23 manufacturing company in Booneville, is shipped to 24 points outside New York State, they only pay tax on 25 10 percent. 1 So $2 million worth of entire net income, 2 allocated only 10 percent to New York, that would 3 be, roughly, $200,000; and let's say, with our 4 7.1 percent, I would pay $14,000 in tax, because 5 I am a C corporation and I'm allowed to allocate 6 just based on revenue outside the state. 7 Let's go to the real world today, where 8 corporations, because of what happened in 1986, 9 operate as S corporations, LLCs, partnerships. 10 They do the same allocation, but what happens 11 is, if you are a New York State resident, that 12 allocation of 90 percent outside New York State has 13 no application. 14 In my example of $2 million, and I'm an 15 S corporation, or a partnership, or a 16 proprietorship, I will pay tax on the full 17 $2 million. 18 And now, because of the "millionaire's tax" 19 that we have, which is 8.81 percent, I will pay 20 8.81 percent on $2 million, a significant difference 21 from a C corporation, to the pass-through entity. 22 Now, a pass-through entity, if I have my 23 allocation 90 percent outside the state, and my 24 shareholder is a Florida resident, he or she only 25 pays tax on the portion allocable to New York State. 1 However, a New York State resident doesn't 2 have the ability to carve that out, and he or she 3 pays tax on 100 percent of the income. 4 The franchise-tax law that we have right now 5 needs to be modified with some sort of a carve-out 6 to put pass-through entities, of which we have 7 approximately 82 percent filing, on an even keel 8 with C corporations, because, follow through what 9 I just said, it doesn't take me long to sit down 10 with Mr. A or Mrs. B, and we plan to get them out of 11 New York State to establish residency in Florida, 12 and now, as a non-resident, they only pay tax on a 13 portion of the tax. 14 And that's why, when you look at the 15 individual tax, and we talk about the 16 "millionaire's tax" over $2 million, it really is 17 quite laughable. 18 I get a laugh out of what the State did with 19 the $2 million, because I could have a $50,000 20 salary, my company could make $2 million, of which 21 the $2 million is not sitting in cash. It's 22 probably sitting in accounts receivable, it's 23 probably sitting in inventory, it's probably sitting 24 in property, plant, and equipment. 25 I don't necessarily have that $2 million 1 there. 2 So, if my salary was $100,000, but as the 3 result of the pass-through from a pass-through 4 entity, such as an S corporation, a partnership, an 5 LLC, in my IT-201, my income is going to be 6 $2,100,000. Now I will pay that 8.81 percent. 7 SENATOR DEFRANCISCO: I'm having flashbacks 8 of my tax course in law school. 9 Before you go on to the next point, let me 10 just ask you two things. 11 Number one, is there some language in the tax 12 code that needs to be modified, to accomplish what 13 you just said, treating S corps the same as C Corps, 14 that you can provide us, the additional -- you know, 15 a little copy of the code, with your scribbles on, 16 showing what you believe would change that? 17 And, secondly, are you saying -- are you 18 giving part of your testimony to the effect that the 19 "millionaire's tax" is not a good thing? 20 ANTHONY DANNIBLE: I -- both comments, 21 Senator, I would concur. 22 SENATOR DEFRANCISCO: Okay. 23 ANTHONY DANNIBLE: I would concur. 24 SENATOR DEFRANCISCO: I'm sorry to interrupt 25 you, but you've got other major areas, and I wanted 1 to make sure I got my questions in. 2 ANTHONY DANNIBLE: Yes. 3 Yes, thank you, Senator. 4 I agree. 5 I think, again, it happened in Congress, when 6 the Obama Administration pointed to the magic 7 "$250,000" as being a wealthy person. 8 Again, I go back to the example of a business 9 owner, and I've got many business owners, where they 10 take out a reasonable salary, but the income from 11 the corporation is added to their Individual 1040; 12 in our case, in New York State, added to your 13 IT-201. 14 Now, this really hurts an individual because, 15 number one, instead of getting that favorable tax 16 rate that a C corporation would get, the 7.1, the 17 6.5, or the 3.25, and, with sales outside the state, 18 that rate goes down even lower on a C corporation, 19 the individual who is a New York State resident pays 20 tax on 100 percent of that income. 21 A non-resident only pays tax on the portion 22 allocable to New York State. 23 Somehow, we have to make an S corporation, a 24 partnership, or an entity comparable to the 25 C corporation. 1 And one follow-up, Senator DeFrancisco, to 2 mention: 3 Years ago, we actually had, for 4 S corporations, a separate New York State tax. 5 There was an attachment to the return, and 6 I'll provide it to the Committee, we used to 7 calculate what the corporate tax would have been. 8 So there needs to be a carve-out for that 9 corporate tax, because you get practitioners like 10 myself that says, Senator, if you are a resident of 11 Florida, you're going to save $200,000 a year in 12 New York State franchise -- or, excuse me, in 13 New York State individual tax. 14 On top of that, when that pass-through income 15 crashes through the individual's return, he or she 16 loses the benefit of all the New York State 17 deductions because of the phase out on itemized 18 deductions. 19 My firm does over 2,000 individual returns, 20 and do you realize, less than 50 people get itemized 21 deductions in New York State? 22 Every other client I have takes the $15,000 23 standard deduction. 24 Again, another disincentive. 25 Also, with all these pass-through incomes 1 coming in from partnerships and S corporations, all 2 these benefits that you debate in Albany, that you 3 pass, tuition credits and is defibrillator credits 4 and R&D credits, all get phased out, so my clients 5 get no benefit. 6 They get no benefit. 7 So, what I think we need to do, is to look at 8 the corporate franchise tax. 9 I think we need to have a broad-based tax. 10 It was already mentioned. 11 I think the states that have grown, the 12 Floridas; 13 The South Dakotas -- which, by the way, 14 Senator O'Mara, ties in with the energy program that 15 South Dakota has had; 16 Texas, I've had clients from Elmira, 17 New York, we bought land down in Texas, to start 18 asphalt-concrete operations; 19 And all of these are looking to taxes. 20 Our taxes, a real thing. 21 I think, the Tax Foundation has ranked 22 New York State at 50th. It's an embarrassment. 23 We've gone from the Empire State to the worst 24 state, from a tax standpoint. 25 Certainly, real-property taxes are high. 1 I had a bank executive that moved from 2 Fayetteville, New York; his real-property taxes were 3 $22,000. 4 He had a house in California, twice as 5 expensive, his real-estate taxes were 20 percent of 6 what he paid in New York. 7 So, all these taxes come into play, but I 8 think, as we start, and we start to digest, I think 9 if 82 percent of the businesses are pass-through 10 entities, we've got a franchise tax that is very 11 detrimental to retaining people, because you have 12 practitioners, like myself, who work with clients to 13 change their residency from New York State. 14 And I think that's a travesty. 15 The second one is net operating losses. 16 Net operating losses, under Section 172 of 17 the Internal Revenue Code, you are allowed to carry 18 net operating losses back 2 years, and forward 19 20 years. 20 And New York State modified the law several 21 years back, that it allows the carry-back, but 22 you're limited to $10,000. 23 And most businesses that I see in the real 24 world are cyclical. 25 For instance, in the aggregate business, the 1 cycle is nine years. They will have nine good 2 years, then they're going to have several down 3 years. 4 Most businesses just don't ride along 5 consistent because there's business cycle. 6 Automobile dealerships: I do 35 automobile 7 dealerships. They run in cycles. 8 The aggregate business I mentioned is 9 nine years. 10 So, as companies are paying taxes, our 11 franchise tax is geared to an income tax. 12 Well, when you have losses, the IRS allows 13 you to go back two years, recover prior-year taxes, 14 and then carry any unused losses forward. 15 New York State, however, limits the 16 carry-back to $10,000, and what it does, it severely 17 penalizes New York State businesses. 18 We should have the carry-back losses equal to 19 the federal carry-back period; and they should be 20 limited to your federal losses, but limited, not to 21 $10,000, but limited to your federal losses. 22 I don't disagree with the New York State 23 adjustments, because they adjust depreciation, they 24 adjust depletion, they adjust some other things, 25 which, we could go for another two days why some of 1 those are inequitable, but assuming the 2 modifications to federal taxable income are 3 acceptable, then we should have an equal carry-back, 4 it should be the same from a federal standpoint, 5 because these are businesses that need to recover 6 those prior taxes and plow them back into business. 7 I think by expanding the base, and whenever 8 you give special credits, like the Tax-Free NY, it 9 gets a lot of press, it sounds great. 10 It is going to be a miserable failure. 11 No question in my mind: it's going to be a 12 miserable failure. 13 If anybody has -- I've followed taxes. 14 I graduated from Syracuse University when I 15 was 20 years old. 16 I've been a CPA for 44 years, and I have seen 17 the taxes. 18 And, these programs, they sound great, they 19 get votes. 20 But, it's not -- the credits that you have to 21 apply for, there's complexities. 22 A broad-based reduction in taxes, they will 23 put more dollars immediately into the businesses in 24 New York State, are what we need, rather than these 25 programs that you apply for the credits, and then 1 you spend the next year and a half arguing with the 2 State, trying to prove to the State that you qualify 3 for these. 4 So, that's one thing. 5 So net operating loss, I think, should be 6 modified as well. 7 Final point is, the repeal of the 8 New York State corporate alternate minimum tax. 9 It is an absolute joke. 10 Out of 650 corporate clients that I do, I 11 have one client that has been an alternate minimum 12 tax. The rate has been lowered to 1.5. 13 I don't care if you lower the rate to .0025, 14 which equals the interest rate that I earn on my 15 bank accounts, I still to have comply with it. 16 My clients have to fill out the form. We 17 have to do separate calculations. 18 It's a useless, complex form, and the 19 alternate minimum tax is useless in New York State. 20 That should be repealed. 21 SENATOR DEFRANCISCO: You say one of the 22 650 corporations, actually, the alternate minimum 23 tax makes a difference? Is that what you said? 24 ANTHONY DANNIBLE: That was the only one, 25 Senator, that we had to pay alternate minimum tax, 1 and when you pay alternate minimum tax, you get a 2 credit. 3 Well, again, for the complexities, and the 4 amount that we had to pay was less than $2,000, but 5 the complexity, every year, to fill out the form is 6 something that we shouldn't have to do. 7 Now, I'm probably talking myself out of some 8 work because, obviously, a CPA, the more complex, we 9 like it, as I mentioned with the simplification, but 10 I think there's been a lot of complexity in the 11 New York State laws. 12 The Empire Zone; we talk about the 13 Empire Zone, and we talked about the complexities. 14 Well, you know, we had shortchangers in 15 New York State, but you know something? Shame on 16 you people. Shame on New York State. 17 You paid certain people in Central New York 18 to go around and tell people how to reorganize, how 19 to get benefit from it, and then you changed the law 20 after 2002. 21 But, it was legitimate. 22 Now, what did the shortchangers do with that 23 money? 24 Did it go in their pockets? No. 25 Any client that I had, and I had five that 1 were shortchangers, they invested in property, 2 plant, and equipment, and they made themselves more 3 competitive. 4 So was it a bad program? 5 Were there shortchangers? 6 I think the State benefited, but it was a 7 poorly designed program. 8 I think rather than these incentives, we've 9 had investment tax credit for 40 years. I've got 10 clients with millions of dollars of unused 11 investment credits that are beginning to expire. 12 It would have been simpler to reduce the 13 rate, broad-based spectrum, and, also, we have to 14 think about the pass-through entities that are a 15 real, real world right now. 16 So, you know, major reform, we could go on 17 with some other things, but I think, certainly, the 18 thing we have to think about is, is the corporate 19 franchise tax. 20 I think that can be simplified. 21 I think because of the inequity with the 22 pass-through entities, there are people like myself 23 that are out there planning with clients, and what 24 we're doing is, we're moving companies outside of 25 New York and losing that revenue. 1 One final point, I think Mr. Falcone 2 mentioned, was the change in residency. 3 When you change from New York State, 4 obviously, to be a non-resident, you have to set up 5 domiciliary; you have to have a domicile in another 6 state. 7 Many people go down to Florida, they set up a 8 domicile. 9 I have a letter I give a client that tells 10 you all the factors that you have to go through to 11 change your residency. 12 One of the requirements is, you have to be 13 outside New York State 183 days. 14 I think Mr. Falcone hit on an interesting 15 point. 16 If that period were shortened, maybe we'd 17 have more people up here spending money, buying 18 automobiles; spending money, incurring and 19 generating sales tax for us. 20 The one interesting thing, too, that I think 21 is, I noticed with a lot of state taxation -- 22 Because I have clients in Illinois, Illinois 23 raised the rates on individuals, they raised the 24 rates on corporations. 25 They quickly backed off because they were 1 going to loose Sears. 2 -- I noticed that most of the revenue being 3 generated by states now are from non-residents, and 4 that's something I think we need to focus on. 5 Rather than taxing residents as we do, how do 6 we generate more revenue from the non-residents that 7 come in? 8 It can be sales-tax revenues, hotel-occupancy 9 revenues, but that's where the states are generating 10 their largest dollars now, are taxing non-residents 11 for the time that they spend in that particular 12 state, be it tourism, or whatever. 13 But, I do think the one thing that I'm a 14 great proponent of, these programs, they get a lot 15 of press, they probably get a lot of votes. 16 In practice, I don't see a lot of benefit. 17 I really don't. 18 We can talk about a 5 percent, 10 percent, a 19 20 percent investment credit. 20 I've got clients that have millions of 21 dollars, that they can't use them. 22 So, I think the corporate franchise tax would 23 be my start. 24 I would it make it broad-based, because if I 25 pay a higher tax in New York State, there's one of 1 two things that's happening: 2 One, I'm going to consider moving; 3 Two, I'm going to reduce the salaries and 4 wages that I'm paying my employees; 5 Or, three, I'm not competitive with somebody 6 outside the state. 7 All three are negative. 8 So, a broader-based tax will generate more 9 revenue because of the three items that I just 10 mentioned. 11 So, that's what I'd like to see. 12 I think the corporate franchise tax, to me, 13 is probably the key one that we can have. 14 To speak to Senator DeFrancisco, I will get 15 him some of the observations. 16 There was an -- also, an interesting TSMB, 17 that New York State actually had published, on 18 non-resident taxation. 19 And when I send that to you, you'll see 20 exactly how it would impact the New York State 21 people. 22 SENATOR MARCELLINO: Mr. Dannible, 23 I appreciate your testimony. 24 It's been enlightening, and it also 25 reinforced why I did not go into accounting. 1 [Laughter.] 2 SENATOR MARCELLINO: Are there any tax 3 credits that you found that were worth it, that were 4 successful? 5 ANTHONY DANNIBLE: You know, I think the one 6 that really stuck in my mind, and a couple of the 7 prior speakers hit on it, was the Empire Zone. 8 I think the -- the -- they had some credits, 9 they had the wage credit, and I think that gave some 10 benefit to some companies, but that wasn't 11 significant. That was only for a 5-year period. 12 I think the one that really helped the 13 clients the most, and helped my clients the most, 14 was, under the Empire Zone, it was the real-property 15 tax refund. The real-property tax refund kept many 16 of my clients in business. 17 Several clients that are paying high 18 real-estate taxes, what a notable client of mine up 19 in Watertown did with the savings, he reduced the 20 cost of his product, and he increased his sales. 21 So, I think the Empire Zone had some good 22 programs in it, Senator. I think there was some 23 abuses in it. 24 But, it's got to be something that's 25 immediate. 1 The broad-based tax cut immediately reduces 2 the tax rate down. And, also, it affects me 3 immediately because I don't have to make estimated 4 payments to New York State, or I may be able to 5 reduce them, so I immediately have that influx in 6 cash. 7 Similarly, I think the real-property tax 8 under the Empire Zone, that was a very good program 9 that benefited many of my clients. 10 SENATOR MARCELLINO: Thank you. 11 I appreciate your testimony. 12 SENATOR DEFRANCISCO: Thank you very much. 13 And I really appreciate it, because, 14 sometimes we get theory, but not specifics, and you 15 were extremely specific. 16 And I'm sure you're going to get a call from 17 one or more of us, to get more information on some 18 of these points. 19 ANTHONY DANNIBLE: Would be glad to help you. 20 SENATOR DEFRANCISCO: Great. 21 ANTHONY DANNIBLE: Would be glad to help you, 22 Senator. 23 SENATOR DEFRANCISCO: Thank you very much for 24 participating. 25 ANTHONY DANNIBLE: Thank you. 1 SENATOR DEFRANCISCO: That is the last 2 speaker, and we are now concluded for today. 3 We will have a similar hearing in Buffalo on 4 September 12th, and the first Thursday and Friday 5 in Long Island and New York City, respectively -- 6 first Thursday and Friday of October. 7 And then, hopefully, we'll come up with some 8 excellent recommendations, so excellent, that people 9 cannot possibly vote against them, so we can get 10 some real things done this year in broad-based tax 11 cuts. 12 Thank you very much. 13 (Whereupon, at approximately 12:12 p.m., 14 the public hearing held before the New York State 15 Senate Standing Committee on Finance and the 16 New York State Senate Standing Committee on 17 Investigations and Government Operations 18 concluded, and adjourned.) 19 20 ---oOo--- 21 22 23 24 25