“Tax-Free NY” is now “Start-Up NY” – Still Bad Tax Policy, Still Bad Economic Development Policy

July 9, 2013. Despite the concerns raised by economists across the political spectrum, a somewhat revised version (A. 8113 and S. 5903) of Governor Cuomo’s “Tax-Free New York” proposal was introduced on June 20, 2013, passed by both houses of the Legislature on June 21, 2013, and signed into law by the Governor on June 24, 2013. The Fiscal Policy Institute’s June 11, 2013 brief on the original proposal concluded that that it was bad tax policy and bad economic development policy. Now recast at “Start-Up NY,” the plan is still inconsistent with the two long-established pillars of tax fairness—horizontal equity and vertical equity—in that it proposes to completely exempt the personal incomes of the employees of favored businesses from the Personal Income Tax for five years and then provide significant exemptions from taxation for the next five years. This “innovative” idea of exempting certain employees’ income from the Personal Income Tax also undercuts one of the main arguments for state-level business tax breaks—that the businesses receiving those tax breaks might not be paying full taxes but by those businesses locating in our state rather than somewhere else, we benefit from a broader and stronger personal income tax base. In some recognition of the shortcomings of this proposal, the revised legislation, as finally enacted, limits this exemption from Personal Income Taxation to 10,000 workers a year.

The claim that the proposal has no cost to the state is incorrect for five reasons that are spelled out in the June 11, 2013, brief. For example, by giving very favorable tax treatment to some businesses, the plan will reduce the market share of some existing businesses that do not receive this favored treatment. This, in turn, will reduce the profitability of those existing businesses and, thus, their tax liability. The favored businesses will not be paying taxes on their covered activities; and the negatively affected existing businesses will be paying less because of diminished income or closure. This will mean some combination of tax increases and service cuts for other businesses and for residents—a costly, downward spiral rather than a no-cost nirvana. The revised legislation, as finally enacted, purports to address this problem by adding “a prohibition of anti-competitive behavior” that requires program administrators to reject “any application to locate in a Tax-Free NY area … from a business that would compete with other businesses in the same community but outside the Tax-Free NY area.” This provision, as written, provides existing businesses some protection from unfair competition from new Tax-Free businesses that locate in the same community, but not from new Tax-Free businesses located elsewhere in New York State. Since retail establishments are categorically excluded from participation in the new program, it is very unlikely that a participating business’s competitors will all be located in the “same community.”