February 16, 2005. Frank J. Mauro, Executive Director, Fiscal Policy Institute, presented testimony to the New York State Legislature’s Joint Budget Hearing on Economic Development and Taxes before the Assembly Ways and Means and Senate Finance Committees.

I greatly appreciate being invited to appear to you today on the subjects of economic development and taxes.

SPUR. As part of his 2005-06 Executive Budget proposal, Governor Pataki has proposed a new program that he refers to variously as SPUR and Operation SPUR, with the SPUR acronym standing for Strategic Partnership for Upstate Resurgence. This program consists of a series of tax incentives for firms that engage in various kinds of economic activity in certain areas of the state where, according to the Governor, need “job growth and investment . . . the most.” But what are those areas? According to the Governor’s proposed Article VII bill, these areas would not be designated in accordance with criteria established by law or even by criteria designated by a state agency but by a public authority, the NYS Urban Development Corporation with only the vaguest of criteria set forth in the proposed legislation – – that the “rules and regulations promulgated by the urban development corporation . . .shall take into consideration employment and population growth and impact on agribusiness.” How’s that for an unconstitutional delegation of the taxing power of the state to a public corporation? There is no way that a state agency, let alone a quasi-governmental entity such as the UDC, should be deciding which businesses are required to pay taxes under the provisions of the regular tax law and which are allowed to pay under an alternative set of provisions.

Even if the criteria for these SPUR areas were set forth in statute in precise detail, the whole proposal seems like a new additional Empire Zones program being layered on top of the existing Empire Zones program, the integrity and targeting of which have both been severely undercut by the “free-lunch” boundary amendment process which was adopted in 2000 through an expedited rulemaking process that was intended to be used for making non-controversial “clean up” type changes in state agencies’ rules and regulations.

Empire Zones. The operation of geographically targeted economic development programs and the maladies that can beset them are issues with which I have been concerned for many years. In 1979, when I became the director of Assembly Speaker Stanley Fink’s Program Development Group, we began a research and policy development project aimed at reforming the state’s Job Incentive Program. That program had begun as the Urban Job Incentive Program in 1968 with strong targeting requirements. But by 1979, it had been transmogrified through a series of statutory expansions and administrative determinations into a statewide program with very rich benefits and very loose criteria. Over the next several years, the professional economic development community resisted efforts to reform the program arguing that this was their most powerful economic development tool and it could not be modified without calamitous results. But by early 1983, the scandals plaguing this program had become so great that an Executive Budget proposal to completely eliminate it was readily adopted by both houses of the Legislature. While I do not believe that what followed was the result of this action, the state’s economy grew quite rapidly from 1982 to 1989 despite the demise of the Job Incentive Program with a net increase of almost one million (988,000) nonagricultural payroll jobs during this period.

In some ways the Empire Zones Program, as it has been implemented since 2000, is actually more problematical than the JIP ever was from both policy and constitutional perspectives.

At about the same time that we began our research on the Job Incentive Program, media and policy attention was growing in an innovation – enterprise zones – that the Congress and State Legislatures were being urged to import from Great Britain. The idea was to target tax and regulatory relief to designated distressed areas. My initial study of this proposal let me to have significant “equal protection” concerns regarding the possible gerrymandering of zone boundaries. In late 1981, for example, I wrote that zone boundaries might “be drawn to include or exclude a particular block, without a change in the overall eligibility of the zone as a whole but with potentially tremendous financial implications for a favored or unfavored few.” In retrospect, this seems quite naive given the scatter-shot “spot zoning” that has come to characterize New York’s Empire Zones program in the last several years.

In 1986 when New York enacted legislation establishing the Economic Development Zones program, which became the Empire Zones program in 2000, these concerns led to the following language being included as a way to give some geographic integrity to New York’s zones program:

Section 958. Criteria for empire zone designation. (a) To be eligible for designation as an empire zone, an area must be characterized by pervasive poverty, high unemployment and general economic distress, must correspond to traditional neighborhood or community boundaries, and where appropriate, be bounded by major natural or man-made physical boundaries, such as bodies of water, railroad lines, or limited access highways; and must meet the following requirements:

This provision applies not only to the initial designation of a zone but also to all boundary amendments. I call your attention to this language, and will discuss it in further detail later in this testimony, because it has been treated quite cavalierly to the point of being consciously or unconsciously ignored by the Department of Economic Development in its administration of the program.

While there are many aspects of the Empire Zones program that could be improved, I will focus on what has gone wrong with the boundary drawing and boundary amending process in the last several years. The root of many of the current problems with the zones program dates to a change in the program’s rules that the Department of Economic Development (DED) adopted in 2000. This rules change took on much greater importance when later in 2000, the Assembly’s proposals for greatly enriching the benefits available to firms through the zones program were included in one of the omnibus language bills adopted as part of the 2000-2001 state budget.

To fully appreciate DED’s 2000 rules change and the questionable legality of that change, it is important to understand the provision of the State Administrative Procedure Act SAPA that was misused to propose and adopt that rule.

In 1998, SAPA was amended to provide for a new expedited rule-making process that state agencies could use for making non-controversial technical amendments to their existing rules and for adopting new non-controversial rules. Chapter 210 of the Laws of 1998, as signed into law by Governor Pataki on July 7, 1998, replaced three separate provisions of SAPA that had previously existed for the adoption of “minor” rules and for the repeal of “obsolete and “invalid” rules with a single expedited process for the adoption of what it defined as “consensus” rules. This revision of SAPA took effect on October 1, 1998.

In order to use this new “consensus” rule-making process, an agency must conclude that “no person is likely to object to (the rule’s) adoption because it merely

(a) repeals regulatory provisions which are no longer applicable to any person,

(b) implements or conforms to non- discretionary statutory provisions, or

(c) makes technical changes or is otherwise non-controversial”

and then include in its notice of its proposed consensus rule-making in the State Register “a statement setting forth a clear and concise explanation of the basis for the agency’s determination that no person is likely to object to the adoption of the rule as written.”

In the March 8, 2000, edition of the State Register, the New York State Department of Economic Development (NYSDED), proposed to use this new provision in a way that was clearly inconsistent with the letter and the intent of the law. In this rule making, NYSDED used the new consensus rule making process to repeal a requirement that NYS Economic Development Zones (EDZs) could not consist of more than three noncontiguous areas. It proposed to do this by simply excising the following clause from Section 10.6 of its rules governing the zones program:

“[; provided, however, that no zone shall consist of more than three noncontiguous areas]”

The required statement as to why this proposal qualified as a “consensus rule” concluded that, “With no limit on the number of non-contiguous areas allowed in a zone, EDZs will eventually include only property used for productive business activity. The proposed rule would thereby enhance the Department’s mission of job growth and job retention. Due to the beneficial nature of this proposed rule making, the Department has determined that no person is likely to object to the adoption of the rule as written.”

While this statement certainly explains why the Department believed that this rule change would be positive, it did not endeavor to explain in any way how this proposal met the definitional standards of SAPA for a “consensus rule.” The only one of those standards that could conceivably have applied in this case was that the Department concluded that “no person is likely to object to (the rule’s) adoption because it merely … is otherwise non-controversial.” It is hard to believe that the Department believed this but, in any event, it did not endeavor to say why the proposal was “otherwise noncontroversial” and subsequent events have certainly demonstrated that this was a quite controversial proposal. Note, for example, the Assembly’s efforts in the 2002 amendments to the zones law to address the problems created by this rules change through the 75/25 provisions and the Governor’s efforts to deal with these problems through the “superboundary” and related proposals that he has submitted to the Legislature in conjunction with this year’s Executive Budget.

The Commissioner of Economic Development should be held clearly accountable for this misuse of a reasonable “safety valve” mechanism that was added to the State Administrative Procedure Act to deal with truly technical and noncontroversial rules.

The Department tried to use this “consensus rule-making” process again in 2002 for a further evisceration of the Empire Zones program’s targeting requirements (see attached notice of proposed rule making dated February 27, 2002, and the comments that I filed on this proposal on April 15, 2002) but later withdrew this proposal from consideration. SAPA does not require agencies to provide explanations when they withdraw rules from consideration but SAPA does require that a proposed “consensus rule-making” must be withdrawn if the agency receives any comment which contains any objection to the adoption of the rule.

As indicated above, I do not believe that the Department’s 2000 rules change and the way that it has subsequently implemented that rules change would have proven to be as problematical as it has if the benefits available under the program had not been greatly enriched by legislative action later in the year. I have been told on several occasion by Assembly staff that they were unaware of DED’s rules change at the time that the enrichment of the program was being negotiated. This seems logical to me since the Assembly worked expeditiously to close this “barn door” through

the 75/25 rule once the nature and use of the rules change became known.

While the 2000 rules change certainly allows a zone to be comprised of more than three noncontiguous areas, I believe that the Department has been incorrect in its conclusion that this rules change allows for many of the kinds of scatter-shot “spot zoning” boundary changes that it has approved since the adoption this rule. My conclusion in this regard is based on the language of the opening sentence of subdivision (a) of Section 958 quoted earlier in this testimony: “To be eligible for designation as an empire zone, an area must be characterized by pervasive poverty, high unemployment and general economic distress, must correspond to traditional neighborhood or community boundaries, and where appropriate, be bounded by major natural or man-made physical boundaries, such as bodies of water, railroad lines, or limited access highways; and must meet the following requirement;.” Under current law this provision of Section 958(a) also applies to the zones designated pursuant to Sections 958(b), 958(c) and 958(d) since each of these latter sections only notwithstand the paragraph (i) of subdivision (a) not any of the other parts of subdivision (a). Paragraph (i) of subdivision (a) establishes the quantitative criteria for zone designation. Subdivisions (a), (b) and (c) provide alternative quantitative criteria which can be used in lieu of paragraph (i) of subdivision (a).

The Commissioner of Economic Development should be required to review all of the existing zones to determine if and how the requirements of the opening sentence of section 958(a) are being complied with and make appropriate changes in all of the zone boundaries to ensure compliance with this requirement. Appropriate transition rules should be adopted by the legislature for businesses that are outside of boundaries complying with these statutory requirements but which have already been fully certified. No additional certifications should be made until such boundary changes are made.

While the legislature has broad discretion in establishing classes for purposes of tax laws, there must be a rational basis to the distinctions drawn by the legislature in order to pass muster under the equal protection clauses of the U.S. and New York State constitutions. The way in which the boundary amendment process has been implemented in the last several years undercuts the classifications that have been established by statute. There are also possible legal problems with the amount of discretion that the Legislature has granted to administrative officials in determining which businesses are taxed one way and which similarly taxed businesses are treated a different way. This problem is most severe in cases where zone administration has been contracted out to non-governmental organizations.

In addition to the analysis presented above regarding the severe problems caused by the ways in which the boundary drawing and boundary amending process have been implemented in the last several years, I also recommend for your consideration the following 11-point “Reform the Zones” plan that has been developed by a broad coalition of organizations concerned with balancing the state budget in an economically and environmentally sensible manner. According to the “Reform The Zones,” plan, the state law authorizing the Empire Zones program should NOT be renewed without real reforms including the following 11 steps:

1. implementing full, annual disclosure of the benefits received and the jobs provided by each participating business.

2. strengthening rather than weakening the program’s focus on the state’s neediest areas by prohibiting zone designations in areas other than census tracts that meet economic hardship criteria and immediately adjoining census tracts in the same community. Similarly, the extension of existing zones boundaries into areas other than census tracts meeting economic hardship criteria should be eliminated.

3. ending the current annual boundary amendment process (the “we bring the zone to you” approach) that has opened the operation of many of the state’s zones to favoritism and corruption.

4. halting the benefits going to businesses that used re-incorporation and other ruses to get into the program.

5. tightening the program’s certification requirements to ensure that firms that violate (or have, in recent years, violated) labor, health and safety, environmental or other important statutory safeguards are not certified to receive zone benefits; or, if they are already certified, that they lose such certification

6. requiring the Commissioners of Labor and Economic Development to hold well-advertised and timely public hearings on all proposed business certifications, all contested de-certifications and all proposed boundary amendments. (Note: Hearings on boundary amendments are currently required but the Commissioner of Economic Development views this requirement as being met by the hearings held by local legislative bodies on the local laws making those boundary amendments. Public hearings are not currently required on business certifications and de-certifications.)

7. requiring that all of the tax breaks and other benefits available to participating firms be based on the number and quality of the jobs actually created. (NOTE: Some but not all of the program’s benefits are currently tied to the number of jobs actually created.)

8. strengthening the program’s job quality standards and the application of these standards to all zone benefits. (NOTE: Under current law employers are eligible for an enhanced wage credit [$3,000 as opposed to the ordinary $1,500 wage credit] for a targeted employee who is paid an hourly wage of at least 135% of the minimum wage for more than half of the period involved.)

9. limiting the total amount of all tax benefits available “per employee,” in any given year, to the lower of (a) $10,000 or (b) 20% of the total of the wages paid to the employee involved and the health insurance premiums paid on behalf of such employee.

10. applying de-certifications for cause to all periods beginning with the earliest documented date of the infraction on which the de-certification is based and require that any benefits received during such period by a decertified firm should be subject to mandatory repayment.

11. ensuring that the program promotes revitalization of the State’s existing cities, towns and villages, efficient use of municipal services and avoids the environmental problems associated with unplanned sprawl development, by limiting zone designations and boundary revisions to areas that are served by public sewer or water infrastructure, previously developed areas, or brownfields.

Reestablishing a Fair Tax System. In both the long run and the short run, reestablishing a fair and adequate tax system is a far preferable solution to New York’s continuing fiscal problems than further service cuts. New York State has a great deal of room within which to implement a “fair tax” solution, because tax changes that made the system less fair and less adequate are at the root of the problem. New York’s personal income tax is still progressive but it is less progressive than in the past and, thus, less able to balance out the regressivity of the state’s property and sales taxes. The state’s corporate income taxes have become more and more like Swiss cheese. General business corporations for example, have gone from carrying over 10% of New York State’s tax load in the late 1970s to less than 4% today. The Swiss cheese nature of the state’s corporate income taxes are also demonstrated by data from the most recent data on state and local government finances from the U.S. Bureau of the Census showing that in 2001-02, New York City’s corporate income tax collections were actually greater than New York State’s ($2.817 billion vs. $2.258 billion). And, it should be noted that the collections attributed to the state include the proceeds from the 17 percent surcharge on the portion of corporations’ tax liabilities attributable to activities in the Metropolitan Transportation Authority service area.

Eliminate Tax Breaks that Don’t Create Jobs. New York State’s annual Tax Expenditure Report shows that business corporations receive over $2.5 billion in tax breaks each year. The Pataki Administration has attempted to solve this “problem” by dropping many of the state’s corporate loopholes from this annual accounting. In addition, untold millions more are lost via transfer pricing and other techniques used by large, multi-national corporations to avoid paying their fair share of taxes. New York could reduce leakage from these tax preferences if it were to adopt “combined reporting” and eliminate the loopholes that were added to the state’s corporate Alternative Minimum Tax in 1994. New York State needs to set its Investment Tax Credit at a more reasonable level relative to its corporate income tax rate. Under the current structure, firms that are simply making the average amount of investment for their industries are able to generate credits far in excess of their tax liabilities. The result is a bank of unused investment tax credits that represent a ticking time bomb for the state tax system.

Combined reporting, as currently required by California, Colorado, Illinois, New Hampshire and the 13 other states, requires a business to file a single combined return for all of its business activities. This prevents profitable multi state and multi national corporations from avoiding state corporate income taxes through accounting trick that shift income and expenses among their numerous subsidiary corporations in order to reduce their overall tax liability by having inordinately large portions of their income show up in subsidiaries that are only taxable in so called offshore tax havens where tax rates are inordinately low, or in states that do not have corporate income taxes, or in states that have corporate income taxes but which do not tax certain kinds of income.

Corporate Tax Disclosure. A growing number of corporations use transfer pricing and a variety of other subterfuges to minimize the percentage of their net income that is subject to tax by any state. New York State should require every publicly-traded corporation that does business in the state to report its gross and net income, deductions and credits, and the amount of New York state taxes paid, much as corporations already do at the federal level. This would allow taxpayers and policy makers to identify companies in the state that may be making profits but, through the use of clever business structures and tax expenditures, are paying little or no New York taxes. Only with that information can the state truly know how well its tax policies are working. The Securities and Exchange Commission, as part of its response to the Enron scandal, should require every publicly-traded corporation to file, as a supplement to its annual report to stockholders, a 50-state spreadsheet that shows its allocation of property, payroll and sales among the states and its tax payments to each of the 50 states.

“Nowhere Income.” Multi-state corporations pay no taxes on profits attributable to sales made in states in which they do not have a physical presence. To address this situation, 28 of the 45 states with corporate income taxes, including California, Texas and Utah have enacted “throw-back” or “throw-out” rules to limit this drain on state revenues. New York State should also adopt such a safeguard.

Corporate Alternate Minimum Tax (AMT). Several significant loopholes that favor multi-state corporations were added to New York’s Corporate AMT beginning in 1994 and the AMT rate was cut from 3.5% to 2.5% in 1999. These changes should be repealed or the AMT should be replaced with a variation of the Alternative Minimum Assessment (AMA) adopted by New Jersey in 2002. To ensure that such an assessment would not hurt small business, it should only be applied to businesses with annual gross profits of $5 million or more.

Make polluters pay for Governor Pataki’s plan to cap greenhouse gas emissions. The Legislature should ensure that the tradable emission permits under Governor Pataki’s proposed regional carbon cap are auctioned rather than given away. The proceeds from such an auction (estimated at about $500 million per year beginning when the program is implemented) could be used to mitigate the negative distributional effects on low and moderate-income households and to serve other economically and socially important purposes.

Create a fair and equitable personal income tax structure. A legitimate statewide solution to the Court of Appeals’ decision in the Campaign for Fiscal Equity case will require substantial additional revenues. The most economically sensible way to raise such revenues would involve reforming the NYS personal income tax structure in a way that ensures that the wealthiest New Yorkers pay their fair share in state and local taxes. The specific approach to be utilized will depend on a number of factors including the overall cost of the remedial plan and the portion of that plan to be financed through a reform of the personal income tax structure. Among the options available for moving in this direction are the following: (a) continuing New York’s current surcharges on the portions of a family’s taxable income above $150,000 (7.25%) and above $500,000 (7.7%), (b) adopting the top brackets from New Jersey (8.97% on income above $500,000) or North Carolina (8.25% on income above $200,000); and (c) replacing New York’s current bracket structure with its 1972 brackets (2% through 15%) adjusted to reflect the changes in the cost of living over the past 30 years. This latter option, under which 95% of New Yorkers would pay less than under current law while the state would collect $7.7 billion more in revenue, indicates how much and in what direction New York’s tax system has changed over the past 30 years.


Addendum to Testimony on the Business Council’s Single Sales Factor Proposal.

Many large corporations are pushing for a change in the way that the net business income of certain multi-state corporations would be apportioned to New York State for corporate income tax purposes. Currently, New York and 24 other states require or allow multi-state firms to apportion their profits among the states based on the average of (a) the share of its property in each state, (b) the share of its payroll in each state, and (c) the share of its sales in each state with sales percentage being double weighted.1 Prior to 1975, New York State used the same three factors but without the double weighting of sales.2 13 states and D.C. currently use this latter method.

Under the Single Sales Factor (SSF) proposal, the share of a manufacturing corporation’s total profit that New York would tax would be determined solely on the basis of the share of the corporation’s total sales occurring in New York. Iowa and Missouri have used this method for decades and, more recently, it has been adopted by Illinois and Nebraska and for all businesses and by Connecticut, Maryland and Massachusetts for manufacturers. Texas adopted this approach in 1991 when it established a corporate franchise tax based on income.

In changing the weighting of the sales factor in the apportionment formula there will be both winners and losers. Some firms will see the share of their income taxable by New York go down while others will see it go up. That is because some multi-state manufacturers have a greater share of their property and payroll in New York than of their sales; while other multi-state manufacturers have a greater share of their sales in New York than of their property and payroll.3 Most firms will be unaffected by this change unless it is accompanied by an increase or a decrease in the tax rate since all of their property, payroll and sales are in New York.

Here are examples of four manufacturing firms, two of which would be helped by the adoption of the Single Sales Factor, and two of which would be hurt by such a change.

New York State Shares Portion of Firm’s Income Taxable Under
Property Payroll Sales Old 3-Factor Formula with Equal Weighting (Pre-1975) Current 3-Factor Formula with Sales “Double Weighted”  

Proposed “Single Sales Factor” Formula


Firm A 20% 20% 7% 15.67% 13.5% 7%
Firm B 10% 10% 7% 9.00% 8.5% 7%
Firm C 5% 5% 7% 5.67% 6.0% 7%
Firm D 1% 1% 7% 3.00% 4.0% 7%

These examples raise several questions. But there are at least two important clinkers that play important parts in understanding the workings of this proposal. The first is that if a manufacturer has sales but no property or payroll in a state, that state, by federal law (P.L. 86-272), can not impose a tax based on income on that firm. Second, New York allows members of the same corporate family to file separate corporate income tax returns, thus allowing intra-family transactions that can increase the amount of income that is nominally attributable to subsidiaries that have sales in the state but no property or payroll.4

Contributing to the cost of state and local public services. Because of the location of their production activities, Firm A undoubtedly makes much more use of the public services (transportation, water and sewer, law enforcement, education, etc.) provided by New York State and its local governments than does Firm D. So, should Firm A and Firm D be making the same contribution to the cost of those services or should Firm A be making a larger contribution? The 3-factor formula (with and without double-weighting of sales) reflects the broad consensus that public services facilitate both sides of the supply-demand equation. The Single Sales Factor approach does not.

Encouraging and/or discouraging economic development. Even if one agrees that logically Firm A should be making a greater contribution to the cost of public services than Firm D, why not give a tax advantage to firms that are bringing income and wealth into the state relative to the firms that are tapping our markets but not employing as many New Yorkers or using as much property in New York State? After all won’t this encourage job creation in New York State?

SSF would give some firms big tax breaks even if they reduce employment in New York State. The large corporations that are pushing the Single Sales Factor proposal in New York will get huge and immediate tax breaks under this proposal whether they increase or decrease their employment levels in the state. If New York State is willing to spend $40 million a year on a corporate tax break in the name of job creation, it should do so directly with appropriate and well-thought out accountability measures rather than by creating another “free lunch” tax break like the Empire Zones program.

SSF will encourage some business to pull jobs out of New York. The Single Sales Factor proposal is likely to encourage job reductions on the part of some firms. Corporations like Firm D in the example above would see their New York corporate income tax bill increase by 75% under the SSF proposal. This firm might simply pay the additional taxes involved under the SSF proposal and change nothing about its operations. But it might just as well respond by restructuring its business operations to eliminate the relatively small amount of property and payroll that it currently has in New York State. Given the provisions of P.L. 86-272, as described above, it would thereby be able to continue tapping New York’s markets for 7% of its sales while avoiding the large increase in its New York State tax liability that it would face under the SSF proposal. For how many firms will the increase in tax liability under the Single Sales Factor proposal be large enough to encourage them to disinvest in New York State?


New York State Shares Portion of Firm’s Income Taxable Under
Property Payroll Sales Old 3-Factor Formula with Equal Weighting (Pre-1975) Current 3-Factor Formula with Sales “Double Weighted”  

Proposed “Single Sales Factor” Formula


Firm D before change 1.0% 1.0% 7.0% 3.0% 4.0% 7.0%
Firm D after change 0.0% 0.0% 7.0% 0.0% 0.0% 0.0%

SSF will discourage some business from locating jobs in New York State for the first time. Because of P.L. 86-272, a multi-state manufacturer that benefits from a state’s markets but which has no property or payroll in the state, is not subject to taxation in the state. But if that firm decides to employ people in that state for the first time it would face a large entry fee. The Single Sales Factor proposal would raise that entry fee substantially, making it increasingly difficult to attract initial investments from multi-state manufacturers that do not currently have any plant or equipment in New York State. In the following example, Firm E, like many national manufacturers has about 7% of its sales in New York State but it is not currently subject to income taxation by New York because of P.L. 86-272. Under New York State’s current law, if that firm were to expand by putting a little bit of property and payroll in New York State, it would go from having no corporate income tax liability in New York State to having to pay taxes to New York on 3.55% of its net income. Under the Single Sales Factor proposal, this entry fee would be virtually doubled making it much more unlikely that New York State would be able to grow and diversify its economy.


New York State Shares Portion of Firm’s Income Taxable Under
Property Payroll Sales Old 3-Factor Formula with Equal Weighting (Pre-1975) Current 3-Factor Formula with Sales “Double Weighted”  

Proposed “Single Sales Factor” Formula


Firm E before expansion 0.0% 0.0% 7.0% 0.0% 0.0% 0.0%
Firm E after expansion 0.1% 0.1% 7.0% 2.4% 3.55% 7.0%

The Double Whammy. The same big businesses that are pushing for the SSF in New York State are also lobbying in Washington for a change in PL 86-272 that would make it possible for them to avoid state taxation in states where they have only a “small” amount of property and/or payroll. These two actions together would greatly reduce the portion of multi-state corporations’ profits that are taxable by one state or another, thus greatly increasing the amount of their “nowhere income.”

Economic Impact. From an economic perspective, it is important to note that in the recent downturn in the economy that the rate of manufacturing job loss in Massachusetts was much steeper than New York’s. Between 2000 and 2003, manufacturing employment in New York State declined 18.1% from 750,800 to 614,600 which was pretty bad. But in Massachusetts the decline was even steeper – down 20% from 407,900 to 326,200. This is one Massachusetts Miracle that New York should avoid if possible.

In comparing another set of neighboring states, Illinois with Single Sales Factor apportionment and Indiana with the 3-Factor Double Weighted Sales formula, we find that over the same period manufacturing employment declined much faster (down 17.6%) in Illinois than in Indiana (13.7%).




1. Vermont and Rhode Island will join the ranks of the Double Weighted Sales states this year.

2.  This traditional 3-factor formula was embodied in a model law called the Uniform Division of Income for Tax Purposes Act (or UDITPA) which had been developed by the National Conference of Commissioners on Uniform State Laws and recommended to the states for adoption in 1957. UDIPTA was the result of an effort supported by the Eisenhower Administration to encourage the states to adopt a common method for apportioning firms’ net income among the states for corporate income tax purposes in order to avoid “double taxation.”

3. In most states that have considered the Single Sales Factor idea, their state tax departments have done estimates of the number of firms that would be helped by such a change and the number that would be hurt. For example, the California Franchise Tax Board estimated that had that state implemented single sales factor apportionment for the 2000 tax year, 8,900 corporations would have experienced tax increases and 5,800 corporations would have experienced tax cuts; the Wisconsin Department of Revenue estimated that if that state had a single sales factor apportionment system in place in 1996, 3,997 firms would have paid higher taxes while 2,426 firms would have had tax cuts; the Maine Department of Revenue Services estimated that 1,371 firms would have experienced tax increases in tax year 2000 if the state switched to a single sales factor formula while about 700 would have experienced tax cuts; Illinois revenue officials estimated that their state’s adoption of a single sales factor formula would increase taxes on 7,586 corporations and cut taxes for 7,014; and Arizona tax officials concluded that 57 percent of a sample of multistate corporations would have experienced a tax increase.

4.  The New York State Department of Taxation of Finance, may require a corporate family to file a “combined return” if it determines that such a step is necessary to avoid distortion. But in response to such determinations, the affected firms frequently tie the state up in litigation that frequently goes on for years.