STATE: A better way to boost Upstate's economy
An alternative to business leader's 'Unshakle' plan
By Jon Greenbaum on Feb. 20th, 2007
On February 15, the people of Sulphur Bay (on the tiny South Pacific island nation of Vanuatu) paint USA on their bare chests, march with bamboo rifles in their mock military base, and pray for "cargo" to be delivered in C46 transport planes to their village.
Sulphur Bay is the home of the last remaining cargo cult, a phenomenon that took off in Melanesia in the 1950's. After the US armed forces left the South Pacific, many native islanders cleared fields and built landing strips, constructing planes, radio equipment, and towers out of bamboo, grass, and coconuts. Their hope was to emulate the American magic that successfully convinced the gods to send planes filled with cargo. Forty years later, the residents of Sulphur Bay are still waiting.
It is easy for sophisticated Westerners to respond with disbelief and condescension to the cargo-cult phenomenon. But perhaps we should be a little more humble about our own attempts to attract "cargo" to our community.
With upstate New York grinding into an advanced case of post-NAFTA Rust Belt-itis, community leaders are working hard to bring new jobs to the area. The pressing question is whether they are working effectively or are just busy carving radios out of coconuts.
Community leaders have many tools at their disposal to help develop the economy. For years, upstate New York leaders have stressed the importance of cutting tax rates and providing subsidies to businesses. And that is exactly what we've done. Over the last 30 years, corporate taxes have fallen by 50 percent and the top personal tax rate has been chopped in half. And the result? Thirty years later, all we have to show for it is a growing state deficit due to the falling revenue.
We were warned for years that increasing taxes would scare away corporations and the wealthy and we'd lose the investing class. Yet in 2003, with the New York State budget deficit growing to monumental proportions, the governor bit the bullet and signed a temporary income-tax surcharge on the wealthiest New Yorkers (those earning over $150,000).
The sky didn't fall. In fact, the economy turned around and added new jobs for three years. And in New York City, property taxes were increased by 18 percent, and the top New York City income-tax bracket was also raised. Yet the residents of the upper West Side didn't pack up and take the Number 2 express line down to Florida. Instead, the population of New York City increased.
This doesn't mean that increasing taxes will necessarily result in an increase in jobs and population. But it does imply that raising taxes may be better than cutting services. And it certainly means that if you build a city that's attractive, people will come --- even if they have to pay taxes to support their choice.
How about the kind of special tax incentives that economic development officials like to hand out? Do they encourage businesses to relocate to our region?
The people best suited to answer that question are site-location consultants, who help corporations decide where to locate their facilities. The consultants identify costs and assess potential relocation sites.
For his book "The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation," Greg Leroy interviewed Robert Ady, the president of Ady International. Ady's firm is one of the nation's leading site-consultant firms, and Leroy questioned him about what businesses consider when they're relocating. Taxes, Ady said, are a minor factor, accounting for about 4 to 5 percent of costs. The major factors businesses look at, Ady said, are labor costs, transportation, and utilities.
Study after study verifies this. In Robert Lynch's meta analysis of the research ("Do State & Local Tax Incentives Work?" published by the progressive think tank the Economic Policy Institute), Lynch identifies several other factors that businesses consider: labor productivity, the local cost of living, quality of education institutions, even proximity to the CEO's house.
By the time the businesses arrive at city hall to ask for a tax break, they have usually already decided where they want to move. In "The Great American Jobs Scam," Greg Leroy quotes from an article from Expansion Management magazine titled "Trade Secrets Revealed: An Insider's Look at Incentives Negotiations." Here's some of the insider advice: "Negotiate incentives for the new project in two or three finalist locations, preferably in different states. Generally speaking, spend the most time negotiating in the preferred location. Use offers from the alternative areas for leverage."
This is how they play one municipality against another.
But as billionaire Mayor Michael Bloomberg once put it: "Any company that makes a decision as to where they are going to be, based on the tax rate, is a company that won't be around very long. If you are down to that incremental margin, you don't have a business."
Have business subsidies actually brought jobs to the Rochester area?
Programs like COMIDA (the County of Monroe Industrial Development Agency) and the Empire Zone operate in a secretive alchemist haze. Last year, Metro Justice released a job-performance evaluation of COMIDA titled "COMIDA Isn't Spanish for Free Lunch." It was difficult to prepare the report, because the recordkeeping submitted to the state comptroller's office is quite sloppy. But Metro Justice did discover that 63 percent of the subsidized projects didn't deliver all the jobs they promised, yet businesses still got to keep the subsidies. And, in fact, 27 percent of the subsidized businesses pocketed the tax breaks and but shrank their workforce rather than increasing it.
The COMIDA tax giveaways meant that local municipalities and school districts took in less revenue. Over the three years that Metro Justice studied (2002, 2003, and 2004), school districts in Monroe County lost out on $13.6 million. And Brighton Town Council member Ray Tierney reports that in 2005, the COMIDA tax breaks in Brighton were the equivalent of 142 homes being taken off of the tax rolls.
These business subsidies do not follow a coordinated strategy. Businesses are granted help on a case-by-case basis. And many of the subsidies don't make sense. For instance, in 2004 COMIDA gave tax breaks to a dentist. Unless COMIDA had some secret data indicating an increase in dental caries that year, this kind of subsidy didn't create any new jobs; it just created an unlevel playing field. Why would COMIDA intervene in the market and provide assistance to one dentist over another?
The Empire Zone program is similarly flawed. The Powder Mill Office Park has received a subsidy for renovations. The Empire Zone program was designed to help distressed communities. The office park was built in Bushnell's Basin, where the average selling price for a home is close to $300,000.
Why are we subsidizing office renovation in wealthy Rochester suburbs? The question is even more relevant considering the city's high office-vacancy rate. (According to the Wall Street Journal, Rochester had one of the five highest office vacancy rates in the country while the Powder Mill Office Park deal was being approved.)
A report by the national policy research center Good Jobs First ("No More Candy Store: States and Cities Making Job Subsidies Accountable") quoted former New York Comptroller Ned Regan as saying that if the high costs and low benefits of tax abatements were reported, there would be far fewer abatements. "Many public officials may instinctively understand this," said Regan, "and perhaps, that is why they do not actively encourage precise record-keeping."
What can upstate New Yorkers do to revive our economy?
Over a century ago, a large infrastructure project like the Erie Canal shaped the path of economic growth in the region. Today, there are interesting discussions about high-speed rail and renewable energy, but in the absence of any political movement on those major projects, New Yorkers need to focus on politically feasible investment strategies for our economic future.
There are many paths that New York can take to a globally competitive economy. This point is underlined by the recent World Economic Forum's Global Competitiveness Report. (It's the World Economic Forum that holds a conference every year in Davos, Switzerland, bringing together world leaders who gather to talk about international trade deals and the state of the global economy.)
The Global Competitiveness Report ranks national economies based on such factors as productivity, rate of return on investment, and market efficiency: in other words, hard-nosed economic criteria. The WEF named Switzerland, Finland, Sweden, Denmark, Singapore, and the United States as the top six economies this year.
Economies are not acts of god; they result from the interaction between public-policy decision making and the market. Although we've been hearing for years that low taxes and less regulation are the path to a better business climate, the WEF list tells us that Finland's path --- investment in infrastructure and technology, excellent social benefits and worker rights, very little poverty, high pay and relatively equitable distribution of income, and taxes to support these investments in a fiscally responsible way --- delivers one of the world's best business climates.
Unfortunately, however, corporate business leaders are urging Governor Spitzer to create different rules for upstate New York. They are resisting a grassroots groundswell for requiring subsidized businesses to pay living wages (and for requiring subsidized construction companies to pay prevailing wages).
Why would we give tax breaks to construction projects that pay our neighbors less than the going rate? Why would we subsidize businesses that pay Wal-Mart wages? If we don't want our children to work for the minimum wage, why would we encourage that kind of low-wage economy with our tax dollars? Finland and the other globally competitive nations from the WEF list prove that upstate New York doesn't have to be stuck in a race to the bottom for lower wages, less workplace safety, and more pollution.
Next week: The better way to revive the Upstate economy.
Jon Greenbaum is an organizer for Metro Justice. This article is derived from a presentation he gave as part of the Thursday Thinkers series at the Rochester Public Library.