Let’s Freeze New York’s Useless Business Subsidies
Broad, fair, evidence-based New York State investments in physical, social, and workforce infrastructure make sense. Think Erie Canal, clean water, the MTA capital plan, universal pre-kindergarten, childcare, community colleges, and technical education. These forms of economic development produce a high return on the taxpayer’s investment. The same goes for State efforts to help the private sector by modernizing licensing processes, ensuring regulations are sensible, and making taxes and fees fair and reasonable.
Unfortunately, New York State is spending an estimated $5 billion a year on “economic development,” mostly in the form of tax breaks for big businesses. Baked into the State’s subsidy logic is that wealthy business owners will not hire more employees or grow their business without subsidies. This is completely untrue. In fact, there is an overwhelming national consensus among independent experts from the left, right, and center that government subsidies to businesses are a very ineffective use of public funds.
With that in mind, the State Legislature should freeze existing business subsidies, rollback select subsidies, and reject new ones in Governor Kathy Hochul’s proposed budget. Here are three that affect New York City in particular.
Let’s Redevelop Penn Station Without Tax Subsidies for Vornado
The State has proposed a massive and controversial redevelopment of the area around Penn Station to partially fund the State’s $1.75 billion share of the $7 billion reconstruction of the nation’s largest transit hub.
Fixing Penn Station is important for commuters and an essential part of economic development. However, the governor’s plan relies on a complex and opaque “payment-in-lieu-of-taxes” (PILOT) scheme. Vornado Realty Trust, which owns or controls a majority of the affected property (and which was a major donor to the governor’s 2022 election campaign) will get a roughly $1.2 billion tax break.
What is the logic of this? The PILOTs won’t cover the full State share, and won't be adjusted to meet cost overruns or changes in the real estate market. More troubling is that the public and policymakers – including the Legislature – still have not seen basic financial details about the project. Tellingly, the New York City Independent Budget Office (IBO) said in its critical May 2022 report on the project that it was “impossible for IBO to evaluate the financing proposal and quantify its impact on the city and state.”
Climbing borrowing costs and lagging demand for office space caused Vornado officials last week to put the redevelopment project on ice, perhaps for years to come. But why keep Penn Station’s future hostage to Vornado? There’s no reason the State can’t fix Penn Station with public funds.
Let’s Let 421-a Expire
The governor also proposes to extend the 421-a property tax credit for New York City landlords and investors. That’s an idea that deserves to die.
As the Community Service Society of New York has shown, 421-a already costs New York City $1.7 billion a year; the intended benefits of incentivizing housing development have not justified the cost. Even as the program’s price has risen by 400 percent over the past three decades, the city’s housing crisis remains as bad as ever. The State needs to come up with a housing proposal that does not force the City to bleed massive amounts of revenue every year, for little benefit.
Let’s Eliminate, Not Expand, the Film Tax Credit
The governor also proposes to increase the Film Tax Credit to $700 million, relaxing qualifications to receive the credit and increasing the percentage of costs that film studios can recoup.
The credit, originally established in 2004, is theoretically “capped” at $420 million annually. However, unlike a typical cap, once the State has awarded all the credits in a given year, future allocations are awarded for current projects. For example, in Fiscal Year 2018, the State forked over $534.2 million to film studios.
New York City is often thought to be a hub for film production. But the evidence does not support a subsidy for the industry, let alone a 55 percent increase. University of Southern California professor Michael Thom, who has published a number of studies of film tax credits, found the tax credit in New York State had no effect on employment whatsoever. Why are we even considering increasing a subsidy that does not work? Reinvent Albany joins our colleagues at the Citizens Budget Commission in calling instead for an elimination of the Film Tax Credit.
New York’s most authoritative study of business subsidies remains the 2013 report to the Governor’s Tax Reform and Fairness Commission, which said, “…research conducted since the mid-1950s [does not] show [that business subsidies] impact net economic gains.”
The 2013 report goes further, noting that business subsidies violate tenets of good tax policy: neutrality, equity, adequacy, simplicity, transparency, and competitiveness. The State should move forward, not backward. That means adopting policies that are equitable, adequate, simple, transparent, and competitive. The Legislature should freeze existing subsidies, rollback select subsidies, and reject new ones. It will go a long way toward creating a more fair and equitable New York for all.
Elizabeth M. Marcello, Ph.D., is a senior research analyst at Reinvent Albany, a nonprofit group advocating greater transparency and accountability in State government. This Urban Matters is drawn from February 9thtestimony to the New York State Legislature.
Photo by: nyc.gov