Reconsidering Empire Zones for NYC

As the Empire Zones (EZ) program sunsets in New York State, there is an opportunity to learn from past mistakes to devise a more functioning economic development strategy. The controversial program expired in January of 2010. How should the program that follows be improved? Alison Bates has some ideas.

As the Empire Zones (EZ) program sunsets in New York State, there is an opportunity to learn from past mistakes to devise a more functioning economic development strategy. The controversial program expired in January of 2010 with Governor Paterson anxious to see the program fade due to multiple abuses. The program that follows in the wake of Empire Zones should include standardized data collection, cost-benefit analysis, and a consistent monitoring mechanism to ensure that New York does not give away the store to big business.

In 2009, the EZ program offered substantial tax breaks to over 6,000 firms. (1) Hefty sales tax, property tax, and income tax credits were doled out in the absence of any cost-benefit analysis. The Office of the New York State Comptroller released a report in 2004 titled "The Effectiveness of Empire Zones," which critically evaluated this long running program. (2) The report claims that "our review of eight Zones disclosed that none of the Zone Boards are aware of the total cost of the Program to the taxpayers and the total benefits provided to the community."(3) One of the reasons that Zones were unaware of the true cost of the program is that "Zone Boards have not established adequate data collection and reporting systems and have not established effective monitoring and evaluation systems to assess individual business performance."(4) Effective cost-benefit analysis was rendered impossible under the EZ program because the data was incomplete, and data for one Zone was often incongruous with that of other Zones.

The construction of the physical Zones was a process rife with political favors and backroom deals. Zone construction requirements are so loose that it is permissible, and common, for one Zone to include non-contiguous areas. A single Zone can be fragmented and disjointed with sporadically placed businesses enjoying substantial tax relief. Eliminating the need for cohesive, connected Zones does little for the true economic development of blighted places, and does much to increase the bottom lines of firms.

The New York State Economic Development Corporation boasts the success of the EZ's, claiming that downtown Poughkeepsie was completely revitalized by the program.(5) The Department claims that "Dutchess County was designated an Empire Zone in 1994 and was able to utilize the tax incentives offered by the Empire Zone Program to propel the economic revitalization of downtown Poughkeepsie."(6) In this specific instance, the claim is that the tax credits incentivized companies to revitalize existing building stock in this area, to hire new employees and to bring the neighborhood back from the brink of devastation. The Department however does not provide any data on how many jobs were created, or the cost of the lost tax revenue to local municipalities. Also touted as a success of the EZ program is the locational decision of Bausch & Lomb to settle in Rochester. "The company is investing over $30 million to construct a 73,000-square-foot addition to its existing world-class R&D center in Rochester and adding 200 new, high-paying jobs." (7)

Here it is important to ask about the cost of these incentives. How much tax revenue has the state foregone to create these 200 jobs? How many educational programs had to be closed due to gaps in the budget that may have been filled by tax revenue from this corporation?

If a firm's location decision were largely based upon tax breaks, then at least the reasoning for the EZ program would be sound. However, there are many factors that influence firm location including access to labor, access to natural resources, cost of living, environmental policies, proximity of competition, and availability of housing. The EZ program addresses economic development with the assumption that tax breaks are enough to recruit and retain businesses, when in fact a favorable business climate relies on myriad factors.

The EZ program did appallingly little to ensure that the goals of job creation were actually met. To receive EZ tax credits, businesses were required to submit an application for certification to the State, and to estimate their total job creation. After giving this estimate, the State did not persistently follow-up to see if these job creation goals had been achieved. The only follow-up came in the form of an annual Business Annual Report which all participating companies were required to complete and submit to the State. "The BAR includes, among other information, job, payroll, investment and selected tax data. Businesses that do not submit a BAR are supposed to be decertified." (8)

Often companies would submit incomplete BARs and were not penalized for doing so. The data collected from these reports is also spurious because all information is self-reported. As noted by the Office of the Comptroller: "we caution against relying exclusively on these results in assessing Zone performance for two primary reasons. Foremost, these data sources were completed by the businesses and have not been verified to other sources such as tax records or wage reporting documents. Secondly, because there are no specific and objective criteria for certification, the optimism of original projections may vary significantly by business and Zone." The Comptrollers report points to specific instances where job creation promises were unfulfilled, but tax breaks still granted. For instance, the reports claims that "in one Zone a business reduced employment levels from 362 in 2001 to 297 in 2002 yet claimed $200,000 in (Qualified Empire Zone Enterprise)QEZE sales tax exemption benefits in 2002. In another Zone a business reduced employment levels from 243 tin 2001 to 206 in 2002 yet claimed $240,000 in QEZE sales tax exemption benefits in 2002." (10)

As New York State is scrambling to balance the budget by cutting funding to hospitals, raising state tuition rates, and planning to close a slew of state parks, it is important for New York to think carefully about how the next incarnation of the EZ program. What replaces this program must include standardized and thorough data collection. All data received from Zones across the State should be in a consistent, accessible format. A thorough and consistent system of cost-benefit analysis must be mandated to determine whether or not the revenue forgone by the State is worth the promises of job creation. Minimum job creation levels should be mandated and firms that fail to meet these minimum requirements should not have access to tax benefits. Loopholes allowing for a firm to receive EZ benefits even if not located in an EZ must be eliminated, and the Zone creation process must be taken out of the hands of only a few politicians interested in appeasing their constituents and big business. Perhaps a tiered benefit system would be beneficial, so large firms are given fewer tax breaks than are firms with more humble budgets. Hopefully we can learn from past mistakes to create a more equitable program that supports economic development in New York State's most hard hit former industrial areas.

Alison Bates Alison Bates is a graduate student and full-time graduate teaching assistant in urban and regional planning at the State University of New York-Albany. Her primary interest is economic development, specifically, promoting smart growth principles such as constructive reuse, and redevelopment of urban areas. Alison is student representative for the APA, and is also the Vice President for the SUNY Albany Graduate Planning Student Association.

Footnotes:
1 The Times Union. Empire Zone Set for Twilight Zone: Controversial Program Providing Tax Breaks Will Be Replaced. Churchill, Chris. September 4, 2009. http://archives.timesunion.com/mweb/wmsql.wm.request?oneimage&imageid=8…
2 Office of the New York State Comptroller. Division of Local Government Services and Economic Development. The Effectiveness of Empire Zones. 2004. Hevesi, Alan G.
3 Ibid. P. 6
4 Ibid. P. 6
5 New York Business. EZ Communities. http://www.empire.state.ny.us/tax_and_Financial_Incentives/Empire_Zones…. Last accessed 11/05/09.
6 Ibid.
7 Ibid.
8 Office of the New York State Comptroller. Division of Local Government Services and Economic Development. The Effectiveness of Empire Zones. 2004. Hevesi, Alan G. P. 11
9 Ibid., P. 16
10 Ibid., P. 19