Incentives Watch: Practitioner Weighs Pros and Cons of “Tax-Free New York” Proposal

In this interview, Daniel Effron, a tax partner at accounting firm Marcum LLP in Philadelphia, discusses the pros and cons of New York Governor Andrew Cuomo’s proposed NY tax-free program.

On May 22, the governor announced a new tax initiative to encourage businesses to move to the state, especially upstate New York. Under the new initiative, certain businesses are eligible to operate tax free for up to 10 years when they locate on or near a State University of New York (SUNY) campus. Retail, real estate, and professional services businesses are not allowed to participate in the program.

Businesses that locate in these designated tax-free zones are entitled to a tax elimination credit that allows them to eliminate their tax obligations. However, the tax incentive is contingent on businesses maintaining net new jobs, and not decreasing their employment numbers or those of their related companies in the state.

As part of the program, employees of businesses that open in these tax-free zones also enjoy tax incentives. For the first five years, the wages of employees in new jobs in the tax-free zones are exempt from personal income tax. There is also a provision for sales tax refunds on certain purchases of tangible personal property and services within the zones.

Bloomberg BNA: What is the impact of the tax-free NY program proposal?
Governor Cuomo’s program aims to address several issues present in New York: a) job creation in areas that have seen no or slow growth; b) encouragement for new and out-of-state businesses to relocate to New York; and c) combat the impression that New York State taxes are an impediment to job growth for businesses.

Bloomberg BNA: What effect will the tax-free program have on New York’s economy?
It’s hard to measure what the impact will be on the economy; however, it is interesting that one of the benefits of this program is that companies that locate in the tax-free zones will be virtually “tax free,” as will any employees who work in these zones. Thus, the normal impact of new business growth in an area contributing additional taxes to the state’s economy will be nonexistent. Should new businesses agree to move to the state and participate in the program, the economy may indirectly benefit from the spending that these new companies and employees would presumably do within the communities where they live.

Bloomberg BNA: Who benefits from the program?
Those companies that choose to participate and locate in the tax-free zones, as well as their employees, will be the clear winners in that they will enjoy the benefits of a well-trained workforce from the neighboring SUNY campuses and not have to bear the burden of the normal taxes that impact most other businesses. The overall community will also benefit from a potential increase in population, who will all need goods and services.

Bloomberg BNA: Do you think startup businesses will be attracted to upstate New York as a result of this program? If so, what specific type of businesses will be attracted to the tax-free areas?
If the program is enacted as described, I believe that, yes, it will attract businesses to the upstate area. Most likely those businesses would be in tech sector or other fields which require an educated work force.

Bloomberg BNA: Do you think businesses from outside New York will move to the state based on this program or do you think the program will mostly drive businesses that are already located in New York to move to a tax-free area within the state, or both?
On paper, it would seem that out-of-state businesses would be attracted to move to New York to enjoy the benefits of a tax free existence, which would typically mean savings of substantial dollars to these businesses. What is a bit hard to predict is whether businesses will be willing to enjoy these benefits at a price of moving to the upstate area, an area that has been hard hit in job growth and expansion.

Bloomberg BNA: How will this program affect surrounding states such as New Jersey, Connecticut, and Pennsylvania?
Businesses in these states may seriously look at the benefits of this program and may possibly decide to leave the neighboring states to enjoy a tax-free status. It would require an economic and cash flow analysis of these businesses to determine the savings to them of a move to New York. It should be noted that the neighboring states each also provide various incentives for businesses in these states, so these states may make changes in these programs to prevent an “exodus” of businesses from these states to New York.

Bloomberg BNA: Will New York, which is known as a “high-tax state,” become more competitive with other states as a result of this program?
Programs such as this will provide some change in attitude [regarding] New York [being] a high-tax state; however, . . . the fact that the benefits of this program are limited to [certain] designated geographic areas may prove to limit the overall change of attitude of non New York businesses [that] may not be interested in moving to these areas.

Bloomberg BNA: How does this program compare to New York’s Empire Zone program, which also offered tax credits to businesses located in designated empire zones?
The benefits of this proposed tax-free zone are broader than those offered under the Empire Zone program, but also contain certain limitations by excluding some businesses from participating. Opponents have criticized the Governor saying that he is now “cherry picking” the types of businesses he wants in the state.

Bloomberg BNA: Do you think “shirt changing” or similar practices will happen under the tax-free program, as they did under the Empire Zone program?
As with any program of this type, strict qualification and registration requirements will be required to ensure that the program does what it is intended to do – attract new companies or expan[d] existing businesses in New York. [D]uring the existence of the Empire Zone program, additional certification tests were implemented after it was determined that existing companies were attempting to enjoy the [Empire] Zone benefits by “shirt-changing” techniques. Similar safeguards would need to be implemented in the proposed tax-free zone program.

Bloomberg BNA: What effect will the program have on the universities and its students?
The tax-free program, if enacted, should provide a boost to the universities and their students, as a result of the impact of possibly curtailing the loss of a well-trained and well educated workforce to other locations upon graduation. Programs such as these may have a positive impact by attracting better and more qualified applicants to the universities in the hope that the students will remain and enjoy the benefits of tax-free employment – a very attractive idea to a young worker! Critics of the program have stated that the SUNY system will lose its integrity as a true research center and become more motivated by the companies that want to utilize these tax-free zones.

Bloomberg BNA: Are there any downsides to the program?
It is possible that there may be some backlash to this program from existing businesses in New York, who have been good and responsible taxpayers for many years. For these businesses, the ability for new businesses to come to the state and enjoy tax-free status may be viewed as “unfair,” or creating a new type of competition with these new businesses, which may be able to price their goods and services at lower levels than existing businesses in the State. Additionally, there are certain businesses which will be excluded from the zone benefits, including retail, medical, and professional service firms.

Bloomberg BNA: Do you think the Governor’s program will be enacted into law?
I believe it is too early to determine if Cuomo’s plan will be enacted. There has already been plenty of criticism in the press concerning this proposal. But given the tough economic times facing New York and its residents, particularly in these designated areas, the Governor will most likely garner the support of the general public, which may be all that is needed to push through the legislation. While there would appear to be no “cost” in additional government spending with this program, opponents may focus on the loss of the tax revenue that would result from these businesses being in the tax-free zone.

Bloomberg BNA: Do you have any other comments about the program?
The Governor’s proposal is a bold step towards revitalizing an area of New York that needs help. It remains to be seen if this program has the legs to pass through the legislature and, if so, will it provide the intended benefits.

For more information about the various tax credits and incentives currently available in New York, check out Bloomberg BNA’s Credits and Incentives Portfolios.

In other developments . . .

New Jersey expanded its neighborhood revitalization tax credit so that it can be applied against a taxpayer’s gross income tax, according to a Bloomberg BNA Weekly State Tax Reportarticle.


By: Kathleen Caggiano

Follow us on Twitter at: @BBNATax .
Join Bloomberg BNA's State Tax Group on
LinkedIn .