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Cuomo’s Sluggish “Start-up”

eye on the news

Cuomo’s Sluggish “Start-up”

The New York governor’s economic-development program is heavy on hype but light on jobs. April 15, 2015

Few economic development initiatives in New York State’s history have been the subject of more marketing hype than START-UP NY, which created scores of tax-free micro-zones on and near college campuses around the state. Governor Andrew Cuomo has spared no superlatives in describing his expectations for the program, backing it with a slick, $47 million advertising campaign that touted START-UP as proof that “in New York State, we’re changing the way we do business.”

But the results so far haven’t come close to living up to the governor’s rhetoric. Companies that began operating in START-UP’s tax-free areas during 2014, the program’s first year, created just 76 jobs, according to a new report from Cuomo’s own economic development agency. The long-term growth projections aren’t much more impressive. Over the next five years, the 54 companies granted START-UP status in 2014 are committed to creating 2,085 jobs—not even a rounding error in a statewide economy whose 600,000 private firms employ nearly 7.6 million people. The nine out-of-state companies on the 2014 START-UP list have pledged to create 451 jobs based on a projected five-year investment of just $4.3 million, or less than 10 percent of the program’s first-year ad expenditure.

Twenty-one of the initial START-UP companies were expansions of existing New York businesses—leaving just 24 genuine start-up firms. In a normal free-enterprise system, most of these ventures could be expected to fail, contributing to the cycle of “creative destruction” essential to growth and progress. However, promotion of start-ups wasn’t the main objective of a program whose title stands for “SUNY Tax-Free Areas to Revitalize and Transform Upstate New York.” Nor, despite that tortured acronym, is the program limited to zones on State University of New York campuses—or targeted solely to upstate New York. Nearly one-third of the companies admitted to START-UP last year are in Long Island or New York City.

The program’s paltry first-year job-creation numbers should not surprise anyone who takes a look at its narrow parameters. The classic enterprise-zone model, along lines popularized decades ago by conservatives such as Jack Kemp, offers broad tax and regulatory relief to any business locating in a given community. START-UP, by comparison, is far more limited. Tax exemptions (but no regulatory breaks) will be available to qualified new or expanding firms locating at designated college campus or campus-related sites, provided that their business activities “support the academic mission of the college or university with which they hope to work.” In addition to the 64-campus SUNY system, tax-free areas can be designated at one City University (CUNY) campus in each borough, on or near private college campuses, and on “strategically located state-owned” property.

START-UP firms and their college sponsors face a fairly daunting application process, with ultimate approval authority vested in Cuomo’s Empire State Development Corp. That effectively means that the governor himself is empowered to pick the START-UP winners and losers. Excluded from eligibility for START-UP benefits are entire business sectors, including retail and wholesale; restaurants and hospitality; real estate; law firms, accounting firms, and medical or dental practices; administrative or support services; and finance or financial services. That limits the program to firms involved in biotech and other scientific research, manufacturing, information technology, and agriculture.

START-UP companies will be exempt from corporate or sales tax (and, if located on college-owned land, property tax) for ten years, and their on-site employees will pay no state income taxes on wages or bonuses for the first five years of their participation in the program. In the second five years, they will be allowed to exclude up to $200,000 of individual wages from taxes. Given those inducements and the chance to tap the expertise of college faculty and students, job creation attributed to START-UP should be expected to increase sharply in the next few years. Nonetheless, the program will lack the scale to become a real game-changer. In fact, the total potential square footage of all the START-UP tax-free zones in New York adds up to roughly one-quarter the land area of the city of Albany.

Cuomo took a more promising approach to economic development last year, when he pushed through the first broad-based state tax reduction of his tenure, which will eliminate corporate tax on manufacturing firms and reduce the corporate tax rate for other types of businesses. But these undeniably positive moves offer little or no relief to the large majority of firms, which are subject to a state personal income tax whose top rate (thanks to a temporary surtax maintained by Cuomo) remains among the nation’s highest. New York’s local property taxes also remain notoriously high, though Cuomo’s 2 percent cap on local tax-levy growth should reduce the relative burden over time.

Taxes aren’t the only obstacle to business investment and job creation in New York. Businesses are also deterred by high costs in other categories, such as energy and workers’ compensation premiums. Equally if not more important, New York has a well-earned reputation as a regulatory hell—especially when it comes to labor, environmental permitting, and land use. Cuomo has done little to address these problems.

While his administration says START-UP is generating a positive “buzz” about New York, Cuomo also created a negative vibe with his handling of regulatory questions surrounding shale gas exploration upstate. After stalling on the issue for four years, the governor abruptly announced last December that high-pressure hydraulic fracturing of the shale gas deposits would be prohibited in New York based on “potential risks” cited by his health commissioner. Even for companies with no direct stake in the energy business, the fracking ban sent a discouraging signal.

Meanwhile, after staying close to home during his first term, the governor plans five foreign trade missions in his second term to promote New York products and businesses. But his first such trip, starting April 20, will be to a decidedly less-than-promising export market: a small, impoverished island nation that long outlawed free enterprise. START-UP Cuba, anyone?

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