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More Business Tax Cuts Not the Ticket to Growth for New York

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New York Governor Andrew Cuomo's proposed business tax cuts -- part of a $2 billion tax-cut package he outlined this week -- would have a negligible impact on economic growth and job creation and would make it harder to fund education, roads, and other critical services that make the state a desirable place to do business.

In an attempt to "attract and grow businesses across the state," Governor Cuomo proposes cutting the corporate income tax rate from 7.1 percent to 6.5 percent and making some other technical changes (costing $346 million a year), creating a refundable property tax credit for manufacturers ($136 million), and eliminating the corporate tax for manufacturers in upstate New York ($25 million), for a total annual revenue loss of $507 million.

But New York already has deeply cut corporate taxes on manufacturers in general and upstate manufacturers in particular.  In 2007 it adopted "single sales factor apportionment," which sharply reduces or even eliminates corporate income taxes on manufacturers that sell most or all of their goods outside the state.  Moreover, nearly all large manufacturers in New York already pay corporate income tax at the 6.5 percent rate, and most small upstate manufacturers pay at a 3.25 percent rate.

As a result, the proposed rate cut and other corporate tax "reforms" would primarily benefit major Wall Street banks and other service businesses, not the manufacturers that Governor Cuomo cites in his call for new tax cuts.

Every state has lost manufacturing jobs since 2007, but New York has ranked in the bottom 10 states in retaining manufacturing jobs even though its total taxes on manufacturers are well below the national average, according to the conservative Tax Foundation.  This is further evidence that cutting state and local business taxes doesn't have a significant impact on how many jobs businesses create or where they put them.

The reason is simple:  State and local taxes represent a very small share -- no more than 3 to 4 percent -- of the average corporation's total expenses.

Labor, energy, transportation, building construction, and similar location-specific costs are much more significant expenses for corporations, and they often vary among states far more than state and local taxes do. They therefore have a much bigger impact on where businesses create jobs.

A vast body of research backs this up, finding overall that cutting state and local business taxes by 10 percent -- more than ten times the governor's proposal -- produces no more than a 3 to 4 percent gain in jobs after a decade.  And even that small impact assumes that the tax cuts don't result in cuts in public services that businesses value, like high-quality education and good roads and bridges.

Frittering away half a billion dollars a year on new business tax cuts, despite the lack of evidence that previous tax cuts have worked, might send a symbolic message that the state is "business friendly" but would have little real impact on the state's economic performance.  New York can put the revenue to other uses -- enabling more kids to get into pre-K programs or displaced workers to get retraining in community colleges, for example -- that would do much more to enhance long-term growth.

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