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Governor Cuomo’s “Tax-Free NY” Plan

2 min readBy: Scott Drenkard

New York’s Governor Cuomo has been getting a lot of coverage for his plan to give new start-ups ten years of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -free operation if they locate close to universities in the state. While similar special tax preferences in “economic development zones” are available in many states, this proposal is unique in that it truly is tax-free. Businesses that open on college campuses would be exempt from all business, property, and income taxes. Employees that work at these companies would even be exempt from state individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es.

This plan is interesting for a few reasons. The first is that it is an implicit acknowledgment that taxes matter for business location decisions. The second is that it is an implicit acknowledgment that New York’s tax system is indeed uncompetitive.

While both of these priors are true, this plan goes about trying to fix them in an inappropriate way. By just lowering taxes on a particular type of business operation (in this case, start-ups on campus) the administration is trying to direct the creative power of the market from the statehouse. This approach, while couched in sexy terms of promoting an “epicenter [of] nanotechnology,” is actually antithetical to what makes for innovation.

Innovation comes from many small efforts on the part of entrepreneurs, only a few of which take hold and are profitable. The whole point of a market-based economy is that people do not know what will be valuable to society until they try it. Cuomo's plan, by contrast, takes this discovery process out of technological advancement and only gives preferences to tech companies that partner with higher education institutions. Nanotechnology is great, and so are university research programs, but economic growth and innovation come from all sectors.

Of course, another flaw with this plan is that it’s not guaranteed to keep companies in the state after the ten year tax-free window is finished. This is perhaps disproportionately true for start-up companies, which often get sold off to larger companies as their product proves viable. A good case study of this problem is the 2009 episode where Dell Computers got $240 billion in incentives from the state of North Carolina, only to move their operation from the state after four years.

Cuomo contends in a recent op-ed that broad-based cuts are impractical, saying, “we must deal with a reality wherein reducing income taxes just one point would cost $6 billion an impossible sum [sic].” But this flippant dismissal ignores the option of broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to pay for rate cuts, the formula for equitable tax reform. In the end, this kind of fundamental tax reform is what New York needs to be competitive in the coming decades. Flashy gimmicks won’t fix New York’s tax problem, even if they do come with ribbon-cutting ceremonies.

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Follow Scott Drenkard on Twitter @ScottDrenkard.