October 16, 2004

Good Tax Policy Could Help Keep Work in New York

(This articled appeared in The Buffalo News October 16, 2004)

Despite campaign rhetoric about Benedict Arnold CEOs sending jobs overseas, New Yorkers are sweating about a jobs threat much closer to home — low-tax U.S. states poaching New York’s businesses.

Tax competition between states for jobs is old hat to state lawmakers. Within America’s 50-state free-trade zone, every change in a state’s tax code affects its competitiveness with its neighbors. But New York’s high-tax reputation has recently made New York companies an unusually ripe target for competing states.

French drug giant Sanofi-Aventis recently pledged to move hundreds of jobs from midtown Manhattan to lower-tax Bridgewater, N.J. Film and television producers have been fleeing New York for Illinois, Louisiana and even North Carolina for years. Even the story of Rudy Giuliani was filmed in Montreal, where lower taxes mean lower production costs. Unfortunately when it comes to tax competition, most states get it wrong. The temptation is to lure sexy employers like sports teams and corporate headquarters with short-term tax incentives. But this strategy almost always backfires — a lesson Gov. George Pataki should remember as he responds to job threats.

Consider officials in Mohawk Valley, who lured a major aircraft repair company with a $5.5 million incentive package back in 1999 in exchange for 500 new jobs by 2006. The company is long gone. It went bankrupt without paying back a penny just 20 months after opening its doors, leaving taxpayers with the bill.

Short-term tax lures seem like a politically attractive way to create jobs. But those expensive giveaways send a damning message about a state’s tax friendliness. To new companies, they signal that only special bonuses can make the state’s flawed taxes attractive. And to existing companies they’re an economic face-slap, treating current employers as dupes who’ll pick up the tab for newcomers.

The real way to lure long-term jobs? Streamline New York’s tax code to be permanently business-friendly to all companies. The Tax Foundation recently released its guidebook on business tax-friendliness, the State Business Tax Climate Index. It ranks the business tax climates of the 50 states, rewarding tax codes that are neutral, have low and flat rates, are simple and transparent, avoid double taxation and have statutory restraints that keep tax burdens low.

The 10 most business-friendly states this year are South Dakota, Florida, Alaska, Texas, New Hampshire, Nevada, Wyoming, Colorado, Washington and Oregon. New York ranked 49th, just barely ahead of high-tax Hawaii.

The reason? New York’s state and local tax burden is America’s highest. In 2004 New Yorkers had to work 16 days longer for Tax Freedom Day — the day taxpayers have earned enough to pay the year’s taxes — compared to the U.S. average.

There is a way out for New York: tell the governor to lead the way toward a more neutral and job-friendly tax code. If you do, the jobs will stay.

Scott A. Hodge is president and Andrew Chamberlain is a staff economist at the Tax Foundation in Washington, D.C.