- Stronger Communities
- Economic Growth
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New York City currently spends around $4 billion every year in the name of economic development -- between $500 million and $1 billion in operating budget outlays, $3 billion in tax expenditures, and several hundred million in capital budget outlays to support economic development. Tax expenditures include exemptions and abatements for residential, industrial, and commercial development, discretionary tax reductions offered to specific projects, reductions on city business and income taxes for particular industries and activities, and tax-exempt financing. Tax expenditures have been growing much faster than the overall tax base: business tax expenditures grew 192% since 2001, even as tax collections rose only 90%.[i]
While some of this economic development inducement has been effective, far too much has gone towards wasteful subsidies of individual companies. In a 2004 deal, Bank of America, the nations’ second largest commercial bank, received more than $42 million in City subsidies in a deal for midtown Manhattan office space.[ii] In 2005, Goldman Sachs’ downtown headquarters was the beneficiary of a $115 million in sales and utility tax payments, and annual property tax discount of $9 million every year.[iii] More recently the City's Industrial Development Agency offered $74 million in City tax breaks to Fresh Direct to expand their presence in the Bronx after the company pitted New Jersey against New York to extract a maximum subsidy.[iv] Even the Partnership for New York City, New York City’s high profile business advocacy group, describes current NYC economic development incentives as “obsolete” and “poorly targeted.”[v]
End a Notorious Example of Poorly Targeted Incentives: The Industrial and Commercial Abatement Program
One notorious example of New York City’s poorly targeted economic development incentives is the Industrial and Commercial Incentive Program (ICIP), recently replaced by the Industrial and Commercial Abatement Program (ICAP). These programs provide tax breaks for rehabs or new construction of industrial, commercial, or mixed-use structures in designated areas. Subsidies flow overwhelmingly to office buildings and commercial retail projects, with only 9% of the exemptions and 3% of the value going to factories.[vi] Manhattan properties account for the largest share of ICIP value by borough (35%),[vii] and while ICAP reduced the eligibility of Manhattan property in recent years, large Manhattan commercial buildings can still receive tax breaks for renovation[viii] or the construction of “smart buildings.”[ix] It’s questionable whether most of these subsidies are necessary to induce any economic activity at all. According to a 2007 study by NYCEDC, more than 75% of the projects receiving subsidies, worth over $2.8 billion, would have gone ahead even in the absence of a subsidy.[x]
In its current form, the ICAP program isn’t worth saving and should be eliminated and replaced with a new less expensive, more narrowly targeted incentive program that meets the following criteria:
- does not provide subsidy for projects in the central business district in Manhattan.
- targets emerging sectors and non-retail commercial and industrial investment in the outer boroughs.
- has a reasonable benefit period which does not deprive City of revenue beyond what is necessary to induce desired economic activity.
- requires LEED certification or a city-certified equivalent for benefits for the construction of new buildings.
- does not provide “inflation protection” for property in appreciating areas.
- requires all developments to make a showing of need demonstrating that the project would not be viable absent a property tax exemption.
In addition, the City should increase auditing of the 7,240 existing ICIP and ICAP beneficiaries who receive $662 million in tax breaks each year to ensure that the use of the property remains eligible for exemption.[xi] A 2005 audit by the New York City Comptroller found that 14% of a random sample of current ICIP beneficiary projects was “being used partly or entirely for ineligible purposes.”[xii]
Eliminate Wasteful Economic Development Tax Expenditures, saving the City at least $250 Million per Year
Beyond reforming ICAP, Public Advocate Bill de Blasio is proposing a broad-based reform of tax expenditures and other subsidies, including those administered through state authorities. This reduction would be performed in conjunction with the creation of a new “Unified Development Budget,” to replace the alphabet soup of existing and conflicting subsidy programs which would require uniform reporting requirements, including job creation metrics, for each tax expenditure and economic development incentive.
To guide these reductions, City officials should perform an analysis of each tax break and economic development incentive to determine what percentage of projects and investments would have occurred absent the subsidy. The City should ensure development in high-demand areas remains on the tax rolls and resist pressure from large developers requesting tax exemptions.
Through reform of the current wide range of economic development programs —and elimination of programs with notoriously weak payoffs like ICIP and its successor ICAP – the City should be able to reduce use of business tax expenditures and other subsidies, and free up $250 million per year – a conservative target that is currently less than 5% of New York’s tax expenditure budget.
As the rest of this paper argues, what the City needs is not slightly more focused tax giveaways but instead a much broader economic development agenda which shifts the focus from investing in retention deals to investing in the City workforce and neighborhood industry sectors, which will ultimately sustain the economy into the future.
[i] James Parrott, Fiscal Policy Institute, “New York City Budgeting, Beyond Balance – Forward-Looking Budget Priorities,” April 2, 2013.
[ii] “Major Corporate Giveaways: Bank of America,” Good Jobs New York, Available at http://www.goodjobsny.org/economic-development/bank-america.
[iii] “Major Corporate Giveaways: Goldman Sachs,” Good Jobs New York. Available at http://www.goodjobsny.org/economic-development/goldman-sachs
[iv] “In the news: Fresh Direct Spurs Border War with New Jersey,” Good Jobs New York, February 14, 2012. Available at http://goodjobsny.org/newsroom/news-fresh-direct-spurs-border-war-new-jersey
[viii] “ICAP (Commercial): Industrial and Commercial Abatement Program,” New York City Economic Development Corporation, Available at http://www.nycedc.com/program/industrial-commercial-abatement-program
[ix] A mid-90’s concept, now seen as unnecessary to incentivize – as market demands for office space will ensure that new office buildings will be “smart” (meeting certain technological requirements involving fiber-optic connectivity and open-interiors for tech firms). Full description of “smart building” requirements at https://a836-propertyportal.nyc.gov/glossary.aspx#Smart Building.
[x] “Industrial and Commercial Incentive Program (ICIP): Analysis and Recommendations,” NYC Economic Development Corporation. April 24, 2007 as referenced in “Senseless Subsidies: A Report on Tax Benefits Under the Industrial and Commercial Incentive Program,” Office of Manhattan Borough President Scott Stringer, May 2008. Available at http://www.mbpo.org/uploads/policy_reports/Senseless%20Subsidies.pdf
[xi] “Annual Report on Tax Expenditures: Fiscal Year 2013”, Department of Finance. Available at http://www.nyc.gov/html/dof/downloads/pdf/12pdf/ter_2012_final.pdf
[xii] New York City Comptroller, “Audit Report On The Department Of Finance Oversight Of The Industrial And Commercial Incentive Program,” June 30, 2005, available at http://www.comptroller.nyc.gov/bureaus/audit/07-13-05_FR03-181A.shtm