Critics: Cuomo's 'Tax-Free' Plan for NY Is Not So Tax-Free

Image: Critics: Cuomo's 'Tax-Free' Plan for NY Is Not So Tax-Free

Tuesday, 04 Feb 2014 06:15 PM

By Cheryl K. Chumley

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New York, rated the worst state in which to set up a business, is trying to lure entrepreneurs with a seductive new TV commercial that promises: "Move here ... and pay no taxes for 10 years."

The campaign is the brainchild of Democratic Gov. Andrew Cuomo, who is up for re-election this year and is mentioned as a possible presidential candidate in 2016.

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But critics say the devil is in the details: the plan, which is centered on the creation of tax-free zones, contains many regulations and exceptions that will make it hard to work as promised.

"Don't expect these zones to achieve much," said Iain Murray, vice president for strategy and a financial and trade expert at the Competitive Enterprise Institute in Washington.

"There will be some businesses for whom margins are tight enough to allow them to start up with the tax relief rather than without it, but nowhere near the number if government really did get out of the way and allow real regulatory relief for them," Murray told Newsmax.

The tax-free zone plan, called Start-Up NY, pledges a 10-year exemption from property, sales, and state income taxes for people starting or expanding a business in New York. Cuomo sees it as a way to generate increased business revenue for the state.

The program has been heavily touted in slick national TV commercials:

"The new New York is open. Open to innovation. Open to ambition. Open to bold ideas. That's why New York has a new plan. Dozens of tax-free zones all across the state. Move here, expand here or start a new business here, and pay no taxes for 10 years. We're New York. If there's something that creates more jobs and grows more businesses, we're open to it."

The program doesn't actually guarantee 100 percent tax-free status — and it only applies to a specific segment of the business world. In other words, it's a lot more complicated than 30-second media spots put forth, says a lawyer who has dissected the program.

"This is a complicated program with extensive regulations and guidelines," Kevin McAuliffe, a partner in the law firm of Hiscock & Barclay, was quoted as saying on Syracuse.com. "The benefits can be lucrative, but they will not necessarily eliminate all tax liability."

Start-Up NY applies only to new or certain expanding businesses that are willing to partner with universities in the state and locate near their campuses.

Some businesses are exempt from the plan, including retailers, hotels, medical providers, and law offices.

The goal is to entice high-tech companies, especially those locating in areas that are home to one of the State University of New York's 64 campuses. But not all high-tech or other welcome companies will receive full tax-exempt status.

Only those businesses "with 100 percent of their operations ... in a tax-free area" would receive a zero tax liability, Start-Up NY said. "For businesses with operations in and out of a tax-free area, the credit would be pro-rated based on the percentage of assets and payroll within a tax-free area."

That could exclude from a tax-free haven high-tech businesses that sell products online or over the phone to sources outside the zones.

"Enactment of enterprise zones is certainly preferable to the status quo in high-tax states," Patrick Gleason, director of state affairs for Americans for Tax Reform, told Newsmax. "However, a more advantageous and economically sound approach is broad-based tax relief for all, regardless of geographic location."

The regulations for Start-Up NY participation could prove dizzying.

Start-Up NY participating businesses have to pay other taxes and fees, depending on the outcome of a regulatory certification process that determines, among other factors, how much of the business activity takes place within the zone, versus outside the boundaries — and how those outside-zone transactions should be valued.

Until properly certified, the businesses pay, in whole or part, organization tax and license and maintenance fees, a metropolitan commuter transportation district mobility tax, and a sales and use tax.

Start-Up NY also promises that "employees will pay no state or local personal income taxes."

But the positions and employees have to first receive a government stamp of approval that the jobs are entitled to the tax break — another certification process.

Start-Up NY business employees aren't necessarily in the free and clear for taxes for the full 10 years.

The rule is that they "pay no state or local income taxes for the first five years," but for the second five years, income limits kick in to determine the tax responsibility for each worker. In general, workers earning more than $200,000 a year start to pay taxes after the fifth year of operation.

On top of that, the business can have only a certain number of workers eligible for the tax-free benefit.

"There is an annual cap per business on the number of employees that qualify for this exemption and an annual cap statewide of 10,000 net new jobs," the Start-Up NY site says.

Murray said previous attempts to set up economic zones didn't always work as planned.

"These zones appear to be the latest in a series of variations on President [Ronald] Reagan's enterprise zones, which had some success in the 1980s. Unfortunately, and this was the case with Reagan's version, too, they don't really go far enough to foster a real free-market revival," Murray said.

"Tax is just one element of the business calculation," he said. "A real enterprise zone would be much more like the Free Cities project being undertaken in Honduras, where four separate freedoms are guaranteed: legal, economic, administrative, political. In other words, the businesses in these new communities are freed from the pile of constraints that go well beyond tax.

"If tax relief is such a good idea for these areas, why isn't it a good idea for the state as a whole? Or the nation? The whole country needs to become an enterprise zone," Murray said.

The nonprofit Tax Foundation just released its list of best and worst states in the nation to conduct business, and New York came in dead last at No. 50.

"The states in the bottom 10 suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates," the Tax Foundation reported in its 2014 State Business Tax Climate Index, which bases its ratings on corporate taxes, individual taxes, sales tax, unemployment insurance tax, and property tax.

Meanwhile, the state's largest city, under the leadership of New York City's new Democratic Mayor Bill de Blasio, is rapidly moving in the opposite direction: toward a less free-market atmosphere, more government intervention, and a populist rhetoric that targets the rich.

De Blasio's policies could well drive out the wealthy — including big businesses — from the city with his vow to tax the richest residents to fund government programs like prekindergarten for all children, and his claim that voters gave him a clear mandate to target the rich for more taxes when they elected him in November.

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