4:00pm

Tue January 25, 2011
Incentives

Cutting coupons: how businesses save big on taxes

These days, having a conversation with local economic development officials is the first step for many businesses in New York State. And it's something we talk about all the time at the Innovation Trail. Here's an explainer about how incentives work - and why they matter.

The first thing to know about incentives is that New York State has been giving them out for a long time. Robert Ward wrote the book on New York State (literally). He explains New York started offering companies benefits to locate in the state when its economy started to falter in the '60s and '70s.

“Under Governor Rockefeller, the state started using this coupon strategy as it’s known, kind of like a grocery store, that gives you a dollar off coupon for a box of detergent,” says Ward.

In this case, coupons give companies discounts on what they need to do business in New York, as opposed to Pennsylvania or Ohio. At a more local level let’s take an example in Broome County: Willow Run Foods, a food distributor.

The company's business model is pretty simple. They take truckloads of French fries, warehouse them, and then ship them off to individual stores. That requires a lot of space.

In the '90s, Willow Run Foods had a building in Vestal, N.Y. But business was booming, and the company needed more room. So it started scouting locations, according to Terry Wood, who runs the company. They looked in Pennsylvania, and at other towns in the Southern Tier, like Appalachin.

Here's the bottom line: Wood is a businessman. He’s willing to pull up stakes and move if he has to, to get the best value for his money. Going back to Ward's analogy, he's willing to look for and then cash in some coupons, to get the most favorable combination of solid employees and affordable taxes.

And here's the other part of the equation: lots of places would be willing to issue a coupon to Wood to bring more jobs and tax revenue to town.

So what Wood does is approach local officials in the areas he’s considering with this pitch:

“Our intention is to build this facility. We anticipate adding this number of jobs, spending this on the building.”

And the local officials go back to their office and they run through some numbers.

“And then basically,” Wood says, “people come back and say 'this is what we can offer you.'”

The offer normally relates to property or sales taxes, but there can be other discounts on the table.

For example, for a data center that Verizon is looking to build in Buffalo, the state power authority said offered up big chunk of guaranteed low-cost hydropower, to help cheaply run all the computers in the facility. 

But there are two problems that come up here.

First, to get the deal that allowed Terry Wood’s Willow Run Foods to locate in Kirkwood, N.Y. (where he ultimately wound up), he had to speak to the town, the county, the school district - because he’d be paying taxes to all of them, on top of the state. And that whole alphabet soup of agencies had to come up with a package - together.

How long does that take?

“Months,” Wood says. “That’s basically all I did for a year.”

The other problem is for taxpayers. Some tax breaks can really add up, and some companies manage to squeeze out a lot more than others. The Buffalo News did the math on the Verizon data center and said the phone firm would be getting incentives equal to about $3 million dollars for every job it created.

As of this posting, no one in Broome County was able or willing to share a similar number from the agreement made with Willow Run Foods. 

But even if the government makes really good deals, it’s not clear that this is the most efficient way to run your state. To go back to Robert Ward’s analogy:

“Well, if they didn’t have the coupons, might they sell the detergent at a lower cost?” asks Ward.

Meaning, if the state weren't focused on making one bargain with one company, and a different one with another, it might be able to focus on lowering the cost of doing business across the board.

“The long term decline of upstate New York relative to the rest of the country did not happen because we did not have good economic development programs,” Ward says. “[It] happened because of a lot of factors.”

The biggest question, Ward says, is not how much impact we can expect to have with economic development programs - but, rather, what we can do about the overall competitiveness of New York State.

And that, my friends, is a story for another day. Specifically a story by Zack Seward, on Thursday.