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By Chris Bragg

March 10, 2013

A measure tucked into Gov. Andrew Cuomo's 2013 budget would limit the ability of local governments to grant sales-tax breaks, a change that Mayor Michael Bloomberg and some business leaders say would hurt economic development in New York City.

The measure would curtail the ability of the city's Industrial Development Agency, a nonprofit run by the Economic Development Corp., to grant incentives to projects such as business relocations or new developments. Under Mr. Cuomo's proposal, the New York City IDA could continue to unilaterally exempt businesses from the city's 4.5% sales tax, but no longer from the state's 4.4% portion. Instead, that authority would go to a Cuomo-appointed economic-development panel. Some industries would become ineligible for sales-tax deals.

After an outcry about the proposal from some IDAs around the state, Lt. Gov. Robert Duffy said last month that the Cuomo administration was open to a modification. But in the governor's recently released 30-day budget amendments, the proposal was unchanged. Legislative leaders in Albany have been largely mum on the matter and are striving to pass the budget early, even a week or more before the April 1 deadline, leaving the city perhaps only a few days to get the IDA provision removed.

In his testimony on the budget in Albany, Mayor Michael Bloomberg singled out the measure as one of the few in Mr. Cuomo's spending plan that he strongly opposed.

"This would seriously impede job creation at the local level, and we urge you not to approve it," Mr. Bloomberg told legislators. "If there's anything that gets in the way of creating jobs right now, it's certainly something we should not have in our state."

Mr. Cuomo's administration says his proposal would save the state $7 million in the first year and $14 million the year after—a tiny fraction of its budget. But Mr. Cuomo has said he is looking to maximize the state's resources by taking a more regional, strategic approach toward development. In particular, he wants to stop localities from giving away state money to draw businesses from elsewhere in the state.

"Part of what we have been doing is subsidizing the same business, and we're just moving the same business from county to county or district to district, or one side of the street to the other side of the street," Mr. Cuomo said in February. "I'm not interested in using tax dollars to move the same job around town or move the same job from town to town."

IDAs around the state give out about $55 million in sales-tax abatements and $500 million in other tax breaks annually in efforts to retain or create jobs, but budget watchdogs have long complained about poor results and a lack of oversight.

"We think this is a good proposal," Elizabeth Lynam, vice president and director of state studies at the Citizens Budget Commission, said of Mr. Cuomo's plan. "This action would help align state and local government economic efforts and restrict state tax breaks to the most appropriate projects."

The New York City IDA provides tax-exempt bond financing or benefits to companies so they can purchase real estate, renovate facilities or upgrade equipment. Some business leaders see the Cuomo administration's move as a way to exert more authority over local development projects—and one that would add unnecessary red tape to projects.

"This proposal would transfer local control of economic development to enhance the executive's authority over local projects," said Brian McMahon, executive director of the New York State Economic Development Council, referring to the governor. "This top-down measure would create roadblocks for local projects."

The measure would prohibit IDAs from abating the state portion of the sales tax unless a project were eligible for the state's Excelsior Jobs tax credits program, according to Mr. McMahon. That would likely prevent "adaptive reuse projects" and small technology businesses from getting the state tax break, he said. A Cuomo spokesman said only key sectors like scientific research, software development, financial services data centers, manufacturing, back-office operations and agriculture would be eligible.

The state sales-tax break makes up only about 5% of a typical incentive package the New York City IDA offers to businesses, a city official said. But unlike other larger incentives—such as those on property taxes—the sales-tax break often comes up-front, on aspects of a project like the purchase of construction materials.

The incentives are meant to jump-start projects on the margins that otherwise could not get off the ground, said the city official—so adding a layer of bureaucracy and uncertainty would present a threat.

But projects getting the breaks often fall short of job-creation goals. The Alliance for a Greater New York, a nonprofit that advocates for stronger oversight of economic-development subsidies, said that of the 560 city IDA-subsidized projects in 2010, only 22 involved state sales-tax breaks. But 13 of the 22 are falling short of their job-creation and retention agreements—a total of 28,200 jobs below their goals, the group said.

Though the number of projects getting state tax abatements is small, recent megaprojects in the city have included them, including the new stadiums for the Mets and Yankees. Six of the 10 most expensive subsidies include state sales tax, the advocacy group said.

But an EDC spokesman disputed the idea that the city was improperly granting the subsidy, saying that 97% of city IDA projects were compliant with their agreements. He added that since 2002, the IDA had recovered more than $85 million in benefits from 105 projects that failed to comply with city standards.

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