Brooklyn's Progress
April/May 2007

BY THOMAS TRACY

The “tax loopholes” Governor Eliot Spitzer planned to close in this year’s budget would have allowed the state to mine millions of dollars from the pockets of business owners throughout Brooklyn.  That was the message Brooklyn Chamber of Commerce Members gave borough legislators during their annual trip to Albany on Mar. 12.

Speaking with borough representatives from opposing sides of the Governor’s proposal, Chamber Members stressed Governor Spitzer’s plan to close the so-called “loopholes,” or business tax incentives, would make Brooklyn – as well as the rest of New York – less competitive to other states.

Chamber Members agreed with the findings of the Business Council of New York State, led by former Brooklyn Chamber President Kenneth Adams, which posited the loophole closures would amount to nearly $600 million in increased taxes for businesses.

“These are not loopholes,” said Mark Kessler, interim president and chief operating officer of the Brooklyn Chamber of Commerce. “They are part of an economic development plan from the 1980s. It’s part of the economic engine that drives city businesses and city businesses drive the state. Why would you take an engine that’s running well and then pull a spark plug?”

“These taxes impact businesses of all sizes which employ about half of the state’s working population,” the Chamber explained in the 2007 legislative agenda, Brooklyn Agenda for Growth, which they handed to legislators. “Excessive taxation on businesses including banks and real estate trusts, health insurance policies and the elimination of tax deductions for production costs is regressive and will severely hurt if not obliterate mechanisms in place that encourage economic activity and growth.”

But members of Governor Spitzer’s administration did not agree.  They claimed the budget was in line with the Governor's commitment against increased taxes.  A section of Spitzer’s 2007/2008 budget entitled “No New Taxes” reads as follows: “The budget does reflect an increase in revenues from closing certain tax loopholes and tax shelters that allow certain taxpayers to reduce their tax obligations. All of these provisions have been carefully reviewed to determine that the actions proposed do not represent tax increases, but rather limit the ability of certain taxpayers to take advantage of unintended provisions in law to reduce their tax exposure through sophisticated tax planning techniques.”

Members of the Governor’s administration said the changes would remove a handful of “unintended and anachronistic tax statutes that have already been addressed by other states and the federal government.” His proposals included: subjecting companies outside the state doing business in New York to be taxed as if they reside in the state; removing a law that allows businesses to move assets into C corporations where they can’t be taxed; and requiring businesses that conduct substantial intercorporate transactions with affiliated companies to file a combined franchise tax return, rather than separate ones that can lower their tax bills. Other changes involved altering the tax laws for banks and real estate investment trusts.

Testifying before legislative fiscal committees last month, Business Council President and CEO Kenneth Adams stated these tax changes would make New York less appetizing to businesses thinking about settling in the Empire state.  At the same time, the new tax laws would put an undue burden on struggling businesses already here. “We're already losing jobs and people because our taxes are too high,” he stressed. “Common sense and painful experience make one thing clear – raising business taxes by half a billion dollars will only make our economic problems worse.”

While private-sector employment grew by 1.4% nationwide in 2006, New York only showed 0.8 % growth – just a fraction of the national employment expansion, Mr. Adams explained, adding that it is not the right time to make New York less appealing by hiking up the cost of doing business with the state.

While the two houses of New York’s legislature were divided on the subject, the Assembly has already fallen in step with the Governor and had adopted his proposal on business tax restructuring, which they believe will generate $450 million and create “a level playing field for all business,” according to Assembly Spokesperson Brian Franke. Still, while the State Senate was divided on the issue, many Brooklyn Senators opposed Governor Spitzer’s proposal.

But on April 2, the budget was passed, and although some unfavorable measures were accepted including the proposal to require out-of-state companies that are related to New York corporations to file combined returns, the budget passed some surprisingly significant tax cuts for big businesses. The taxable income rate for manufacturing, securities and other firms that pay corporate tax under the state's alternative minimum tax will receive a 40% drop from 2.5% to 1.5%. And the Executive Budget proposal that called for the elimination of REIT deductions for larger banks that have real estate investment trusts will be phased out over four years instead of being phased out immediately.  The deduction remains in effect for banks with assets of less than $8 billion.

“The question we have to ask is when is an incentive no longer necessary. It’s a struggle. We have a $1 billion cut in health care, and some of the money we may use to restore these cuts may come from closing loopholes,” said Brooklyn Assemblyman Bill Colton (D – 47AD), a member of the Ways and Means committee. “The bottom line is I don’t think that banks are going to leave New York State over this. What concerns me more is how these changes are going to affect small and middle-sized businesses.”