State and local governments love giving out taxpayer money so private companies will choose to do business there instead of someplace else. Each U.S. state has some form of an economic development agency whose primary purpose is to incentivize companies to set up shop within the state or to keep them from leaving.
A new report by economic development watchdog Good Jobs First finds that New York’s agencies are specifically incentivized to give out as much taxpayer money as possible, in order to pad their own bottom lines.
In New York, industrial development agencies (IDAs) are “public benefit corporations” established under state law to foster economic development in the state. IDAs have the authority to exempt preferred projects from sales, property, and mortgage taxes, and their members are appointed by county legislators.
New York has 107 IDAs, and Good Jobs First analyzed data from the 104 for which sufficient data were available.
“IDAs budgets are driven by the size and number of the deals that they award, because a large portion of their budgets are based upon the transaction fees they collect from each project,” the report notes. “Essentially, these fees are money that businesses pay to the IDA in exchange for enabling the tax breaks.”
How much of a difference does this make? In 2018–2022, New York IDAs’ operating revenues totaled over $361 million, of which $289.2 million—80 percent of the total—came from deal fees.
Deal fees make up only 57 percent of IDAs’ total revenue, though the report notes that “total revenue includes non-operating revenue, such as subsidies/grants, which are irregular sources of income….Operating revenue is generally considered a better indicator of an entity’s financial health.”
Of the 104 IDAs examined, 70 received more than 80 percent of their operating revenue from fees, with 34 agencies receiving 100 percent from fees.
“Because IDAs are so reliant on deal fees for their budgets, they are incentivized to create
more and bigger projects,” the report notes. “One-third of IDAs are completely reliant on fees as their only source of operating income, pushing them to exempt more taxes at the public’s expense to maintain and grow their own budgets. This creates a perverse incentive to generate more fees by providing more tax breaks, even if such tax breaks are not necessary.”
That incentive structure is playing out in noticeable ways: Of the five IDAs with the largest amount of taxes exempted in 2021, three received 100 percent of operating revenue from fees; a fourth—New York City, the state’s largest, with over $222 million in tax exemptions in 2021 alone—received 96 percent.
The report charges that this sort of system creates a “perverse incentive,” whereby “IDAs can only grow their budgets by awarding more and bigger tax breaks to companies. The abatements take money away from cities, counties, and schools, and shift the tax burden onto other taxpayers.” As a result, “IDAs have every incentive to push through unnecessary deals (or needlessly expensive deals) that harm communities, just to increase their own budgets.”
To that end, “sixty-two percent of IDAs’ expenses are for staff salaries, benefits, and consultants.”
“It is not unusual for development officials in New York State and elsewhere to refer to
companies as their ‘clients,’ which indeed they are when commissions are involved,” the report noted. “But of course the officially intended beneficiary of IDAs’ work is the general public and its well-being.”
The authors recommend that the task of economic development “be returned to local governments, staffed and controlled by an executive agency, the same as other municipal duties, and with final tax-break authorizations made only by a vote of elected officials.”
IDAs have long been controversial: A 2013 study conducted by the New York State Tax Reform and Fairness Commission found no “conclusive evidence from the research that state and local taxes, in general, have an impact on business location and expansion decisions.”
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