Empire Zone under microscope Report says good intentions have gone bad By LYNN WOODS

Empire Zone under microscope
Report says good intentions have gone bad
By LYNN WOODS

The state’s Empire Zone program, billed as a tonic for ailing economies, is itself fraught with woe, an audit states.

The Empire Zone (EZ) initiative, which grants multiple tax credits to companies that create new jobs and bring in investment, is coming under scrutiny by Empire State Development (ESD), the agency that oversees economic development for the state.

In a historic first, ESD has conducted a full audit of certified companies’ 2005 Business Annual Reports (BARs). The audit revealed almost a third of the 9,800 certified firms scattered across the state’s 82 zones failed to meet at least 60 percent of their projected jobs or investment.

A letter was sent out to each company on the list, notifying the owner that ESD would be reviewing its 2006 BAR to see if there had been improvement. If not, the letter stated the company would likely be decertified. Previously, companies were decertified only if they failed to file their BAR or violated labor laws, according to ESD spokesperson A.J. Carter. He said qualified tax benefits under certification were good for 10 years.

Approximately 500 of the companies on the list are in the Hudson Valley, with 114 in the Poughkeepsie zone, 39 in the Newburgh-Stewart International Airport zone and 62 in the Kingston-Ulster zone.

Steve Finkle, Kingston’s director of economic development and the Kingston-Ulster zone administrator, downplayed that number, noting that with a total 200 certified companies, “70 percent are delivering.” He said the zone, which was established in 1995 in the wake of IBM pulling out, had been valuable in creating jobs and spurring new investment in the city, as well as the reuse of old buildings.

Catherine Maloney, coordinator for the Kingston-Ulster zone, said there had been $332 million invested in capital projects since the zone’s inception. Employment for the period had increased 75 percent, resulting in a total 3,256 new jobs, she said. However, when figuring in company downsizings and closings during the same period, the net gain for 11 years was 1,650 jobs, according to published reports.

That number is especially underwhelming considering companies in the Kingston-Ulster zone were awarded a total $24.33 million in tax credits from 2003 through 2005, according to information that was made available earlier this year after the Syracuse Post-Standard sued the state for the data long swathed in secrecy and won.

That averages out to $8.11 million worth of tax credits per year for Kingston-Ulster for the three-year period, which means the cost of subsidizing each of the 150 jobs that were created annually on average was approximately $54,156 per year. By comparison, the per capita income for Ulster County in 2005 was $26,250. The subsidy also far exceeds the state average, which in 2005 was $17,400 for each new EZ hire, according to a March 15, 2007, article in the Rochester Democrat and Chronicle.

The Rochester paper reported that in 2005, 26,600 jobs were created and the EZ claimed $470 million in tax credits. This year, the cost of the EZ tax credits to state taxpayers is projected to reach $600 million, up from $30 million in 2000.

The cost is one issue; another is accountability. Finkle said if a company didn’t deliver on the promised jobs and investment, there was no loss to the taxpayer, since the firm wouldn’t qualify for the credits. He said he had confidence in the ability of companies to monitor themselves, given that company owners who lie on their tax returns risk “going to jail.”

Conflicting views

A survey of the data reveals that at least a few of the Kingston companies ESD claims failed to meet 60 percent of their jobs or investment goals, yet nonetheless received tax credits. According to state data, River Radiology, a diagnostic service that relocated to an old industrial building in 2001, got $181,875, most of it in sales tax credit (plus a $4,500 credit for creating one new job). According to ESD, the company projected an investment of $3.4 million but invested cumulatively “$0” and is occupying only 20 percent of the building.

Maloney disputed the ESD data, saying River Radiology had invested “millions of dollars” to purchase and fix up the old building. She said River was still paying half of the 8 percent sales tax on materials purchased.

One-fifteen Green Street, a real estate holding company, was listed on the ESD 2005 audit as having an investment goal of $440,000, although it cumulatively invested $23,750. The company, which has two part-time positions, received $68,284 in tax credits most related to the real property benefit between 2003 and 2005, which exceeded its gross wages for the period of $54,180, according to state data.

Maloney said the company failed to list $425,000 it invested in a new building in its 2002 BAR. “They made a mistake,” she said. “They’ve submitted modified paperwork, which showed they’ve met more than 60 percent of their investment goals.”

Ulster Acquisitions, which is listed as owned by Savannah Partners, a New York City developer, also takes a hit in the report. The company, which owns two locations near TechCity and has one employee, invested $2.7 million, falling short of its goal of $6 million, the ESD states, but it got approximately $1.1 million in tax credits, from 2003 through 2005, according to the state data.

“It’s generally not completely true that you get no benefits if you don’t create jobs,” said Frank Mauro, executive director of the Fiscal Policy Institute, a nonpartisan research and education organization focusing on tax, budget, economic and related public policy issues, based in Albany. Mauro said certified companies automatically benefit from an investment tax credit of 9 percent, compared with the standard 6 percent. “If I’m going to invest $1 million but only invest $500,000, I still get a $45,000 credit deducted from my income taxes,” he said.

Furthermore, while a loophole enabling newly formed companies to operate tax-free leading to a practice called “shirt changing,” in which existing companies reincorporate to qualify for the EZ tax credits has been addressed, many firms are grandfathered in and are still raking in hefty benefits, regardless of their investment or jobs, Mauro said.

The recent A.T. Kearney report commissioned by ESD castigated the EZ program as “perhaps the best example of good economic development intentions gone wrong.” It noted the near impenetrability of the complex scheme of tax incentives, which include two types of credits on sales tax, an investment tax credit, a zone capital credit and a real property tax credit.

Carter at ESD said the agency is examining each company on the list on a case-by-case basis. “Just because you’re on the list doesn’t mean you’re a bad company,” he said, noting that extenuating circumstances, such as a flood, could account for some of the missed goals. For example, the Kingston Ulster Commerce Park, located on Route 32 near the Kingston Airport, planned to invest more than $4 million and to hire 52 employees. The fact that it had invested only $1,836 and had only two employees, according to its 2005 BAR, was in part attributed to setbacks caused by the death of company founder Michael Zinn, ESD acknowledged.

Old companies made new?

In at least two instances, existing companies qualified for the EZ tax breaks in the Kingston-Ulster zone simply by moving from one location to another. The transition enabled them to report zero existing jobs at the new location when they got certified, making it appear that they were bringing in new jobs. Catherine Maloney, coordinator for the Kingston-Ulster zone said she had no problem with this, as long as the company brought in jobs.

Rosita’s Mexican Restaurant got $28,915 in tax credits, although it failed to create the 22 new jobs it promised, according to the Empire State Development report, which put it on the ESD list of companies falling short of their promised jobs or investment (see accompanying story). The wage tax credits it received were for eight existing jobs, although according to the EZ guidelines the $1,500 benefit is only supposed to be applied to each newly created job. Rosita’s indicated it had only one job when it was certified for the Empire Zone, although the restaurant had been around for more than a decade.

Maloney said Rosita’s “shut down its old operation for almost a year. That restaurant went away” while it was renovating a new location, so technically it did have only one employee when it got certified.

But how did moving from one location to another, even with the year’s renovations, qualify it as a new business bringing in new jobs?

“We lost that business. It was shut down,” she said. “I think it’s a good thing they created eight jobs.”

Another local business that was able to report zero jobs when it got certified although it was a going concern was Jeff Lowe Plumbing, Heating, AC. The company created nine new jobs, amounting to a total 39, and claimed $143,000 in wage tax credits, according to data from 2003 to 2005 that was obtained from the state via lawsuit by the Syracuse Post-Standard. Lowe was not on the ESD audit list.

Maloney said Lowe Plumbing moved from the town of Ulster to a new location in Kingston and literally didn’t have any employees at the new Empire Zone location when it got certified. She also said the company got certified because “it projected new employment.” How many jobs then did Lowe Plumbing have before getting certified? “Unfortunately that question wasn’t asked at time of certification, so I don’t have that information,” she said.

She said the problem, whether perceived or real, had been corrected: “We’ve got the criteria in place now. If you’re not projecting a certain number of jobs, you don’t get certified. Before, there were no minimal thresholds. The point is we need these jobs because in 1993 we lost 7,000 jobs” when IBM closed.

Owner Jeff Lowe said he added about four new jobs since moving to the new location in 2004. He said his attorney had advised him to set up a separate company to purchase the building, which has one employee, netting him another $4,500 in wage tax credits, according to the 2003-2005 data. “I would have moved here anyway, even if I hadn’t gotten the credits,” he said, noting that he bought the building for $600,000 and hadn’t bothered to fill out the paperwork for additional sales tax credits he’s qualified to take on $200,000 worth of renovations.

“If a company is located in the zone and is creating jobs and making an investment, it should be eligible for the benefits,” said Maloney.

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