New York Business Lawyers

Can New York Design Better Tax Credit Law to Stimulate High Tech Business Growth-Pt.4?

by / Friday, 28 May 2010 / Published in Startup & Corporate

New York High Tech Businesses are the Real Growth Engine

By: Kyle Devine

Part I Part II | Part III

Following the news that New York City has Created a Tech Startup Venture Capital Program,  New York State’s actions on the same topic warrant further scrutiny.

New York State Legislation for Job Creation

So all of these proposals for job creation sound great and all, but there is still something missing… where does the money come from? In order to establish the resources needed to invest in job creation and tax cuts the most crucial step is a cap on State spending. Governor Paterson recently proposed legislation that would place a limit on State spending. In opposition is Lieutenant Governor Richard Ravitch who suggests borrowing billions to avoid fiscal crisis.  However, Mr. Paterson has said that spending is the state’s greatest problem and it must be capped before resorting to borrowing. Already, the current deficit is estimated at $2 billion.

Once effective, the proposed spending cap would prohibit an increase in State spending more than the average rate of inflation for the previous three years. But first the amendment must pass two consecutive legislative sessions and then a public referendum (as early as November 2011).

Not MY Money!?!

The current fiscal crisis has been exasperated by the State’s tendency of spending beyond its means. From 2002 to 2008 State operating funds surged from $53 B to $77 B, with an average annual growth rate of 7.86%. To put the proposed spending cap in perspective consider this: If during that time the spending cap had been effective, the average annual growth rate would be a mere 2.7%, limiting the 2008 spending to $60 B (That’s $17 B less than what was actually spent!!!)

With all the proposed legislations, I believe NY is headed in the right direction to create a better business environment, but more must be done to promote small business. For example, one Senator recently proposed a small business tax freedom plan that would enact a moratorium on any new taxes for small businesses.

In terms of tax incentives, the U.S. as a whole is badly lagging behind many of its top competitors; moreover NY ranks among the worst in the country. These local incentives are significant because they provide one of the few distinctions between potential locations. The number one problem is the State’s focus on getting the biggest bang for their buck without realizing that smaller amounts could be spent on numerous small businesses, essentially with less risk. NY must create tax incentives that cultivate a more attractive environment for entrepreneurs and start-ups.

Instead of acclimating tax incentives to the desires of giant firms, NY needs to shift their attention to businesses that actually create jobs. Not only is investing money into small businesses and start-ups a lower risk, but it also produces higher returns. Right away this reminds me of a quote from a Friedman article (Start-Ups, Not Bailouts link). “Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less.” In other words, established firms created no new jobs during that period… WOW!!!

Now take a look at the type of jobs that large firms do tend to create. Going back to the AMD example covered in part 2 of this series, we can look at the wage distribution at a normal chip-fab plant (NY’s billion dollar “standard” investment). “Growing Pennsylvania’s High-Tech Economy” describes the wage distribution curve at many high-tech facilities as comparable to a dumbbell. Whereas wage distribution at an auto factory is more similar to a bell curve (majority of jobs are middle-income), high-tech facilities are extremely automated with more low-wage jobs, few middle-income staff, and a considerable number of highly-paid management jobs. So although AMD was successful in creating some jobs, the wage distribution will be discouraging for economic stimulation.

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