(Newsday.com posted the following article by Jordan Rau on March 24.)
ALBANY, N.Y. — State lawmakers took the long route in deciding whether to provide a tax break to CSX Corp., a Virginia-based freight hauler that owns railroad tracks throughout upstate.
For four years, legislators told the railroad industry that they were contemplating cutting the railroad property tax, which CSX complained was higher than tax rates on other industries. “I think this is a lock for the next budgetary session,” an upstate senator predicted publicly in 2000.
By the time the tax break finally arrived, CSX’s various corporate entities had donated $39,714 to state politicians, including $10,000 given to the state Republican Party on Oct. 18, 2002 – less than three weeks before the election – as the bill was making its way to the desk of Gov. George Pataki, who had already indicated he would approve it.
“In the scheme of things, we’re probably a smaller contributor, but we like to show respect to those we’d like to see returned to office,” said John Casellini, CSX’s vice president for the region. Other railroad companies kicked in an additional $178,736 in donations to Pataki, the state GOP and legislators from both parties.
Promoted as high-minded economic development instruments, narrowly tailored tax breaks such as this one also have matured into potent fund-raising inducements that benefit the lawmakers who author them, according to an examination of campaign finance records and legislative documents as well as interviews with government officials, lobbyists and campaign donors.
Since 1995, Pataki and the Legislature have revised New York’s tax code 130 times in efforts to sway corporate behavior and aid particular industries, or in some cases individual companies. Fiscal experts say there is no reliable way to tell if they have created jobs, or if any new employment would have occurred regardless.
The cost to the state’s treasury is more quantifiable. The railroad tax break, for instance, will cost the state $70 million over the next decade because the legislation required Albany to make up some of the property taxes lost to local governments. This year, as lawmakers consider dramatic cuts to schools and health care, the Pataki administration forecasts that companies will claim $372 million in various credits that they can claim against their state taxes.
Politically profitable corporate tax breaks enacted in recent years include:
New York’s beer tax, which Pataki and the Legislature have reduced four times since 1995, lowering it from 21 cents a gallon to 11 cents per gallon come September. In 1999, state lawmakers also doubled a tax exemption for small breweries. Various associations of beer wholesalers and distributors have donated at least $735,796 to state political campaigns in the last four years.
A 1998 investment tax credit for financial services companies that purchase new equipment. Pataki and lawmakers authorized the credits even though Pataki’s tax commissioner at the time warned that “effective auditing” of companies claiming the credit “may prove to be prohibitive” because of “several problems” in the way the credit was designed, according to an administration memorandum. The securities industry, which supported the legislation, has always been one of Albany’s most generous contributors. Companies are projected to take $75 million worth of these credits this year.
Two tax credits created in 2000 to encourage homeowners and developers to install energy-saving technologies. One Connecticut developer made its first donation to a New York State campaign last June – $5,000 to Pataki’s re-election campaign – as it was readying its application for $6 million in tax credits, records and interviews show.
The Empire Zones Act of 2000, which provided new property, sales and income tax exemptions and credits for businesses in the most economically depressed areas of the state. The program is expected to cost the state $176 million this year. Many of the companies seeking inclusion in the zones have donated extensively: for instance, Pyramid Co., an upstate development group asking for $52 million in credits to construct the largest mall in America in Syracuse’s Empire Zone, has given state lawmakers $232,444 since 1999 through the company, its executives and their relatives.
“The tax code tends to reflect who’s got the most effective lobbyist,” said E.J. McMahon, a fiscal analyst at the Manhattan Institute, a conservative think tank. “The state’s tax structure is an ungodly complicated mess, out of date in some respects, non-competitive in other respects, unfair and difficult if not impossible to understand.”
Lawmakers, Pataki aides and donors deny any link between the campaign gifts and tax breaks. Lawmakers said they approved the railroad tax break not because of campaign donations but because they feared CSX would win a lawsuit it had brought challenging the state’s railroad tax.
“Some people thought a court judgment could have been more expensive,” said Assemb. Paul Tokasz (D-Cheektowaga), a bill sponsor. “I think the railroads would have won, and school districts were saying, ‘The uncertainty is what we can’t live with here. Maybe we can negotiate something.'”
Casellini, the CSX executive, said the cost of property taxes “was a make-or-break issue for the rail industry in New York” and that CSX was paying 31 percent of its property taxes in New York, even though only 7 percent of its tracks ran through the state. He said CSX had not upgraded half of those tracks because of the added taxes it would cost the company.
Other lobbyists and good-government groups say even though politicians rarely explicitly try to extract donations, business groups feel compelled to give money whenever they press for law changes, a process that has cascaded as New York’s tax code has become increasingly fractured.
“The pay-to-play culture has seeped into every pore of the body politic in Albany,” said Blair Horner, a senior lobbyist with the New York Public Interest Research Group. “This is the latest in the long list of nauseating examples.”
Tax breaks that help specific companies are nothing new in New York. The state’s Job Incentive Program of 1968, which was supposed to encourage companies to expand, was so liberally written that large corporations with no intention of leaving New York or adding jobs – including Tiffany & Co., Philip Morris and Newsday – collected tens of millions of dollars worth of tax credits before the program was finally overhauled in the 1980s.
During Pataki’s first term, he and the Legislature instituted broad cuts in the state’s corporate and income taxes. But since then, the governor and lawmakers have focused on far narrower changes to the tax code. They established tax credits for the purchase of defibrillators, construction of low-income housing and rehabilitation of historic barns. The administration’s report explaining all of the state’s tax breaks runs 177 pages.
These new tax breaks allowed lawmakers to claim credit for cutting multiple taxes without starving the state’s coffers as much as if they had cut broad-based taxes. The targeted tax breaks contributed to a gradual shift in New York’s tax burden in which corporations today pay a smaller share of the cost of state government than they did before Pataki was first elected in 1994.
In the fiscal year ending March 31, 2002, the state collected $4.9 billion in corporate taxes, 20 percent less than it received during Pataki’s first year in office, according to the state comptroller’s office. Business taxes accounted for 5.2 percent of the state’s revenue last year, down from 8.6 percent in the fiscal year that ended in 1995.
“They’re allowing many large, profitable businesses to be free riders,” said Frank Mauro, director of the Public Policy Institute, a liberal think tank funded by unions. “Some people say there shouldn’t be a corporate income tax. If they want to say that, say it right out rather than hiding it by making the corporate income tax more holey than Swiss cheese.”
Along the way, independent fiscal experts say, the patchwork approach has created inequities in tax burdens among different industries, setting off a frenzy of lobbying and donations for even more tax breaks.
For instance, coin-operated car cleaning machines were exempted from the state’s sales tax in 1997, but full-service car washes were not. The state’s Car Wash Association has been pushing for a similar exemption ever since, giving lawmakers $84,750 over the past four years.
The largest donations went to the lawmakers who sponsored the association’s legislation and to campaign kitties controlled by the Democratic Assembly speaker, Sheldon Silver of Manhattan, and the Senate Republican leader, Joseph Bruno of Brunswick. Spokesmen for both leaders said there was no relationship between tax breaks and donations.
A number of advocates of tax breaks, however, have found that having a solid rationale for their position is sometimes less important than having political muscle behind it. Since 1990, interior designers have been trying to repeal a state sales tax on their services that lawmakers established in 1990 to help close that year’s budget gap.
The interior designers hired a lobbyist and made what they thought was a strong case to lawmakers. They pointed out that they are the only group of 44 licensed professionals in New York required to charge state sales tax on their services, and argued that it put them at a competitive disadvantage with architects, who perform many similar services but are exempt from the sales tax.
One thing they didn’t do was give a lot of money. In 2000, they created a political action committee, but it gave out only $6,250 before disbanding the following year, records show.
Senate Republicans supported their request one year, but it was dropped during budget negotiations. To this day, interior designers still must charge sales tax for their services.
“Without the resources and lobbying, without the kinds of dollars behind it, it never hit the radar screen,” said Jan Dorman, the administrator for Interior Designers for Legislation in New York. “It’s a question of fair’s fair, but we play in an unfair world.”