Empire Zone or Twilight Zone?

In late 2006, portions of Schoharie County were awarded Empire Zone status by the Empire State Development Corporation, New York State’s industrial development agency. Areas designated as Empire Zones enjoy tax benefits for companies to set up or expand their business and therefore increase local employment. Ever since, county leaders have been excitedly hailing the program as a panacea for Upstate’s economic woes.

However, across the state, a growing number of critics of the Empire Zone program are suggesting drastic changes to the current system, some going as far as to urge getting rid of it. One major criticism is the use of Empire Zone exemptions to attract retail businesses, which seldom make decisions about where to locate based on tax benefits. Many of these businesses would choose a location regardless of the Empire Zone benefits it receives. Further, retail businesses often take business away from existing businesses, thereby reducing the net creation of jobs.

Further, there are no conditions or requirements associated with the awarding of Empire Zone benefits. There is nothing to stop a company from taking advantage of the program and then cutting jobs. A report released by the New York State Initiative for Development Accountability in May, 2007 claimed that in 2005, of the nearly $400 million in tax exemptions created by the program, 70 percent went to companies that cut jobs!

However, the biggest problem with this program is that it only reinforces the inter-municipal competition for development (also known as the race to the bottom) throughout the state. Upstate’s major cities (Albany, Syracuse, Rochester and Buffalo) are actually a patchwork of numerous municipalities that each must compete for industry for its own small tax base. Doing away with this fragmented system of municipal government would create multiple benefits for economic development. First, Upstate’s regions would experience less duplication of services which would enable them to lower taxes. Secondly, region-wide planning and development agencies could create a unified and coherent vision, which would eliminate the need for each town, village and city to fight over every tax ratable that comes along. Incidentally, companies facing such a unified front might be a lot less inclined to request outrageous benefits packages if they couldn’t pack up and move to the neighboring town and village.

In the face of all these fragmented municipal governments, perhaps creating even more “zones” to intensify inter-municipal competition is not the smartest policy, especially if we’re going to be handing out tax exemptions like candy with no strings attached.

And while New York State is focusing all this effort on a program to create tax exemptions for companies, they are nearly ignoring other strategies for economic development. Companies don’t just look at the tax rate when looking for a location. Many companies instead want a steady supply of college graduates from which they can draw qualified and talented employees. Upstate NY has plenty of colleges, but it presently doesn’t have the resources and attractions necessary to keeping students here once they graduate. Cities like Albany and Rochester have made strides recently with their own efforts to create a vibrant nightlife in their cities, some projects have even utilized Empire Zone designations. But right now, Upstate cities can’t compete with places like Manhattan/Brooklyn, Boston, or San Francisco. This can change, and it must.