Council Member Dan Garodnick at a press conference (photo: William Alatriste)
On Thursday afternoon, the New York City Council Committee on Economic Development will meet to discuss the efficacy of tax breaks provided to businesses through the New York City Economic Development Corporation (EDC). The EDC is a not-for-profit corporation controlled by the Mayor's office and dedicated to encouraging economic growth.
Among the key programs the EDC runs to promote business and job growth in the city is a system of tax incentives. This system has been the subject of scrutiny before and the council economic development committee, led by new chair Council Member Dan Garodnick, is set to take another look at the operation.
The EDC has a long history starting in 1966 as the NYC Public Development Corporation. Over the years it evolved and in 2012, the former New York City Economic Development Corporation merged with New York City Economic Growth Corporation, another not-for-profit corporation. In it's latest iteration it works on a contractual basis with the City to provide assistance and financial services to businesses. It's mission is to attract private investment, promote employment opportunities, and manage projects such as community infrastructure.
In April 2010, former City Comptroller John C. Liu released an audit report on the EDC and cited a "noticeable lack of transparency in the public classification and disclosure of several revenue transactions, resulting in EDC's failure to remit $125.5 million in payments owed to the City between 2005 and 2008. Also problematic were internal control deficiencies that resulted in inadequate controls over disposition of City property, incomplete collection of rental income, as well as other weaknesses."
Among other things, the report recommended that there be enhanced transparency at the EDC and reforms to ensure that city assets and revenue were handled responsibly. In September of the following year, in yet another report, Liu noted that the EDC had failed to disburse or return funds meant for public projects.
The EDC responded to each point in each report and contended that, for the most part, the Comptroller's office was wrong. "The Comptroller, for whatever reason, enjoyed issuing audits with respect to EDC," said Seth Pinsky, who was then president of the economic development agency. "In most cases, those audits simply misunderstood the items they were reviewing."
"The EDC and Industrial Development Agency (which is under EDC) have been held up by third parties as models for transparency," Pinsky added. The EDC and Industrial Development Agency (IDA) are already subject to significant oversight and disclosure requirements from both the City and the State. IDA requirements include reports on annual investment, public authorities law reports, and a compliance report. The body is governed by a fifteen-member board comprised of mayoral appointees and appointees recommended by borough presidents and the Comptroller.
But the audits raise the larger question of possible lapses in projects funded by public revenue. Basically, are taxpayers receiving the benefits of investments being made by the city with their money?
"The City puts millions of dollars into economic development initiatives," said Garodnick, who will chair Thursday's oversight hearing. "We need to make sure we're getting the right bang for our buck."
The committee's agenda on Thursday will look at the EDC's parameters for success in allocations, the contractual obligations of fund recipients, and the protocols for monitoring project compliance.
"We took note of Comptroller Liu's audits and recommendations. We believe that he raised some legitimate issues to be pursued. Beyond that, we want to make sure we're getting what we need from our economic development investments," Garodnick added.
Tax benefits seem to be the keystone on which the committee has pegged its agenda of oversight. Over the last year, New York has begun to face increased competition from neighboring New Jersey, which has announced more than $1.5 billion in tax breaks as a means to attract investment and recover from the aftereffects of the recession. Making matters worse for New York is a complicated tax structure in the state (New York State was ranked last on the 2014 State Business Tax Climate Index compiled by the Tax Foundation, an independent research body).
This perhaps makes City incentives a necessity. "Incentives are one of the issues in economic development nationally," said Pinsky, who now works at RXR Realty. "It's another form of public investment in a project."
But there are those who question the advantages. "We should be skeptical of tax incentives," said Scott Drenkard, economist and manager of state projects for the Tax Foundation. "They lead to higher rates for collecting the same revenue. The way New York and New Jersey should start competing more is through broad-based tax cuts which level the playing field for all businesses."
Akin to the Council's intentions, Drenkard stressed that there needs to be a continual eye on requirements for businesses and robust tax expenditure reports. "They're hollowing out the tax base and foregoing revenue. They should know the size of that hole they're creating," he added.
The bottom line is whether the EDC works or not. Something that Garodnick is sure to get at in his questioning, especially of the tax subsidies expert from EDC who is expected to testify.
"There's always room for improvement," said Pinsky. "But it is an incredibly successful economic development agency and multiple large jurisdictions are trying to replicate its success."
Current City Comptroller Scott Stringer also seems encouraged by the direction the EDC is taking while stressing the need for accountability. "Oversight of all city agencies is necessary for the function of government, but it is critically important in any tax incentive program," he said. "EDC has taken some positive steps over the last year towards transparency, including participating in the Comptroller's Checkbook NYC," he added, referring to the City's online platform for data dissemination through which contracts, vendor details, and disbursements by the EDC are now available to the public.
The EDC, within its limited mandate, can provide tax breaks for budding and established businesses, but tax policy at large is set in Albany. On that front, Governor Andrew Cuomo has enacted tax reform, including cuts in the corporate rate structure and simplification of filing procedures. These are indicators, according to Drenkard of the Tax Foundation, that the state's tax climate will improve in coming years.
John Liu said he will attend the committee's hearing but will not testify - he is bringing a group of his Columbia University students with him who are enrolled in his municipal finance class. A representative for the EDC said they would comment at the hearing.
by Samar Khurshid, Gotham Gazette
Note: this article has been corrected to reflect that John Liu is bringing students from Columbia, not Baruch.