The state budget keeps wasting economic development cash

As the New York state budget was being adopted by the Legislature this weekend, some legislators objected to a $3 million appropriation for an upstate luxury golf tournament deemed to be an economic development initiative. While this expenditure certainly raises eyebrows, the problems with economic development spending are broader and deeper – and they cost New Yorkers much more than $3 million.

New York state spends billions on economic development programs each year, but evidence of success is hard to come by – especially in many regions upstate, where the local economy continues to lag. The state’s newly adopted budget adds economic development spending, without making needed reforms.

For the last year in which full spending data is available, fiscal year 2016, New York spent $4 billion on economic development programs, including $2.4 billion in tax breaks. Local governments and authorities spent $4.6 billion of their own dollars in addition to this amount. The Citizens Budget Commission painstakingly assembles these figures because there is no unified economic development budget in which state and local investments can be tracked over time. Nevertheless, one thing is apparent from our preliminary calculations for fiscal years 2017 and 2018: The dollars allocated to economic development continue to grow.

The fiscal year 2019 budget will be no exception. It contains $1.7 billion in new appropriations for economic development, in addition to spending authority from appropriations in previous years and billions in tax credits and deductions, the full cost of which will only be known after they are claimed. Notable projects include a new $300 million appropriation for a High Technology Innovation and Economic Development Infrastructure Program; a new $122 million appropriation for a New York State Capital Assistance Program for Transportation, Infrastructure, and Economic Development; and $600 million for a life sciences laboratory, adding to $150 million appropriated last year for the same project. There are also myriad smaller appropriations for local projects about which little, if anything, is known.

Despite the large sums invested, evidence of positive results is lacking. Overall, the state’s regions are not seeing the economic success promised by the governor’s initiatives. Total job growth outside of New York City was 5 percent between 2010 and 2016, less than half the 11 percent national growth rate. Seventeen of the state’s 62 counties suffered employment losses from 2010 to 2016. Only five have had employment growth outpacing the national average from 2010 to 2016: the Bronx, Brooklyn, Queens, Staten Island, and Saratoga County. Jobs in the remaining counties grew slowly, if at all.

A new study by economist Timothy Bartik of the W.E. Upjohn Institute finds that the costs of typical economic development incentives are nearly equivalent to the benefits, and that average-sized tax incentives are the deciding factor in fewer than 20 percent of location decisions by businesses, suggesting that most incentives go to support jobs that would have been created anyway. Furthermore, some incentives can lead to additional costs that outweigh their benefit. For example, job growth that attracts migration to the area can lead to additional public costs, often not accounted for in the initial projection of a net benefit to the community.

There is also a lack of transparency about the taxpayer’s return on investment. Little information exists about the outcomes of individual projects undertaken to spur job growth. Empire State Development, the state agency that administers most economic development programs, does not comprehensively report on the results of its investments. Some programs, such as Start-Up New York, have quarterly or annual reports, but metrics are rarely comparable across programs, so evaluating which programs are most effective is impossible. Additionally, some of the state’s economic development spending occurs in one-off projects, not through programs with defined eligibility criteria. These investments are intended to transform local economies, but are even less transparent than subsidies provided through established programs. Without reliable, comprehensive data on the jobs produced by the state’s investments, the state’s case for continuing these costly efforts is based largely in anecdote.

Where data do exist, it is clear that many of the state’s economic development efforts are not worth their high cost. The $15 million film hub and $105 million high-tech factory in and around Syracuse and $250 million photonics consortium in Rochester have struggled to meet expectations. The film hub sits mostly empty; the factory, originally built for a tenant that walked away from the deal, required an additional subsidy to attract another tenant; and the photonics consortium has faced repeated delays. The Film Tax Credit remains the largest economic development tax expenditure, despite growing evidence that such tax credits are not effective. The regional economic development councils continue to award funding to each region to much fanfare each year, but in several regions, investments in the councils’ prioritized industries have failed to translate into significant employment gains.

The status quo should not continue. New York state’s current economic development efforts are a wasteful and ineffective use of public resources. There should be a moratorium on new economic development spending until the following reforms are made:

• Publish a “database of deals” that includes funds committed and disbursed to each recipient across all programs, as well as project progress and results.
• Use a unified economic development budget, reflecting the full scope of costs including tax expenditures, agency and authority spending, and the value of discounted power, to plan for future years.
• Standardize metrics across economic development programs, so that results can be compared.
• Improve program design so that benefits are provided retroactively based on performance, not up front; eligibility is standardized rather than discretionary; and results are regularly evaluated.
• Make administrative reforms to ensure transparent, competitive procurement and stronger oversight.

Rather than pursuing headline-grabbing projects in which taxpayers are the ones on the hook when a deal falls through, or providing excessive, narrowly targeted tax breaks, the state should consider approaches that provide more widespread benefit. Investments in infrastructure, workforce development, and higher education, as well as a more competitive tax system, can improve New York’s ability to attract and retain employers.