In order for Western New York’s economy to remain stable, economic development officials argue that industrial development agencies need to grant tax breaks and other incentives.
“People just aren’t going to build here unless they have incentives to help them to do that,” Mark Onesi, chair of the Niagara County Industrial Development Agency, told Investigative Post last year. “It’s expensive to do business here so we help as many people as we can.”
“The system as it has evolved allows companies to get paid to do what they would have done anyway,” said Greg LeRoy, executive director of Good Jobs First, a national subsidy watchdog organization.
“And that’s terrible, because it means that money got taken out of schools and other public services that would benefit everybody else.”
Indeed, some Western New York school districts forgo millions in revenue every year due to IDA tax breaks.
IDA tax breaks — which include forgiving part or all of a company’s sales, mortgage or property taxes — are not granted based on need. They don’t have to be under state law.
The Elma-based defense contractor Moog, for example, recently won $2.9 million in tax breaks from the Erie County IDA not because it needed the money, but a threat by company to take part of its business to Utah.
“It’s not that they can’t afford it, it’s not always a question of affordability,” said Brenda McDuffie, chair of the IDA’s board.
All the while, IDAs earn fees from every subsidy package they approve, incentivizing them to approve as many deals as possible. Those fees can be lucrative and make up a significant portion of an IDA’s annual budget. For example, the Erie County IDA stands to earn up to $500,000 from the Moog deal.
Read the first part of our series: Tax breaks cost schools money.
IDAs also face precious little oversight.
While their boards are appointed by local elected officials, they have no oversight authority over their IDA. The state comptroller has the authority to audit New York’s 107 IDAs, but only completed six audits last year. In his annual IDA report, Comptroller Thomas DiNapoli reported that IDA incentives were up 9 percent while the number of jobs created were down nearly 2 percent in 2021.
The Authorities Budget Office also has authority to review IDA operations, but scathing critiques — like a recent draft report about the Chautauqua County IDA — are rare. The ABO and comptroller rarely, if ever, weigh in on individual subsidy deals IDAs approve.
State lawmakers have introduced legislation this session that would drastically reform the tax subsidy system.
“We desperately need a paradigm shift and desperately need to start rethinking economic development,” said Ron Deutsch, head of New Yorkers for Fiscal Fairness, a nonprofit that advocates for economic development reforms.
“If we’re going to use our limited resources, in particular school revenues and/or county tax revenues, we should make sure that the community is getting a huge return on investment for us to make that worthwhile,” he added.
Genesis of IDAs
Industrial development agencies were created in New York in 1969 amid the demise of the state’s industrial base and growing unemployment. The idea was to offer tax breaks to lower the cost of doing business in New York, considered a high-tax state.
New York has not been alone in creating IDAs and other economic development programs. The result: States and localities compete for projects.
“There are often situations where firms can come in and almost hold communities and spaces hostage asking for handouts,” said Russell Weaver, director of research for Cornell University’s Industrial Labor Relations Buffalo Co-Lab.
A case in point: Amazon solicited proposals from 238 cities in 2018 for its second headquarters. States and cities around the country offered grants and subsidies worth billions. A Washington, D.C., suburb won, offering just $23 million in grants.
“It becomes this competition over who can give the most resources away,” Weaver said. “It’s that classic race to the bottom.”
Unpacking ‘but for’
By law, every IDA application must ask a version of the question: Would the project go forward without IDA assistance? Companies are asked to check “yes” or “no.”
That’s where the “but for” test ends. IDAs do not, and are not required to, conduct further investigations into whether or not a company actually needs the assistance. Neither do oversight agencies.
The “but for” test has no legal bearing, experts and officials told Investigative Post. It’s just a question on an application.
“It incentivizes [companies] to be dishonest to a degree to seek those subsidies,” said Deutsch of New Yorkers for Fiscal Fairness.
“I mean, who doesn’t want free money? If you were running a business and [an IDA] said, ‘I’m going to give you this bucket of cash, just check this box that says you wouldn’t build without subsidies.’ You know, why wouldn’t you?”
Only retail projects — such as stores, restaurants, doctor’s offices — are explicitly banned from receiving subsidies. But even that restriction has exceptions: Subsidies for retail projects in tourist and “economically disadvantaged” areas are still allowed.
That was the case earlier this year when the developer of two fast-food restaurants told Investigative Post he didn’t need tax incentives to proceed with his projects in Niagara Falls. The Niagara County IDA nevertheless approved $172,000 in tax breaks and grants worth $261,750.
“[Businesses] are not coming here. It is a depressed area. We need jobs. I don’t think you understand that concept, that you give a little to get a little,” Onesi, the Niagara County IDA chair, told Investigative Post when questioned on the incentives.
In Orange County, northeast of New York City, state Sen. James Skoufis, chairman of the Investigations and Government Operations Committee, got an independent monitor installed over the local IDA after a developer admitted on its application for subsidies that it didn’t need the assistance. That monitor will have the power to veto subsidy deals the IDA approves.
“I would say the large majority of IDAs do not contemplate in any real manner the ‘but for’ clause of economic development,” Skoufis said. “And they instead engage in what I characterize as blank check economic development: The business walks into the IDA office, tells them to jump and the response is ‘How high?’ as opposed to ‘Do you really need what you’re asking for?’ ”
The “but for” issue is compounded by research that’s found tax breaks, in reality, create few jobs.
In his 2019 book, the economist Tim Bartik found some 75 percent of jobs created with the assistance of tax incentives would have been created without those subsidies.
Similarly, research by University of Iowa professors Alan Peters and Peter Fisher in 2009 found “incentives work about 10 percent of the time, and are simply a waste of money the other 90 percent.”
“There are very good reasons — theoretical, empirical, and practical — to believe that economic development incentives have little or no impact on firm location and investment decisions,” the pair concluded.
Tax breaks help fund IDAs
IDAs collect a fee for every subsidy package they approve.
“We need to somehow unwind this perverse incentive and we need to either allow, if not require, IDAs to spend down their slush funds,” said Skoufis, the state senator. “The whole system is crazy.”
Fees vary, depending on the IDA, but are typically around 1 percent of a project’s total cost. IDAs also charge application and sometimes other fees.
With Moog, for example, its $77 million project is projected to net the Erie County IDA between $450,000 and $500,000.
For the Niagara County IDA, the fees account for one-third of its annual revenue on average, though sometimes more. In 2018, for example, the agency earned $1 million in fees, covering 60 percent of its budget. Meanwhile, the IDA abates $3.2 million, on average, from the Niagara-Wheatfield Central School District each year.
Fees collected by the Wyoming County IDA make up 37 percent of its agency’s budget, on average. In 2021, though, the IDA collected $452,000 in fees, accounting for nearly 75 percent of its budget. Meanwhile, Letchworth and Warsaw schools forgo $2.8 million and $2.6 million, respectively, each year due to the IDA’s tax breaks.
The Chautauqua County IDA, meanwhile, collects nearly half of its budget, on average, from fees. Some years, those fees total $1 million or more. For Dunkirk schools, the IDA’s abatements mean $5 million less to spend, on average, per year.
(A draft report from the Authorities Budget Office found the Chautauqua County IDA mismanages the money it collects, and criticized the agency for, among other expenses, reimbursing the chief financial officer’s membership at a golf club.)
Erie County Executive Mark Poloncarz knows IDAs can waste taxpayer dollars.
Poloncarz, who sits on the Erie County IDA board and controls several appointments, said he came into office wanting to reform the agency. For one, he said, the agency was routinely subsidizing retail projects, a type of subsidy considered so wasteful lawmakers largely banned the practice several years ago.
“When I first proposed this, there was a lot of pushback among the business community that, ‘Oh, you’re going to kill growth in our community,’ ” he said. “The exact opposite happened. We had some of the best years ever.”
But Poloncarz said he believes some tax breaks are still necessary. Erie County must contend with the force of global capital, after all, something that’s difficult to do without subsidies.
“There are times in which, yes, you have to do tax breaks,” Poloncarz argued.
While some advocates have called for IDAs to be abolished, reformers have focused on limiting the size of subsides. Sen. Sean Ryan’s Senate Bill 89 would bar IDAs from abating property taxes that would otherwise flow to school districts.
“I happen to think that the large majority of projects would still move forward if they were not offered or able to be offered school property tax breaks,” Skoufis said. “And so let’s take that off the table.”
Related legislation, sponsored by Skoufis, would regionalize IDAs. The state’s 107 IDAs would be consolidated into 10, including one for Erie, Niagara, Chautauqua, Cattaraugus and Allegany counties. Skoufis described both bills as “transformational” and legislation “that would really flip over the tables and get us on a real meaningfully correct track.”