Is “START-UP NY” Starting Up NY?: A Post-Keynesian Case Study Analysis

Is “START-UP NY” Starting Up NY?: A Post-Keynesian Case Study Analysis

Lynn B. Jean-Snarr (Westminster College, Salt Lake City, USA), Hal Snarr (Westminster College, Salt Lake City, USA) and Daniel L. Friesner (North Dakota State University, Fargo, USA)
DOI: 10.4018/IJSECSR.2017010101

Abstract

This article describes how “START-UP NY” is a state-funded economic development program that encourages businesses to locate to several of its college campuses in exchange for a 0% tax rate for business and their employees. While the program has received much coverage in the popular press, it has not been thoroughly assessed in the academic literature. Using a simple post-Keynesian analysis, this article illustrates the fundamental flaws in the START-UP NY program. In doing so, this analysis demonstrates why the program was, and is, ineffective in generating job growth.
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Introduction

Compared to other U.S. states, the State of New York has many historical, geographic and institutional features (including access to world financial markets, international ports, the St. Lawrence and Hudson rivers, etc.) that promote a robust economy. Unfortunately, many of these features are offset by an onerous tax and regulatory environment. For example, in 2014, the state’s tax revenue as a percent of its Gross State Product (GSP) was 62.1% (Balotopedia, 2018). In 2016, the median New Yorker annually earned $60,088 (Statistica, 2018) and had an estimated tax burden of $18,871 (Smartasset, 2018). However, the salary of a person on the boundary of middle class and upper-middle class would have to be between $134,000 and $235,000 (O’Leary, 2013), which would put their estimated tax burden between $50,731 and $93,312 (Smartasset, 2018). The 2017 State Business Tax Climate Index (Walczak, Drenkard, & Bishop-Henchman, 2016) ranked New York State’s regulatory environment among the ten most onerous among the U.S. states.

Unlike New York State, Silicon Valley, and more recently Austin, Texas, have become havens for new entrepreneurs, especially technological startups. The business models for these firms are based on both technologic ingenuity and strategic financial practice. Simmons (2016), for example, writes:

For sheer ingenuity, you can’t beat Silicon Valley—especially at outsmarting the tax man. By selling intellectual property rights to sock-puppet subsidiaries, tech giants shift profits to low-tax nations like Ireland. But that’s just a start. Sublicense the IP to a second Irish unit that books global sales, has entity B pay onerous royalties back to A (wiping out its earnings), then show that A is headquartered in the Caribbean, making its royalty income untaxable in Ireland. Slick! Only problem: Until the IRS gets its cut, the companies can’t bring the cash back home to use it.

As more businesses flocked to Silicon Valley, the State of California increased its top income tax rate to 13.3 percent in an attempt to prevent such “income shifting” (Brajcich, Friesner, & Schibik, 2016; Ebeling, 2016). This, in turn, incentivized a movement of new business ventures to Austin, Texas. Montgomery (2015) attributes this trend to several factors, including the fact that Texas does not assess personal income taxes, real estate is relatively inexpensive (compared to Silicon Valley), the community boasts a strong technology-focused regional economy, and Austin’s city leaders have implemented initiatives to revitalize downtown Austin to make it more business friendly. As a result, Austin was recently ranked by Forbes as the top city in the country for technology job creation growth.

To compete with Austin and Silicon Valley, New York Governor Andrew Cuomo established a program entitled “START-UP NY” in 2014. The goal of the program was to create tax-free enterprise zones for new and growing firms on the State’s CUNY and SUNY campuses. More specifically, for firms who conduct 100 percent of their operations within these communities, the initiative provides tax credits which effectively exempt the firm from paying any state or local taxes for a period of ten years. Tax credits are prorated for firms with less than 100 percent of operations conducted within a tax-free community (York College, 2018). The program was heavily marketed, with more than $86 million spent promoting the program since its inception (Spector, 2015a). Despite empirical evidence suggesting that programs like START-UP NY often fall short of their lofty goals (Couch and Barrett, 2004; Wilson, 2009; Czarnitzki, Hanel, and Rosa, 2011; Rubin and Boyd, 2013), Governor Cuomo has stood by the program.

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