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Cuomo’s proposal for fewer tax sweeteners runs risk of hampering downtown renewal.

By David Robinson

News Business Reporter

A proposal tucked in Gov. Andrew M. Cuomo’s budget proposal would almost cut in half the value of sales tax incentives that industrial development agencies could dole out to often-controversial retail projects, from doughnut shops to car dealerships and restaurants.

But the change also could reduce the incentives available for other, less controversial projects to renovate vacant buildings, especially in struggling areas such as downtown Buffalo.

“For all of the talk about small-business development and downtown redevelopment and smart growth, this proposal flies in the face of that rhetoric,” said James J. Allen, executive director of the Amherst Industrial Development Agency, which has been one of the Buffalo Niagara region’s most aggressive supporters of tax incentives for retail and redevelopment projects. “Hopefully, we can get this removed from the budget.”

The governor’s budget proposal would significantly reduce the value of the incentives available to retail and redevelopment projects, along with a wide range of other developments, by limiting the ability of IDAs to provide tax incentives that include the state’s 4 percent share of the sales tax. IDAs still could grant incentives involving the local portion of the sales tax, which in Erie County is 4.75 percent.

The proposal also would limit the ability of IDAs across New York to provide exemptions from the state’s portion of the sales tax to projects in seven “key” business categories, and prevent the agencies from extending that incentive to retailers or “adaptive reuse” projects that would bring new uses to buildings that have been vacant for several years. Those tax breaks have been a source of controversy in Buffalo Niagara, as projects such as car dealerships, wine stores and doughnut shops have been granted tax incentives.

The financial impact of the change would vary widely, depending on the scope and nature of the project.

For instance, Paula’s Doughnuts’ controversial project to open a store in Clarence received $8,000 in sales tax breaks from the Clarence IDA. Had the Cuomo proposal been in effect, the value of those incentives would have reduced to about $4,350. Because it was a retail project, the Clarence IDA did not grant Paula’s Doughnuts any property tax breaks, which typically are much more lucrative than the sales and mortgage tax incentives that retail developments often receive.

At the same time, developer Rocco R. Termini’s $34 million renovation of the Hotel Lafayette that resulted in the Hotel @ the Lafayette received $2 million in sales tax incentives, playing a key role in shaping the project’s economic viability. “That can make or break a project,” Termini said.

Supporters said the proposal would greatly reduce the value of the incentives available to projects that often bring little new wealth to the region, while opponents said Cuomo’s plan would stifle economic-development efforts, especially in distressed or dilapidated areas.

“It’s a huge change,” said Assemblyman Sean M. Ryan, D-Buffalo, who has been unsuccessfully been pushing his own legislation in Albany that would allow suburban IDAs to grant tax breaks that involve only revenues from their own communities. “It certainly reduces the amount of money they can give away.”

Allen said the Cuomo proposal would gut an important economic-development mechanism that has helped towns such as Amherst support projects that have breathed new life into long-vacant buildings and spurred new development in targeted neighborhoods. By placing the proposal within the budget as a way to raise revenue – an estimated $7 million during the upcoming fiscal year and $13 million annually after that – Ryan and others said Cuomo is framing the debate as a money issue that is part of budget negotiations. They said that could increase the initiative’s chances of gaining approval.

“What troubles me is this is a backdoor way of getting at it, approaching it as a budgetary matter as opposed to a policy matter,” said Andrew J. Rudnick, president and CEO of the Buffalo Niagara Partnership and an Erie County IDA board member.

The proposal would still allow IDAs to provide exemptions for the local portion of the sales tax, which in Erie County is 4.75 percent.

But Cuomo’s proposal would impose several new restrictions on the types of projects that IDAs can provide with sales tax incentives, and change it from being a tax break that companies receive upfront to one that they would be refunded only after certifying that they met investment and job guidelines.

Rudnick said the proposal could make it harder for all projects to receive financing because the rebate provision would mean that a developer’s upfront costs would not be reduced. That could make tight cash-flow projections on borderline projects less viable in the eyes of bankers.

To be eligible for state sales tax incentives, a project must fall within one of seven “key sectors,” ranging from scientific research and development and software development to agriculture, back office operations and distribution centers. Projects involving financial services data centers and manufacturing also would be eligible, provided they also qualify for tax credits through the state’s Excelsior program. Those Excelsior guidelines impose job-creation standards that range from 10 new jobs for scientific research and software projects to 150 net new jobs for back office and distribution center projects.

The New York State Economic Development Council, which represents IDAs, said the Cuomo proposal would hit distressed areas such as Buffalo especially hard by limiting the incentives available for community redevelopment projects, which often are not economically feasible without a robust incentive package.

Brian T. McMahon, the council’s executive director, would not venture a guess as to whether the proposal would pass. “The fact that it is in budget is a concern to us,” he said.

McMahon said limitations on incentives for adaptive reuse would hurt cities such as Buffalo that have made concerted efforts to revitalize downtown properties. And the restrictions could hinder economic development overall, he said.

“As a result, some of the projects won’t get done,” McMahon said. “Some of the projects will be smaller than they would have been.”

The Cuomo administration, in its budget message, said IDAs need reform because they “are allowed to use state resources for economic development purposes without consulting the state.” The governor’s proposal would require IDA projects receiving state sales tax incentives be approved by the local Regional Economic Development Council such as Western New York’s.

That stipulation, Allen said, “adds a layer of bureaucracy and delay that could very negatively impact projects and cause them to look elsewhere for a site.”

News Business Reporter Matt Glynn contributed to this report. email: drobinson@buffnews.com