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It's getting a lot tougher for development officials to dole out tax breaks for doughnut shops, wine stores and restaurants.

New rules included in the state budget drastically reduce the ability of industrial development agencies to hand out tax incentives to retail projects, vastly curtailing a controversial practice that critics say squanders tax revenue without doing anything to create meaningful economic growth.

The new rules don't ban tax breaks for retail projects outright: They still will be allowed in certain circumstances where they are part of a broader tourism destination project, are within an economically distressed area, such as most of the City of Buffalo, or will provide goods or services that aren't currently available.

“This will definitely cut down on the tax breaks to doughnut shops, car dealers and liquor stores,” said Assemblyman Sean Ryan, D-Buffalo, an IDA critic.

The new rules, included in the state budget, would revive a ban on IDAs offering tax breaks to retailers that had existed from 1993 to 2008. When those restrictions expired, it opened the door to IDAs providing incentives to a host of projects that hadn't been eligible for assistance before.

Those retail projects were magnets for controversy because critics said they did not generate new wealth within the region, served a strictly local clientele and favored one business over others that were fighting for a piece of a shrinking local retail market.

“I think it's pretty clear that a Prime Wines or a Paula's Doughnuts would not have been eligible for incentives had this been in place,” said Erie County Executive Mark Poloncarz.

The new rules are the result of a compromise that scaled back more rigorous restrictions on IDA tax breaks that Gov. Andrew M. Cuomo originally included in his budget proposal.

Under the new rules, there are only three instances where retailers can qualify for tax breaks: They must be part of a “tourism destination” project; be located in a highly distressed area, which would include most of the City of Buffalo but exclude the majority of the region's suburbs; or provide a good or service that is not readily available locally.

And when an IDA determines that a retail project does meet one of those three criteria that would exempt it from the ban, the incentives then must be approved by the top elected official overseeing the agency, such as the town supervisor in the case of a suburban IDA or the county executive in the case of a county IDA.

“It will require IDAs and their boards to make findings that retail projects meet one of these criteria,” said Brian McMahon, the executive director of the New York State Economic Development Council, a group that represents IDAs. “I think it will solve some of the problems.”

Because retail projects typically do not qualify for property tax breaks, sales tax breaks often were the most lucrative portion of the incentive package available to those often-controversial projects. But the new rules will block sales and mortgage tax breaks for retail projects going forward.

“No tax abatements of any kind are authorized for any retail project that does not qualify under one of the exemptions,” McMahon said.

The compromise also drops more severe restrictions Cuomo had sought to place on IDAs that would have required the local regional economic development councils to sign off on any project receiving state sales tax breaks. IDA officials had worried that those provisions would have added months to the process companies must go through to obtain incentives.

“Nobody's better able to judge what you should do and what you shouldn't do than the people who live in your town and know the local businesses,” said Clarence Supervisor David C. Hartzell, who also is chairman of the town's IDA.

It also eliminates provisions Cuomo had sought to restrict sales tax incentives for any project that falls outside seven key business categories and force those projects to also meet the tougher eligibility guidelines used for the state's Excelsior tax credit program.

IDA officials said the agreement is a vast improvement on the original Cuomo proposal, which would have made it difficult for the agencies to provide incentives for adaptive reuse projects aimed at encouraging new uses for long-vacant or dilapidated buildings – a key aim of many projects in the City of Buffalo and an increasing focus in many of the suburbs.

Critics of the Cuomo proposal noted that sales tax breaks have been part of incentive packages that have led to the renovation of several prominent downtown buildings, including the Hotel @ the Lafayette, which received $2 million in sales tax subsidies. Had the Cuomo plan been in place at the time, the value of those subsidies would have been reduced by nearly $1 million.

“I don't think this affects the urban core at all,” said Andrew J. Rudnick, president of the Buffalo Niagara Partnership and an Erie County IDA board member.

“We're still able to do redevelopment,” said James J. Allen, executive director of the Amherst Industrial Development Agency. “The question we're asking is, if we're not assisting the tenant, can we provide incentives in a redevelopment zone not knowing if the tenant is going to be retail?”

The compromise also includes provisions requiring IDAs to return to the state any sales taxes they recover from businesses that don't keep their promises about job creation and investment.

email: drobinson@buffnews.com