Gov. Andrew M. Cuomo is thinking big – by thinking small.
By proposing to set up tax-free zones in and around State University of New York campuses, the governor is making a valiant stab at making New York the kind of place were savvy entrepreneurs with bright ideas will want to try to build their businesses.
Ten years with no taxes is a good place to start.
Like his Buffalo Billion pledge more than a year ago, the tax-free zones are an eye-catching idea that, if the state Legislature goes along in approving the plan, could help put New York back on the map for business start-ups.
“It could have a real ‘Wow!’ effect,” said Colleen DiPirro, the president of the Amherst Chamber of Commerce.
And that’s exactly what Cuomo has in mind.
The governor knows full well that New York has a lousy reputation as a place for doing business. Chief Executive magazine, in its latest issue, ranked New York 49th among all the states as a place for doing business. Our taxes are high. Our regulatory burdens are heavy. The overall cost of living isn’t cheap. And the state is viewed as a place where getting things done is rarely easy.
The tax-free zones could, at least, take the tax disadvantage off the table. You can’t get much cheaper than no taxes, especially when the pledge also wipes out the income taxes that company owners and their workers would pay in their entirety for five years and on earnings up to $200,000 during years six through 10.
“It’s a game-changer,” Cuomo said. “It’s big. It’s simple. People get it. It takes our greatest liability and flips it.”
The Cuomo plan also acknowledges that the state’s colleges and universities – and the graduates and ideas they produce – can be a powerful force in a local economy. The proposal also lets private colleges and universities compete for a tax-free zone of their own, setting aside as much as 3 million square feet of space for those institutions.
“The SUNY campuses and the whole education infrastructure has to be seen as an engine that drives economic growth,” said Paul Ciminelli, the president and chief executive officer of Ciminelli Real Estate Corp., an Amherst developer.
Indeed, college graduates tend to be more productive, and the more of them you have, the better the chances that some will come up with ideas or products that turn into businesses that start off small and grow into something big.
And the Buffalo Niagara region has plenty of college students. Our 21 colleges and universities churn out almost 14,000 graduates each year – more than double the national average – but too few of those graduates stay here. The Buffalo Niagara region produces roughly four college graduates for every one who stays in Buffalo or moves here, according to a 2011 study by economists at the Federal Reserve Bank of New York in Buffalo.
The Buffalo Niagara region’s colleges and universities do OK on the research side of the equation, too. Buffalo ranks 47th among metro areas nationally for total research funding, and funding levels here are almost double the national average, the Fed study found.
Yet the region ranks 97th in new business formation – glaring proof that the region does a lousy job turning that research and discoveries made here into new businesses. Far too often, those innovations end up being developed at businesses located someplace else, and that’s a big reason why we keep losing our young people.
Over the last 20 years, we’ve lost a quarter of our population between the ages of 20 and 39, a loss of nearly 117,000 people. We’re losing people in that key age group six times faster than the decline in the overall population during that same time frame, the Fed study found.
“I love the concept of using universities as economic development centers and using them to grow cutting-edge technology companies,” DiPirro said.
But doing that takes more than tax breaks. For starters, it can take years before fledgling companies are making a profit, which diminishes the real value of the tax incentives. Sometimes, the founder doesn’t even take a salary from their start-up, which would take some of the shine off the income tax break.
“For start-ups, it’s not about taxes because a lot of these companies don’t make money,” said Jordan Levy, the Buffalo venture capitalist who last year co-founded the Z80 Labs incubator for budding technology companies. “Once you’re successful, then you’re worried about taxes.”
More important, Levy said, is developing a true culture of entrepreneurship within a region: a place where there are strong support systems and good mentors to help entrepreneurs get going, a place where there is a big enough core of start-ups that venture capital and other financing is readily available. In other words, becoming a place where entrepreneurs want to be.
And the scope of the tax-free zones are fairly limited, restricted to the SUNY campuses outside New York City and a little less than five acres of designated space surrounding each campus. Upstate private colleges could create tax-free zones on another 69 acres, and the plan would designate 20 other state-owned sites away from SUNY campuses. Put all of the off-campus land together, and you’ve got a site that’s a little less than twice the size of Ralph Wilson Stadium and its surrounding parking lots.
“We’re still talking about relatively small areas,” said E.J. McMahon, the executive director of the Empire Center for New York State Policy in Albany.
But the tax-free zones are an eye-catching start. The tax-free zones just might be the carrot that lures the smattering of key startups or out-of-state companies that become the catalyst for others to follow, creating the critical mass and the vibe that’s so important to attract the financing and develop the entrepreneurial environment that’s so essential in the big picture.
“If it’s a way to stimulate more innovation and technology transfer between SUNY institutions and the people who create jobs, that’s a good thing,” said Andrew Rudnick, the president of the Buffalo Niagara Partnership.
Rudnick also noted, however, that the state still needs to do more to improve the state’s overall business climate. Otherwise, those startups could end up leaving – not right away or after a year, as they often do now – but once the benefits of the tax-free zone run out in 10 years.
By then, Cuomo is betting that those startups that survive that long – slightly more than half of all new businesses fail within five years – will have settled in.
“It’s not easy to move after 10 years,” he said. “You have a house. You have kids. You have roots. You have clients.”
And if they still are looking to move, those now-mature businesses would be in a position to take advantage of the traditional tax breaks and incentives available through state and local agencies, he said.
“When you have big problems, you need a big solution,” Cuomo said. “This will capture people’s attention. It’s new. It’s novel. It’s the two best things in the world: New York and no taxes.”