FOR RELEASE:

Audit Finds Poor Oversight of Empire Zone Tax Credits

While Many Firms Create Jobs, Most Don't Meet Goals But Still Receive Tax Breaks
Poor Records Means Total Costs and Benefits Are Unknown

An audit of eight Empire Zones located around the State found that the Zones are poorly administered, keep inadequate records, and do not hold firms that receive tax breaks accountable for actually producing jobs, New York State Comptroller Alan G. Hevesi announced today. Auditors determined that individual Empire Zones have routinely failed to do the basic analysis needed to determine whether the tax breaks given to businesses are cost-effective or if businesses were reporting accurately about the number of jobs created.

The audit reviewed the operations of eight Empire Zones around the State, located in Binghamton, Buffalo, Friendship (Allegany County), Islip, Rochester, Syracuse, Tonawanda and Yonkers, and found that:

• While 30 percent of the businesses that received tax breaks met or exceeded their job creation targets, 47 percent created fewer jobs than they promised and 23 percent actually lost jobs.
• Local zones did not evaluate the performance of companies, so firms continue to receive tax breaks for years even if they are not creating jobs and despite the fact that job creation is a criteria for receiving tax breaks.
• There is poor accounting for the amount of tax breaks given out, so it is difficult to quantify how much the program costs, what taxpayers are getting for their investment and which Empire Zones are effective and which are not.

"Giving companies tax breaks is giving away real money. Empire Zone officials must ensure that the tax benefits actually create jobs and healthy companies," Hevesi said. "Some companies that receive tax breaks are creating jobs. That's important. But while the State Department of Economic Development (DED) maintains that much of the responsibility to manage the Zones lies with local officials, local officials told us that DED must improve its oversight of the program. The end result is that we have no way of knowing whether the hundreds of millions of dollars in tax breaks businesses receive each year are actually creating the desired economic benefits.

"Empire Zones are based on the concept that the best way to stimulate long-term economic growth in struggling communities around the State is to support business growth and job creation. While the program may be generating increased economic activity in some areas of the State, we should take a careful look at the ways that it is not succeeding so that we fix the Zones that are not working and create more jobs," Hevesi added. "This is essential information for the Assembly, Senate and Governor as they take up Empire Zone reauthorization legislation in the coming months."

The audit also found the following:

• Of 375 businesses tested by auditors, 113 businesses exceeded projections for job creation, 176 created fewer jobs than projected and 86 actually reduced employment. Overall for the eight zones studied, businesses created 2,380 fewer jobs than projected. Thirty-four of 86 businesses that reduced jobs nevertheless claimed real property tax credits, sales tax exemptions or wage tax credits tax benefits totaling nearly $2.4 million.
• According to the DED, which administers the Empire Zone program, the local Zone Administrative Boards are ultimately responsible for the administration of individual Empire Zones. Auditors determined that the Zone Boards do not see this as their role and are not effectively monitoring and evaluating Zone performance.
• Companies that receive tax breaks are required to file Business Annual Reports (BARs) detailing investments and the number of jobs created. Zone administrators did not compare BARs to initial certification applications to determine if businesses had met goals. Zone boards can work with DED to decertify businesses for performance shortfalls, but auditors did not find a single instance of such action.
• In some cases, it appeared that Zone officials had failed to enter data from all BARs they received or that some businesses had not submitted BARs. As a result, Zone Annual Reports submitted to DED included inaccurate or incomplete data.
• In seven of the eight Zones studied, the Zone Board had not taken steps to determine whether providing benefits to businesses in the Zone was an effective use of tax dollars. Auditors also noted that no cost benefit analysis is conducted during the application process prior to the certification of an Empire Zone business to determine if potential job creation and investment benefits will outweigh tax breaks.

In general, the local Zones do not collect the data necessary to conduct cost-benefit analyses for most tax breaks. Auditors were able to do a partial analysis for a small sample of companies for which some data was available. Auditors identified 32 companies in five zones where State and local tax breaks exceeded benefits provided to the community through payroll and investments, for a total of $3.6 million.

In Syracuse, for example, a real estate company created one job at an annual salary of approximately $26,000 but claimed a real property tax credit of $250,000 and a tax reduction credit of $13,700. A Rochester real estate holding company created one job at $10,000 annual salary and received a real property tax credit of $137,000.

These examples clearly show that the Legislature acted correctly in 2002 when it tightened provisions of the Empire Zone program regarding the way that real property tax credits and employment levels are calculated. However, Empire Zone businesses certified prior to July 31, 2002 are still eligible for benefits based on more permissive calculations.

There are 72 Empire Zones throughout New York State. To be eligible to become an Empire Zone, local areas must meet certain criteria including measures of poverty, unemployment and economic hardship. Initially, Empire Zones were required to include part of the neediest census tracts in a given locality. Auditors found that when DED loosened this rule, many Zone Boards chose to subdivide Zone lands in a way that may have reduced the Zones' effectiveness. Auditors noted, for example, that Buffalo divided its two Zones and four square miles into more than 130 separate areas.

Businesses in the Zones – and, in some cases, residential property owners – can be eligible for tax benefits that include sales tax refund on construction materials, real property tax abatement on property improvements, real property tax credits, wage tax credits, investment tax credits, sales tax exemptions and tax reduction credits.

The legislation that established Empire Zones is scheduled to expire later this year.

The audits released today are part of a comprehensive study of Empire Zones around the State. Additional audits will be released when they are completed.

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Click here for a copy of the Comptroller's Audit of Empire Zones.
Click here for local data on each individual Empire Zone included in the audit.

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