Apr 30
2024
IDAs have ‘perverse incentive’ to issue tax breaks
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The Erie County IDA earns a majority of its revenue from fees generated by approving subsidy deals. Photo by Garrett Looker.
No wonder industrial development agencies across New York State dole out so many tax breaks, watchdog groups say: The more IDAs issue, the more money they make for themselves.
That system creates a “perverse incentive,” the groups claim in a new report.
“It just creates this horrible incentive where the IDA isn’t working for the public anymore, it’s working for its own self interest,” said Anya Gizis, a researcher at Good Jobs First and one of the report’s authors.
The report, from Washington, D.C.-based Good Jobs First and New York City-based Reinvent Albany, argues that because IDAs collect fees from each tax abatement deal they approve, they have an interest in dishing out as many as possible to fund their organizations.
The new research, based on state data, found that the transaction fees IDAs earn are a major revenue generator. Across all IDAs in New York, fees account for 80 percent of their income. For a third of IDAs, the fees account for 100 percent of their annual revenue.
In Western New York, nine of the 15 IDAs get half of their annual budget — or more — from fees. Six get 99 to 100 percent of their annual revenue from fees, including the Hamburg, Lancaster and Amherst IDAs.
All 107 IDAs across New York have the power to cut a company’s property, sales and mortgage taxes.
The so-called “perverse incentive” works like this: A company fills out an application, and then pays the IDA a percentage of its project’s total cost — typically 1 or 2 percent, as set by the individual agencies. The $550 million Amazon warehouse in the Town of Niagara, for example, netted the Niagara County IDA a $5.5 million fee. That alone could keep the IDA open for three years.
In addition to fees, IDAs earn money through grants, charging rent on buildings or industrial parks they own, and land sales.
“It turns out we set up a system where IDAs get paid for good deals and they get paid for bad deals, but they have to do some deals in order to keep open,” said state Sen. Sean Ryan, a frequent IDA critic. “And that’s a real bad incentive system.”
IDA officials said they disagree with the report’s conclusions.
John Cappellino, president and CEO of the Erie County IDA, stressed that while agency staff are funded through deal fees, the unpaid board of directors makes decisions on which companies get tax breaks.
"Currently, the costs of administering economic growth tax incentives and other important ECIDA community initiatives are rightfully paid by the private businesses applying for and receiving benefits, and not a burden of local government and taxpayers," Cappellino said in a statement.
Tom Sy, executive director of the Lockport IDA, said his organization doesn’t grant tax breaks just to earn fees. His IDA last year generated $258,000 in revenue, 99.8 percent of that total coming from fees. One of those projects was a $2.3 million plastics factory that was beset by controversy after the developers circulated a fake, AI-generated study to the IDA board.
“While most years our funding does come from project fees, our resources are such that there isn’t any need or desire to do projects simply to sustain our budget,” Sy said.
The Lockport IDA receives additional revenue from state grants, he said.
Officials from the Niagara County and Amherst IDAs did not immediately respond to a request for comment.
The report drew its conclusions based on 2021 data IDAs reported to the state Authorities Budget Office. Investigative Post gathered additional data from the agency for 2022 and 2023 and found the report’s conclusions were consistent across the years.
In 2021, for example, 10 Western New York IDAs received half or more of their annual revenue from deal fees. That was the case for eight of the 15 IDAs in the region in 2022. Last year nine of the IDAs received most of their budgets from fees.
Consistently, the IDAs for Amherst, Clarence, Hamburg, Lancaster and Lockport as well as Cattaraugus County receive 99 to 100 percent of their annual revenue from fees, Investigative Post found.
The Erie County IDA receives between 60 and 70 percent of its annual revenue from fees, the review found. The Niagara County IDA has greater year-to-year fluctuations in revenue: Between 31 and 53 percent of annual income has come from fees. The Chautauqua IDA has experienced similar trends.
The report's authors argue New York lawmakers need to change the structure of IDAs to eliminate the “perverse incentive.” Rather than having IDAs exist as separate entities, the report suggests municipal governments be given the authority to grant tax breaks.
“The problem here is, if you're selling hammers, every problem looks like a nail,” said Greg LeRoy, executive director of Good Jobs First and co-author of the report. “And if you're an IDA, and the only thing you can do is tax breaks, every problem gets solved with a tax break, because that's what you're selling.”
LeRoy argued that if tax breaks could be granted by city or county governments, their economic development offices would then have “a full menu” to offer companies. For companies and developers that could mean a one-stop-shop for land and zoning assistance, accessing workforce development programs as well as tax breaks.
“If you think tax breaks are necessary, those can be done by local economic development agencies like they are done in many states by local governments,” LeRoy said.
Ryan said he agreed that LeRoy’s recommendation would make the tax-break process more answerable to the public.
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The report also recommended that state lawmakers remove IDAs’ ability to grant property tax breaks that affect school districts and bar them from subsidizing housing developers.
An investigation last year by Investigative Post found a handful of Western New York school districts, all in rural and low-income areas, that lose millions of dollars in revenue each year due to tax breaks from their local IDA. Those losses are due to property tax breaks IDAs grant to companies, including for warehouses, apartments and wind farms. In some districts, Investigative Post found, the tax breaks equate to thousands of dollars less per student for districts to spend. That means fewer after school programs and fewer teachers, superintendents said.
IDA officials contend that without the tax breaks they offer, companies wouldn’t locate or expand in their communities, costing jobs and revenue once tax incentives expire. Academic research refutes that assertion, finding that 75 to 90 percent of development would occur without tax breaks.
Ryan said he’s spending the rest of the year’s legislative session pushing a bill to strip IDAs of the power to grant property tax breaks where the money would otherwise flow to local schools. The New York State United Teachers, as well as other public employee unions, support the bill.
Teachers and municipal workers, Ryan said, “are now drawing the direct dots to 'I don't have enough . . . money to fund programs in my school district because the IDAs gave it away.'”
“The public is starting to look with more scrutiny at some of these IDA deals and I think it's about time,” he said.
Editor's note: This story was updated with a statement from John Cappellino.
