How A Useless $400 Million Tax Break For NYC Developers Chugged Along For 20 Years

Lower Manhattan in 2011

In all the uproar over the $3 billion that New York city and state plan to give away to win Amazon's new Queens corporate center, one of the defenses put forward by Governor Andrew Cuomo and Mayor Bill de Blasio has been: Everybody does it. Each year, the city and state combine to issue more than $5 billion in "tax expenditures" for economic development projects, and much of what's being granted to Jeff Bezos is routinely handed out to other companies as well: “Nothing in the Amazon transaction is new," Cuomo insisted in November. "The tax incentives we provide for single business transactions are usual and typical and have been operational for decades.”

With billions of dollars at stake every year, you might expect that someone has been checking to see whether the public actually benefits from all these corporate tax breaks. If so, you would be wrong. While both the city and state finance departments are required to tabulate all the tax money that the government has forgone each year, neither has attempted to evaluate what kind of bang—in job creation, new tax revenues, or new development—the public is getting for all its bucks.

Last November, the city took its first tentative steps to remedy this gap in oversight. The city Independent Budget Office, at the behest of a city council law passed the previous year, evaluated the effectiveness of two longstanding economic development tax expenditure programs to see if they were meeting their goals.

The findings were not good. As the IBO wrote in its final report last November: "IBO and the City Council determined that the goals were to increase employment and reduce office vacancy rates in Lower Manhattan. This evaluation did not show CRP or CEP to be effective in these regards."

Council Speaker Corey Johnson promptly called for phasing out the two programs, and all signs are that they will soon be gone. (Though their costs may live on — more on that later.) But it still leaves the question: How did two tax breaks rumble on for decades, costing the city a total of $400 million and counting, without anyone asking if they were worth the expense? And will other, more lucrative tax breaks — like the ones that are fueling the Amazon deal — be subjected to the same scrutiny?

Mayor-elect Rudolph Giuliani announced the appointment of Liberal Party Chair Fran Reiter, left, as Deputy Mayor for Planning and Community Relations at a news conference in New York, December 16, 1993 (Marty Lederhandler/AP/Shutterstock )

In 1995, New York was a very different place from the hyperdeveloping forest of construction cranes we see today. The city had been hit hard by the Bush-era recession, and companies were starting to demand wired buildings to be ready for some newfangled thing called the internet.

Downtown Manhattan appeared to be in especially dire straits: Vacancy rates had more than doubled from 11 percent in 1984 to nearly 23 percent in 1993. The city's deputy mayor for economic development, Fran Reiter—who currently runs her own lobbying shop with Rudy Giuliani's cousin—insisted that the best way to address the problem was to offer breaks on property taxes and commercial rent taxes for any rehabbed buildings located below Murray and Frankfort Streets and built before 1975.

Mayor Giuliani, though a critic of "corporate retention" deals on the campaign trail, had already begun to warm to them: He would go on to approve more than $1 billion worth of special tax breaks during his two terms in office. The mayor quickly had a bill submitted to the state legislature — which, as in so many other areas, has ultimate control over city taxes — to establish the Commercial Revitalization Program to provide Reiter's requested tax breaks. The legislation passed the state assembly 145-4 and the state senate 53-1, and was soon signed into New York state law by Governor George Pataki.

The new program was initially set to expire in 2000. Yet five years later, with downtown vacancies having fallen to historic lows, not only was the CRP renewed, it got a little brother: the Commercial Expansion Program, which provided similar tax breaks for commercial renovations above 96th Street and in the outer boroughs. Initially intended to last only three years, the CEP was instead extended multiple times, as was its older sibling.

The pro-subsidy arguments at the time were much the same as those made for the Amazon deal today: Sure, it would cost tax money, but the companies involved would be paying even more in taxes, so why not kick some back to induce them to stick around? "This is a major, major business center," said Giuliani at the bill signing. "And we were losing it, frankly." The mayor wrote to Pataki in urging him to sign the bill, "It is an aggressive program that the City believes will pay far itself over the term of the tax benefits."

"We know that there are literally businesses lined up to sign leases down here" because of the new law, Reiter told the Times. And indeed, following the law's passage, downtown vacancy rates plummeted, from 20.2 percent in 1995 to just 3.6 percent in 2000.

Yet the effectiveness of these tax breaks, according to the IBO study, was a mirage.

"The downtown office vacancy rate was high in the early 1990s, but so was the one in Midtown, the one on the Hudson waterfront in New Jersey, and the one in Midtown South," explains Arash Farahani, the IBO economist who authored the recent study. Likewise, the study found, commercial vacancy rates across the region dropped in lockstep in the latter years of the decade — "so we cannot attribute lower vacancy rates to the [CRP] program."

Worse yet, many landlords appeared to be double dipping by applying for multiple tax breaks for the same renovation work, according to the report: "Since there is no law to prohibit using the same physical improvements to participate in multiple programs, some of the CRP and CEP participants may be doing so."

Way back during the 1995 state senate debate over the downtown tax break, state senator Franz Leichter — a devout foe of corporate subsidy programs who would end up being the only "no" vote in the senate on the legislation — had raised concerns about its efficacy. Citing a projected total cost to the city of $354.1 million over the CRP's first seven years, Leichter noted, "That's a lot of money for the City of New York, and I think the question is, is this money being well spent?"

There were other explanations for the high vacancy rate in downtown, said Leichter — namely, the opening of the World Trade Center in the 1970s and Battery Park City in the 1980s, which had served to glut the downtown commercial rental market. And yet no one had tried to determine whether the tax break was either sufficient or necessary to turn things around.

"I have asked, 'Show me one study, one survey that will prove or at least indicate that if we put this amount of money into commercial modernization and residential conversion that we're actually going to create the jobs that are being claimed, that we're going to get a good return for the public investment,'" Leichter said during the brief senate debate over the bill. "You know what? There isn't one survey. They haven't made one market study."

True, no studies had been done, admitted bill sponsor Martin Connor. But, he asserted, none were needed.

"Senator Leichter says, 'Where is the study?' Well, we've all seen studies and reports and false promises in paper. The people in this business, in this real estate market, got together with their consultants and devised this because they believe it works, and they are the people that have to go out and sell. They're the people who have to go out and sign those leases, sign up those tenants with these employees, and they believe it will work, and I say give them a chance."

Governor Hugh Carey points to an artists' conception of the new New York Hyatt Hotel/Convention facility that will be build on the site of the former Commordore Hotel. At the launching ceremony are, from left: Donald Trump, son of the city developer Fred C. Trump; Mayor Ed Koch of New York; Carey; and Robert T. Dormer, executive vice president of the Urban Development Corp (AP/Shutterstock)

New York's tax breaks first took off in the wake of the 1970s fiscal crisis, when business leaders and developers—Trump among them—convinced the architects of the city's recovery that the best way to encourage private investment was with public subsidies. As more and more incentive programs were added over the years, criticism grew that the subsidies failed what was called the "but-for" test: Would much of the same development have taken place anyway but for the public cash?

In 2014, newly appointed city council finance chair Julissa Ferreras-Copeland set out to answer that question. "I was briefed on these tax expenditures," Ferreras-Copeland tells Gothamist from Australia, where she relocated with her family last year, "and I'm like, 'How do we know they're working or not?' They attempted to give me an answer, but then I realized, wow, there's really no evaluating of this."

To accomplish this, says Ferraras-Copeland, she and then-Council Speaker Melissa Mark-Viverito set up a task force on economic development tax expenditures to provide a variety of perspectives on city tax breaks, including representatives of labor unions, current and former agency staffers, and other experts. "We were trying to have a breadth of opinions," Ferraras-Copeland explained.

One of those task force members, James Parrott — then deputy director at the Fiscal Policy Institute, now economic and fiscal policy director at the New School's Center for New York City Affairs — pointed out a potential model for the city to keep tabs on tax expenditures. A decade earlier, the city Economic Development Corporation had conducted an internal study into whether the city's $500-million-a-year Industrial and Commercial Incentive Program had been as successful at spurring new development. The study found that more than three-quarters of the tax breaks were not needed, because the buildings they incentivized would have been profitable regardless.

"I kept pointing out to people, we're losing a lot of money on the Hudson Yards tax breaks, and we should learn from our stupid mistakes of the past," recalls Parrott.

Ultimately, the council settled on Local Law 18, which directed the IBO to start evaluating programs one at a time. Not wanting to bite off more than it could chew, the agency started with two smaller tax breaks, the CRP and CEP, that had nonetheless been a significant boon to the commercial developers and renters who received them. A City Hall official testified in 1995 that the CRP tax breaks—a 50 percent cut in property taxes, plus a 100 percent rebate on commercial rent taxes—would reduce commercial rents downtown by about $5 per square foot a year, roughly a 17 percent decrease.

The total cost to the city budget over the last 24 years is slightly harder to calculate, as the city's annual tax expenditure statements are inconsistently issued, and the bookkeeping over the years has changed. Still, the available reports list a total of $358 million in tax breaks via CEP and CRP since 1998 — and if the missing years are in line with those before and after them, the total has almost certainly cost the city $400 million or more.

The good news is that both CRP and CEP expire on their own in 2021, meaning no action needs to be taken by the state legislature for them to disappear. (Of course, at current rates the city will have forgone another $50 million in tax revenue by then.) A staffer for state senator Liz Krueger, who as chair of the senate finance committee would oversee any renewal of the programs or lack thereof, confirms that she "would not be interested in extending these unless the City Council and Mayor asked for it. So if the city wants them to sunset, she's happy to let that happen."

The less-good news is that even expired tax breaks can cost taxpayers millions. Since CRP and CEP tax exemptions can last up to five years, New York City will still be paying out these tax breaks, at minimum, though 2026.

It is, in fact, very common for city and state tax incentives to outlive their authorizing legislation. The Industrial and Commercial Incentive Program, which provided 25-year property-tax breaks for new or remodeled commercial and industrial buildings, was eliminated in 2008 and replaced with the scaled-back Industrial and Commercial Abatement Program. In 2017, ICAP cost the city $121.9 million in lost taxes, according to the city's annual tax expenditure report. (It's also slated to provide $386 million of the $1.3 billion the city is offering Amazon in tax breaks.) Thanks to past tax breaks that had yet to expire, though, the ten-years-dead ICIP cost a whopping $616.8 million — and will go on costing hundreds of millions more into the foreseeable future.

Mayor Bloomberg and City Council Speaker Christine Quinn join Related Companies, Oxford Properties Group to break ground on 26-acre development at Hudson Yards on December 4, 2012. The development is getting more than $5 billion in tax subsidies. (Spencer T. Tucker / Mayor's Office)

The next item up for scrutiny by the Independent Budget Office is still being determined, according to Johnson's office. Big-ticket items still to be investigated include not just ICAP, but also the Relocation and Employment Assistance Program, which provides tax credits to any company that moves at least one job to New York City (including Amazon, which will collect $900 million from REAP). On the state level, the Empire State Film Production Credit delivers $382.7 million a year to film productions in New York with similarly scant evidence for encouraging job growth, while the state Excelsior job credits, which will provide $1.2 billion to Amazon (and hundreds of millions of dollars more to other companies), is set through 2026—though the state legislature will have to approve lifting the existing cap on the program before Amazon can get its payday.

Johnson's office, though, indicates that the next inquiry may be into company-specific subsidies, not these broad tax breaks. One holdup is that programs like REAP aren't currently eligible for a Local Law 18 review, since the city finance department is prohibited from releasing companies' tax records by state privacy laws; the speaker's office says it's currently looking into possible remedies.

Ferreras, for her part, declares herself "very proud" to see Local Law 18 bear its first fruit, and is looking forward to further investigations. "There's a lot of work to be done with tax breaks that are existent, where we're talking about billions and billions of dollars that can be reinvested into our community that we're currently not collecting," she says. She also hopes the findings will help inform future legislation to spell out concrete goals for tax expenditures: "If it's meant to create jobs, then how many? When you create these breaks, you need to state clearly what is the intention, so it can be measurable."

Parrott, meanwhile, says he's hopeful that the public-opinion tide may be starting to turn against tax breaks that can't prove their worth, with city comptroller Scott Stringer having already called for scaling back REAP and ICAP.

"I think the environment in Albany is different enough that the programs will get trimmed," says Parrott, "I can't imagine them eliminating the programs entirely, but at a minimum they should say that any company that has a book value of more than $100 million doesn't need this." He pauses. "At a minimum, they should do that."

Correction: Reiter points out that her current partnership is with Rudy’s cousin by marriage Catherine Giuliani, not the former mayor. Gothamist regrets the error.