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NY Governor’s FY ‘09 Budget Proposes $100M in Tax Breaks for Life-Sci Shops

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New York state life-sciences companies could see up to $100 million in new tax breaks, to be generated through reforms to the lower-tax Empire Zones program, if Gov. David Paterson’s fiscal 2009 $121 billion proposed budget passes.
 
Paterson, facing a $1.7 billion shortfall for the the year beginning April 1, 2009, and a $13.7 billion deficit projected for fiscal 2010, would create as part of his incentive package a new $50 million loan and grant fund called the New York Growth, Achievement and Investment Strategy Fund.
 
The fund, dubbed “New York GAINS,” would be targeted to job creation in biotechnology and other life sciences, as well as in manufacturing, financial sectors, agri-business, and high-technology.
 
Paterson’s budget also seeks to spend $5 million to expand eligibility for the state’s existing Research and Development Tax Credit in 2010 to life-sci and tech businesses with fewer than 100 employees in New York state but more than 100 staffers worldwide. In addition, the state would eliminate its penalty for businesses creating more than 100 jobs.
 
In addition, the budget would create a new R&D “fixed-pool” tax credit allocated through the state’s main economic development agency, the Empire State Development Corp., to projects deemed to have the best potential for job growth.
 
The state would set aside no more than $20 million the first year, then increase that total over time to $45 million. In addition, under this program the state hopes to promote business-academic partnerships by reimbursing companies carrying out R&D at state-based colleges and universities a portion of the value of the grants they received toward research.
 
Paterson would also cut $9 billion in state spending. Among the cuts affecting the life sciences is elimination of the state’s $160,000 subsidy for the public-private life-sciences marketing effort, New York Loves Bio. That will force the program to skip next year’s Biotechnology Industry Organization 2009 International Convention, set for Atlanta in May [See related article, this issue].
 
The governor would also fold the New York State Foundation for Science, Technology, and Innovation, known as NYSTAR, and the state Department of Economic Development into a consolidated Empire State Development Corp., at a total projected cost savings of $11.1 million for fiscal 2009, which starts April 1, 2009, and $11.8 million for the following fiscal year.
 
Much of that savings, $10.4 million a year, would come from a combination of eliminating two NYSTAR programs and cutting funding for a third. Gone would be funding for Syracuse University's high-tech Sensing, Analyzing, Interpreting and Deciding Center, and the Centers for Applied Research and Technology, or CART — the latter at a savings previously announced at $900,000 — while the state would cut funding for its 15 Centers for Advanced Technology — which includes the Cornell (University) Center for Life Science Enterprise in Ithaca, NY.
 
That center’s mission is “to benefit the biotechnology and life sciences industries of New York State by focusing on technology transfer, economic development, workforce training, entrepreneurial support, and research and development.
 
“In support of this mission, the center funds research and development programs for Cornell faculty in partnership with New York companies representing many diverse disciplines in the biological and physical sciences. Of particular interest are research in biologically-targeted diagnostics, biologically-based products within the life sciences, enabling sciences, and agricultural sciences,” the mission statement said.
 
Another state-funded biotech center is the Center of Excellence in Bioinformatics and Life Sciences in Buffalo, part of the Centers of Excellence program. Paterson would continue CoE in 2009-10.
 
CART, designed to foster greater collaboration between industry and non-doctoral-level academia, was envisioned as a $5 million-a-year program when created by the state Assembly in 2002. Since then, the state only designated two such centers: the Center for Applied Research in Collaborative and On-Demand Computing at Marist College in Poughkeepsie, and the Center for Engineered Polymeric Materials at the College of Staten Island — but had plans to create a third center focused on life sciences.
 
A NYSTAR spokeswoman was unavailable last week to comment on Paterson’s proposed cuts, which came despite the agency’s submission last month of a “core mission” spending wish list. In that report, available here, NYSTAR proposed adding $200,000 next fiscal year to the $10.5 million CAT program, and maintain this year’s $1.85 million budget for the High Technology Matching grant program that includes SAID.
 
NYSTAR is operating this fiscal year on a budget of just under $29.5 million, which is about 31 percent lower than its $42.5 million budget of fiscal 2007.
 
Earlier this year, NYSTAR cut its maximum size of Faculty Development grants this fiscal year from $750,000 to $500,000, after Paterson ordered a 10-percent across-the-board cut in spending by all state agencies [BRN, July 7].
 

“We’re not the only state faced with this economic crisis, so I think that the competitive landscape has changed significantly from a recruiting perspective.”

Remarking on the plans to expand the Research and Development Tax Credit, Timothy Gilchrist, the governor’s deputy secretary for economic development and infrastructure, said: “We think that because of the emergence and increasing importance of the technology sector, that it would be advantageous to remove those caps, which serve as a disincentive to growth of over 100 jobs.”
 
On the fixed-pool tax credit, he said: “We’re matching the federal definition under this $20 million program so that there will be a wider range of expenses eligible for reimbursement,” including salaries of the research staff and other so-called “soft” costs, in addition to capital investment, machinery, and equipment previously covered by the state.
 
Gilchrist, who made his remarks during a conference call with media last week, told BRN the state hopes to ramp up the R&D tax credit to the full $45 million by 2010-11. Whether the state follows through with that increase will depend on how much bio and other tech businesses take advantage of the program, he said.
 
“It’s a relatively quick ramp-up,” Gilchrist said. “Also … as we’re dealing with [future] budgets, the numbers are not always as fixed. And we want to see what the response is, and the benefits we get from that program, and are certainly willing to make adjustments there.”
 
The tax incentives, like the rest of Paterson’s spending proposal, are subject to review and approval by state lawmakers. Legislative leaders had yet to weigh in on the programs last week, though in public statements they said they would not act on the proposed budget before learning how much aid the state would receive under President-elect Barack Obama’s stimulus plan. .
 
Two other factors complicating quick budget action: The unpopularity of some of Paterson’s proposed cuts and fee hikes, such as a 14-percent tuition increase for State University of New York undergraduate resident students, and a new “iPod tax” on music downloads; as well as uncertainty over who will lead the state Senate next year.
 
State Senate Republicans have vowed to prevent the seating of newly elected Democrat Hiram Monserrate (D-Queens) following his felony assault arrest last week in a domestic dispute with a companion. If the GOP prevails, it would deprive Democrats of the votes they need to replace current Majority Leader Dean Skelos (R-Rockville Centre) with Malcolm Smith (D-Queens).
 
Smith has said publicly that fellow Senators have concerns about approving the cuts, while Skelos recently denounced the governor’s budget in a radio interview as one that “really discriminates against suburban communities.”
 
The $100 million proposed for the new or expanded tax credits would come from savings the state expects to realize from reforms Paterson has proposed to the state’s Empire Zone program. The governor has proposed funding the program until 2010-11 as previously planned, but raising from $15 to $20 the value of economic benefit applicants must generate — in either jobs, or capital investment — for every dollar in subsidies they receive from the state. That would apply to all roughly 9,200 companies in the zones.
 
“The estimates have been in the range of 2,100 [current Empire Zone benefit recipients] that wouldn’t meet this test,” Gilchrist said. He and a second state official rejected the argument that the change from $15-t$1 to $20-to-$1 would sway businesses thinking of relocating to or expanding within New York state into creating jobs elsewhere.
 
“We’re not the only state faced with this economic crisis, so I think that the competitive landscape has changed significantly from a recruiting perspective,” said Dennis Mullen, ESD president for upstate New York. “I’m not overly concerned at this point that this would put us in a significant competitive disadvantage.”
 
Gilchrist said the deadline will give the state two years to study whether the reforms help the program achieve its goals: “It allows essentially for a pilot period where we would be able to make decisions about whether the program in its reformed state was worthy of continuing, or whether we should pursue different approaches.”
 
Gilchrist and Mullen said that during the next two years, Empire Zone benefits will be targeted to the life sciences and four other industries where the state hopes to boost the number of jobs — manufacturing, financial services, agribusiness, and high technology. That list of targeted industries may change over time, they added.
 
“As we move from a manufacturing economy to a knowledge-based economy, we really want to work with high-tech and biotech and emerging businesses,” Mullen said. “We think that those industries will give us the best return on our investment, and in addition to that, our investments will be well-invested for the long term.”
 
Retailers, real-estate firms, and electric power producers will not be eligible going forward, Gilchrist said, since these firms are deemed unlikely to move out of state if they don’t procure benefits.
 
“Especially in these economic times, we want to work with a much more targeted program to keep those important industries, rather than try to keep the important industries with a widespread approach,” Gilchrist added.
 
The change is intended to address years of criticism voiced by state officials that the program has failed to stimulate enough economic growth to justify its projected $610 million cost for 2009-10.
 
The Empire Zone program was intended to jumpstart economic development in New York’s poorest communities when it was launched in 1986 as “economic-development zones” by then-governor Mario Cuomo.
 
Cuomo’s successor, George Pataki, renamed the zones and more than doubled their number to 76; today there are 82 zones. Pataki also allowed manufacturers to claim Empire Zone benefits if they are deemed “regionally significant” by employing residents of a community where a zone is located. That allowed Bayer HealthCare in 2005 to win a promise of state aid for announcing plans to shift its Diabetes Care division and its 100 employees from Elkhart, Ind., to Tarrytown, NY — where Bayer then employed some 20 residents of Yonkers, NY, which has an Empire Zone.
 
A February report by Comptroller Thomas DiNapoli, and one released in 2004 by his predecessor, Alan Hevesi, have concluded that the effectiveness of Empire Zones could not be measured given the failure of many local zones to keep adequate records or hold accountable firms that did not deliver on their promised jobs or new investment.
 
“There’s been, I think, general consensus that the Empire Zone program as currently configured is not as strategic as some economic-development tools should be,” Gilchrist told reporters.
 
However, the state will not “claw back” or seek to recapture benefits from underperforming companies in Empire Zones, he added.

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