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Time to rethink local economic development

While the campaign was guilty of oversimplification and of pandering to voters, it is very difficult to disagree with the notion that New York’s business climate –both real and perceived–has severely hindered local economic development initiatives. As evidenced by Pataki’s State of the State address and his budget proposal, we will see a move by the new regime in Albany to address business-climate factors.
The much-hyped 25 percent across-the-board income-tax cut is the cornerstone of these efforts. To mitigate pressures that may be created on local taxes, the governor promises streamlined government and mandate relief. In addition, local government revenue sharing and school district support will be held at current fiscal-year levels–at least for one year.
The challenge, of course, is to make this work. Significant increases in property-tax burdens that may result from income-tax cuts can jeopardize local economic development initiatives–and in fact may drive business out of the state. There is a need to address property-tax reform–perhaps even a move away from our reliance on property taxes. Further cost-cutting and cost-sharing efforts in local government also are needed. State policies should encourage and reward these efforts.
In his State of the State message, Pataki stated that “we must free people from redundant, excessive and overbearing regulation.” The challenge will be to use the scalpel and not the meat ax as the promised regulatory relief unfolds. It is important to recognize, as President Bill Clinton reminded us in his State of the Union address, that most regulations serve noble and legitimate public interests. An appropriate target for change is onerous regulatory specification, as well as the arbitrary and often adversarial bureaucratic behavior of regulators.
Like tax relief and reform, regulatory relief–even if well-designed–will not necessarily provide New York with a competitive advantage over other states. While such efforts serve to level the playing field, they may not be enough.
Also in his address, Pataki voiced plans to “combine New York State’s array of economic development authorities into a single Empire State Economic Development Corp.” Rationalization of the state’s economic development programs is a critical need. The key question here is, what is the state’s vision when it comes to offering a coherent set of local and regional economic development policies and programs?
It seems clear that even dramatic cuts in the state’s income-tax rates will not adequately address the state’s negative business climate. For one thing, personal income-tax rates are not typically among the most important factors considered by business executives as they think about the location, relocation or expansion decision. Such executives tend to focus on a tight array of key cost drivers that are more directly related to the nature of their operations: labor costs, energy costs, access to customers, access to suppliers, efficiency of physical plant and the like. Where taxes are of concern, they more typically relate to such things as property taxes, energy taxes and regulation–specific “costs.” These include business fees and the much-scorned workers’ compensation insurance.
What else can New York do to improve the business climate in a way that supports local economic development? Other than income-tax cuts and agency reorganization, it is not clear what the state’s economic development strategy will be. Albany should be reminded that local economic development is multifaceted. It is not just locality development and infrastructure investment. It includes human-resource development and the entire social infrastructure including housing, personal security, education and training.
Industry-specific strategies need to be fostered. The state is encouraged to build upon its investment in university-based technology centers. (Indeed, the governor is to be applauded for continuing funding for these centers in his budget proposal.) In addition, the state ought to foster and facilitate the growth of industry clusters and manufacturing networks.
New York has several initiatives in place that effectively realize community-based approaches to local economic development. These initiatives include: the Neighborhood Based Alliance program, the Economic Development Zone program, the Gateway program and the New York State Rural Preservation Corp. program. Such initiatives are consistent with the philosophy of decentralizing government. These programs place responsibility and resources within the community and/ or region.
There are other areas also deserving attention:
State-local partnerships: New York’s interests are served by working with its congressional delegation to fight to keep the Appalachian Regional Commission and Economic Development Administration in place. In particular, ARC is a highly successful and innovative example of using state-local partnerships in designing local economic development initiatives.
Business pirating: The state’s economic development strategy needs to address the intrastate pirating of business that frequently exists–often with the full support of the state economic development programs.
Privatization: The rhetoric of privatization of state activities needs to be translated into specific initiatives. Innovation in the use of non-profit agencies, financial institutions and foundations needs to be encouraged as a way of enhancing local economic development. Many of the agencies noted previously include a strong private-sector component.
Community input: Local economic development is a “process with a product.” Community input and community leaders are central to this process as local areas identify priorities, goals and objectives. This process is one of articulating community values. Values define the “product” of local economic development: jobs, quality of life, tax base, type of economic activity and the like. The state needs to encourage and support such local initiatives.
Education: The message from Albany regarding education has been one of “cuts and freezes.” From a local economic development perspective, the state needs to understand that a highly trained work force and the availability of high-end jobs go hand in hand. Brainpower is replacing labor cost as a competitive factor in the national and global economy. New York’s highly trained work force has long provided a source of competitive advantage. This advantage is eroding. Disinvestment in primary and secondary education as well as higher education will have a detrimental impact on the state’s long-term business climate.
Health care: The governor’s first budget proposal takes significant steps to address the high cost of Medicaid in New York. These steps appear to be vital in dealing with the overall fiscal crisis. From a business-climate perspective, however, one factor cited frequently by New York’s businesses is the flawed workers’ compensation system. Health care reform and innovation are an integral part of the solution to flaws in this system. Most experts point to managed-care plans as central to any remedy. Of all the many problems that need to be addressed by our new governor, I would bet the first thing he asks his friend Bob King to tackle is a major overhaul of workers’ compensation.
(Dr. David Szczerbacki is dean of Alfred University’s College of Business.)

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