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How Wealthy Manhattan Firms Profited from the Zone Equivalent Area (ZEA) Program

Introduction:

On June 13, 2004, an obscure tax incentive program – the Zone Equivalent Area (ZEA) Wage Tax Credit – that had strayed far from its original anti-poverty intent was allowed to expire. This program was originally created to encourage businesses located in depressed areas outside of Empire Zones to hire needy individuals.  But especially after 2001, when the value of the benefits available under the ZEA program was substantially increased, many of the largest and most profitable businesses in Manhattan began registering to receive credits. Contrary to its original mission, the ZEA program provided finance, law, and media firms with tax breaks for hiring stockbrokers, lawyers, and other high-income employees. ZEA benefits have also gone to food and retail employers that offer workers poverty-level wages and few or no benefits. Firms in Manhattan’s major business districts benefited from the fact that in certain areas, such as Times Square, many poor individuals live in areas in which many very profitable businesses are located.

Despite the program’s official sunset date last June, a secret rider on ZEA was included in a budget bill passed by the State Legislature on March 31^st 2005. The rider authorized firms that got into the ZEA program prior to the 2004 sunset date to collect benefits for up to five additional years. It passed as part of the Empire Zones "reform" legislation (Part W of the omnibus revenue bill, S3671 and A6845) even though there was no mention of the ZEA program in the public meetings of the Economic Development Budget Conference Subcommittee.  Nor was this matter mentioned in the report that this subcommittee files with the General Budget Conference Committee. The exact language of the provision reads as follows: “notwithstanding the previous sentence, a taxpayer which has been certified under article eighteen-b of the general municipal law in a zone equivalent area prior to June thirteenth, two thousand four shall be allowed a credit under this subdivision for a total of five consecutive taxable years, provided that payments of empire zone wages are made and the conditions set forth in this paragraph are satisfied in each of those years.”

Following the release of a report on the ZEA rider by Good Jobs New York, State Legislators acted to remove the rider during the budget amendment process. The final budget signed by the Governor contains no provision for additional ZEA benefits.

Background:

Like many economic development programs, the ZEA program, which began in 1994, started out as an attempt to reduce poverty and unemployment in New York. However, in New York City it has been used to provide lucrative tax breaks to firms in already bustling areas with no requirements for local hiring and only minimal job quality standards.

Times Square businesses made a real rush on the program after 2001 when the ZEA program’s benefits were enriched.  But by 2001, the area’s transition to a major business and tourism center was largely complete, removing the original justification for the tax credits.

Recipients in Times Square include Ernst & Young, Morgan Stanley, Lehman Brothers, White & Case, Giuliani Partners, Giuliani Group, Giuliani-Kerik (which was re-named Giuliani Security and Safety, following the recent departure of former Police Commissioner Bernard Kerik from the firm), and Giuliani-Van Essen. The Giuliani firms are registered to receive benefits at 5 Times Square, a building, which pays no property tax as part of the 42nd Street Redevelopment Project and which is also home to ZEA beneficiary Ernst & Young, which collaborated closely with the former mayor to launch Giuliani Partners in 2002. (See press release at http://www.giulianipartners.com/press_ey_011502.aspx)”

Tax breaks were made available not only to high-end professional service firms, but to low-wage employers in food service and retail, without requiring any benefits to be passed through to the workers or the surrounding neighborhood. Food and retail recipients include Aramark Services Management, which offers cafeteria services to several of the finance, law, and media firms on the ZEA recipient list, Duane Reade, and Rite Aid. 

Loose, outdated guidelines, the absence of local hiring requirements, and inadequate job quality standards all make the ZEA program a cautionary tale about the pitfalls of using tax credits to draw jobs to areas of high residential poverty and unemployment. Understanding the ZEA program’s problems may prove useful as public officials target other areas for development , including Manhattan’s Far West Side, Downtown Brooklyn, and Long Island City.

What is a Zone Equivalent Area?

In 1994, state legislators extended some of the benefits available to companies in Empire Zones – geographic areas designated by the state as “distressed” and eligible for a variety of business tax credits – to companies in areas that had not been designated Empire Zones but that still experienced high rates of poverty and unemployment. Specifically, these “Zone Equivalent Areas” or ZEAs had to be in a census tract that, according to the 1990 census, had a poverty rate of at least 20% and an unemployment rate of at least 1.25 times the statewide unemployment rate. Beyond focusing on areas of high poverty and unemployment, the ZEA program was designed to encourage companies to hire low-income people with a two-tiered benefit system that offered more tax credits for employees that had been previously on public assistance, eligible for the Work Opportunity Tax Credit[1] or Job Training Partnership benefits, earning an income below the Federal poverty line or living in a family whose income is below the poverty line. In 1990, the Federal poverty line for individuals was $6,652 and for a family of four it was $13,359.[2] (When the program closed, in 2004, the thresholds had risen to $9,827 and $19,484, respectively.[3])

In New York City poor residents may live quite close to wealthy businesses without necessarily reaping any benefits from their corporate neighbors. In 1990, both the major business districts, Midtown and Lower Manhattan, contained enough residential poverty to make the businesses in the area eligible for ZEA benefits.

What are ZEA benefits?

Businesses certified under the ZEA program can receive wage tax credits – a certain dollar amount per new employee per year that can be deducted from the company’s overall state tax bill. The original level of credits was relatively low: $500 in the first year and $250 in the second year for a “non-targeted” employee and $1,000 in the first year and $500 in the second year for a “targeted” employee. Targeted employees, as noted above, are defined as New York State residents eligible for a variety of public assistance programs or living in a family below the poverty line. Companies could only receive full credit for targeted employees if they paid them at least 135% of the minimum wage (at least $5.74 per hour in 1994, $6.41 per hour in 1996 and $6.95 per hour since 1997).[4]

An amendment to the original legislation that went into effect as of January, 2001 made the program more lucrative for recipients, extending benefits from two years to five years and increasing the annual benefit that could be claimed per employee to $3,000 for targeted employees and $1,500 for non-targeted. The vast majority (over 95%) of the firms that registered for benefits in the Times Square area did so after the 2001 amendment. For a company with about fifty employees, such as Giuliani Partners, for example, this could mean a tax savings of over five million dollars annually for five years for a total of over twenty-five million dollars.

How does a company qualify to receive benefits?

In order to qualify, a business located in a ZEA must have, on average, more full-time employees in the state and the Zone than it had in the four years before it created its first new full-time job following the designation of its area as a ZEA. This “trigger” job must have been created within five years of ZEA designation. Once the business is certified as ZEA eligible by the Commissioners of Economic Development and Labor, its new employees are registered as they are hired in order for the wage tax credit to become available. If a business is new and therefore had no employees before the ZEA designation, it can receive tax credits for all its employees. 

The total amount of credits claimed cannot exceed 50% of taxes owed. However, if the credits would cancel out more than half a company’s tax bill for a given year, the company can carry over any remaining credits to the next year. In the following year, the carry-over amount is added to the “earned” amount for that year, and if the result is over half the next year’s tax bill, then any remainder can be carried over again.

Disclosure problems

Because of poor disclosure on ZEA beneficiaries, it is not possible to know the total costs and benefits of the program on a per-firm or an aggregate basis. Company-specific data are not available due to legal restrictions on disclosure of corporate tax returns, so there is no way for the public to learn exactly how many wage tax credits are being used, what kinds of jobs are made available at recipient firms, and who is obtaining those jobs. Total aggregate information on the cost of the ZEA program is not publicly available either. The New York State Annual Report on Tax Expenditures lumps ZEA together with costs associated with the Empire Zone program, preventing a separate assessment of ZEA. And the New York State Department of Taxation and Finance publishes information on the cost of ZEA only for regular business corporations, excluding the many recipients that are taxed as banks, insurance companies, or unincorporated businesses. In addition, this partial report is available only after a four year lag. The most recent was published in March 2005 and shows amounts for regularly taxed businesses in 2001.[5]

The report indicated that of the $26 million in ZEA credits claimed by regular business corporations in 2001, $10 million was used to reduce that year's tax liability and the other $16 million was carried forward for use in future years.  Again, these figures are for regular business corporations and do not include the value of any ZEA credits claimed, used and carried forwarded by banks, insurance companies and unincorporated businesses.  In 2000, effective with the 2001 tax year, the guidelines for the program were loosened resulting in a substantial increase in the number of applications for ZEA benefits - many from successful business districts like Times Square.  The result was that the value of the ZEA credits used by regular business corporations increased from $1.3 million in 2000 to $10 million in 2001, and the value of the credits carried forward to future years increased from $1.5 million in 2000 to $16 million in 2001.  Data for years after 2001 has not yet been published by the the Department of Taxation and Finance. However, because so many recipients began collecting benefits after 2001, it is reasonable to assume that the cost of the program greatly increased in its last three years.

Conclusion

Over the ten years of its existence, the ZEA program shifted from a well-intentioned anti-poverty effort to a handout for wealthy firms in New York City’s business districts. The absence of a needs-assessment invited firms that were making hires regardless of the subsidy to benefit from actions they were already taking. A lack of local hiring requirements allowed companies to use tax credits without reducing local unemployment. Low job quality standards (set at 135% of the minimum wage) meant that companies could collect thousands of dollars on employees while denying them health benefits and a living wage.

Any future incentive programs targeted to economically distressed areas should include much stronger accountability mechanisms, including better disclosure, high job quality standards, and strong “clawbacks” or money-back guarantees if job targets are not met. These mechanisms would help ensure that the intent of future anti-poverty programs remains at their core as they are implemented.