Public Policy Institute of New York State, Inc.

Putting stock in New York State

The securities industry is vital to New York’s future. And tax reform can help keep it growing here.

Why it’s important for New York to maintain a strong position in the securities industry—and what we need to do to ensure that happens:

  • Supporting Medicaid costs the average family of four in this state over $5,000 a year.

  • Our costs for Medicaid are well over twice the national average.

  • The two larger states, California and Texas, have almost three times our population—but combined, they spend only a bit more than New York on Medicaid.

  • Our costs are particularly out of line with the norm in spending on nursing homes and home health care.

  • What drives our costs? A program that is more generous to health-care providers than other states'.

  • New York's costs are so far out of line that the state sticks local governments with a substantial share—and that, in turn, is a major reason our property taxes are so high.

  • But plenty of ideas for cutting costs are on the table.

Everyone is in the stock market these days—at least, that’s how it sometimes seems.

Actually, about half of American families own stocks or mutual funds, according to surveys by the Federal Reserve and the Securities Industry Association. Both found that, as of 1998, between 48 and 49 percent of households owned publicly traded stocks directly or through mutual funds, retirement accounts or other managed assets. That proportion had risen sharply in recent years—from 37 percent just six years earlier. To put the figure in perspective, Americans who are “in the market” now outnumber by several million those who have a home mortgage. And these percentages don’t count others who are invested through their employers’ pension plans.

The growth of the securities industry has been good for all sectors and regions in New York State

On a typical day now, 1 billion or more shares of stock are traded on the New York Stock Exchange alone. Additional billions of dollars of value are represented in daily trading of bonds and other securities.

The tremendous growth of the investor class has been good—very good—for New York State. Those trades require expert services: assembling large amounts of capital for new or merged businesses, providing sharp-eyed analysis of the industries and companies involved, processing order forms and so on.

More than two centuries after it started near what is now Wall Street, the securities industry is the most important sector of the New York City economy, and plays a key role throughout the entire state.

The industry employs more than 190,000 statewide. Those jobs are extraordinarily highly paid, with average salaries a staggering $162,000 a year. The industry’s total payroll in the state added up to more than $23.7 billion in 1997, according to the Census Bureau.

The U.S. Commerce Department estimates that, for every job created in the securities industry, another two jobs are created in support industries. Many of those, too, carry above-average compensation, in such industries as law and marketing. Other jobs that grow out of the wealth generated in the securities industry provide employment for lower-skilled individuals—in restaurants and retail stores, for instance.

“New York State is richly blessed by the wealth created in the financial sector centered in New York City,” Governor Pataki’s Chief Economist, Stephen Kagann, wrote in 1999. “The city, its suburbs and the state benefit from jobs, wages and other economic benefits as well as tax revenues.” Other experts have echoed that analysis, in a dozen or so reports in recent years.

The statewide impact

Outside the Big Apple, Long Island benefits from a large concentration of the industry—more than 6,700 jobs. In upstate cities such as Albany, securities firms are among the anchors of downtown areas.

Wherever they are, securities-industry jobs bring high salaries and excellent benefits. In Rochester and Long Island, for instance, average annual pay in 1997 was over $85,000, according to the Census Bureau.

Even those areas without a concentration of the industry’s employment benefit from the huge tax revenues securities firms produce for New York. The Securities Industry Association estimates that the industry generates 25 percent of the state’s personal income tax revenues, some $6 billion in the coming year.

Fortunately, this wealth-producing industry is growing in New York. Securities and brokerage firms added nearly 30,000 jobs through the five years ending in 1999. Job growth in the industry outpaced other private-sector job growth in the 1990s.

Behind the good news, though, is a troubling trend: The Empire State isn’t getting its fair share of the national growth.

New York lost 33,000 jobs in this sector from 1987 to 1991. By 1997, securities employment was back to where it had been 10 years earlier. But during that same decade, the industry’s employment in the other 49 states grew by 55 percent.

What must the Empire State—the world capital of the securities business—do to encourage more growth here? Clearly, one answer is reducing the cost of doing business, still high in New York.

One way to do so would be to treat securities firms, for tax purposes, the way that manufacturers and other industries that export goods or services are treated. States generally try to avoid penalizing companies that have a high proportion of jobs within the state but a large share of their sales elsewhere.

How corporate taxes are calculated

Employers that do business in New York and other states figure their New York tax by apportioning their income among the various jurisdictions. To do that, they calculate the proportion of their overall payroll, property, and sales that is in each state. The sales factor is counted twice, so that the ultimate tax is lower for companies with more jobs than sales in New York. The average of the four percentages is the share of income that is apportioned to New York—and on which the company must pay state tax here.

It’s relatively simple for companies to calculate what share of their payroll and property are in a given state. The sales, or receipts, factor is more complex—especially when the item being sold is a service rather than tangible goods.

Traditionally, receipts from the performance of services have been assigned to a given state based on where the service is performed. In recent years, though, a number of states have begun assigning receipts based on the location of the customer.

After all, we want to encourage companies with national or international scope to locate their jobs in the Empire State.
That is, in effect, what New York State does with companies who sell their products outside the state. Our Tax Law does the same for several specific types of service companies. For instance, a New York-based magazine would allocate advertising receipts to its New York income based on how many copies it sells within the state. The idea is that magazines sold in, say, California or Florida should not increase the publisher’s New York State tax. After all, we want to encourage companies with national or international scope to locate their jobs in the Empire State.

That’s even more true of the financial services sector, given its huge role in our state’s economy. But, under current law, securities firms face a different tax regime—they will pay more tax for every new customer they acquire, even if the customer is in another state.

The securities industry has proposed that its allocation of income be treated the same way as that for manufacturers and those service businesses mentioned above. The state Senate Finance Committee staff has estimated the reform would reduce state revenues by $35 million a year—a small amount compared to the industry’s current tax payments and its potential for more.

Service firms are effectively taxed more

A report by the state Department of Taxation and Finance bolsters the industry’s argument that it is not treated equitably.

“Service firms generally face higher effective tax rates, compared to other industries, in the state where they perform most of their services,” the department’s Office of Tax Policy Analysis said in the 1991 report, Business Tax Analysis: The Attribution of Income From Services.

The department’s report added that “a number of factors, such as changing technology and deregulation of the financial services sector,” make it easier for service companies to locate their offices outside the state and continue to sell services in the state. “New York’s shift to a more service-oriented economy dictates that it review its tax policy relating to service corporations,” it said.

The argument even goes beyond economic competitiveness, to the practical difficulty of applying existing tax rules in a dramatically changing marketplace. More than 200 firms—including, but by no means limited to, the best-known companies based in New York—now trade securities over the Internet. If the company’s headquarters is in Manhattan, but its website server is in Nebraska and its back-office operations in New Jersey, where is the “service” of an Internet trade performed? In such cases, it would be much more straightforward for New York allocation rules to consider the location of the customer rather than the service.

Keeping the securities industry growing in New York is vital for many reasons—to power the engine of the downstate economy, to pay for billions of dollars’ worth of vital public services all across the state, and to keep the luster on the national and international reputation of the Empire State.

Modernizing the state’s tax treatment of this key sector is one way to start meeting those goals.

March 2000