Opinion

Boosting NYC biz

New York City is a lousy place to start up, run or invest in a small business, but city officials don’t seem to have a clue as to what to do about it.

Economic growth, innovation and job creation are overwhelmingly about entrepreneurs, along with the investors willing to supply capital to entrepreneurial ventures. According to the US Small Business Administration’s Office of Advocacy, small businesses created about two-thirds of net new jobs over the last decade and a half. But Mayor Bloomberg and the City Council have done little to lower the cost of innovating, building businesses — small or otherwise — and creating jobs.

In her Feb. 18 State of the City Address, City Council Speaker Christine Quinn talked up the high-tech economy. She said: “Now what does it mean to create an economy of innovation? It means attracting and investing in the kinds of high-tech companies that will grow into the major employers of tomorrow. Unfortunately, when it comes to new technology startups, New York City lags behind other parts of the country.”

She noted that “we need a tax environment where all businesses can expand and create new jobs,” but only vaguely proposed extending a targeted corporate tax credit to certain small retailers.

This kind of proposal doesn’t begin to scratch the surface of what needs to be done to make the city business-friendly. In fact, when it comes to taxes, the city arguably ranks as the most hostile place in the nation for entrepreneurs. They not only face higher costs for rent, power and other basics, but sky-high income-tax rates literally punish the crucial acts of starting up, building and investing in successful businesses, and working for these ventures.

If an entrepreneur sets up as an unincorporated business — as a sole proprietorship, partnership or limited-liability company, as most small firms do — he or she pays a state personal income tax with a top rate of 8.97 percent (one of the highest among the states), not to mention a city-imposed personal income tax with a top rate of 3.648 percent. That’s a combined rate of 12.618 percent — a big bite out of the bottom line. Investors also pay this same high tax rate on capital gains — a clear disincentive for investment in new or expanding businesses.

Unfortunately, there’s more. The city piles on many of these important risk-takers an unincorporated business tax. That’s another 4 percent income levy, raising the top rate on these businesses to 16.618 percent.

But don’t get the impression that incorporating allows business to escape crushing taxes. The state corporate tax, plus the business-tax surcharge that helps fund the MTA, combine for a corporate income-tax rate of 8.307 percent. The city adds an 8.85 percent tax, for a top combined rate of 16.857 percent.

Many entrepreneurs choose to set up their businesses as “S corporations” for the tax benefit. That is, for federal and state tax purposes, the corporation’s income is not taxed as a business; instead, the proprietor pays personal income taxes on the profits. But an S corporation in New York City gets socked with the city corporate income tax. That means business earnings are subject to the city corporate tax rate of 8.85 percent, and dividends to owners can get hit with the top combined personal tax rate of 12.618 percent — for a total tax rate of more than 21 percent. These levels of taxation are unheard of elsewhere in the nation.

In his own State of the City speech last month, Bloomberg asserted that “more than any place on Earth, New York is a city for entrepreneurs,” but also indicated that the days of businesses having to be in certain places, like New York, are long gone. Entrepreneurs, capital and workers are more mobile now than ever before. So why would an entrepreneur in high-tech or any other industry with the next big idea start up a business in Gotham?

New York once was a city of cutting-edge entrepreneurs, but it hasn’t been for decades. It won’t become one again until city government provides deep and broad tax relief. Eliminating the unincorporated business tax, the extra taxes on S corporations and capital-gains levies would be an excellent start. Cutting city personal and corporate income-tax rates at least in half would help, too.

In the end, city politicians must choose between big government and constrained entrepreneurship or smaller government and an expansive environment for entrepreneurs and the businesses and jobs they create.

Raymond J. Keating, a Long Is land-based economist and writer, is a columnist with Long Island Busi ness News.