The seaway and interstates didn't help, but they were well after Buffalo lost it's spot as the major RR hub - to Chicago around the 1890s. Buffalo was second thereafter for years. The seaway wasn't begun until 1954 and the interstates in 1956. Taxes were a problem until the lawsuit against the state - I was told by those that knew that CR paid more in taxes in NYS than in all its other states combined. I used to know the amount per switch in NY and have forgotten the exact amount, but it was ridiculously high. NY also didn't help matters with other requirements - by keeping the full crew law much longer than other states (many trains had to stop and pick up an extra man entering the state and dropped him off leaving), banning bobbers and short cabeese, and some other requirements that other states didn't have.
Other factors around BCT area - stock yards closed after meat was processed out west (Chicago, Kansas, etc.) and reefers hauled the meat in, the ice house closed when mechanical reefers came about, the East Buffalo car shops closed as fewer car facilities were required due to fewer and better cars (progressively larger cars with all steel construction/better technology), the coach yard (and BCT) closed as passenger service dwindled away, REA died a slow death for a number of reasons, and fewer yards required overall as NYS business climate and technology drove industry out of the state/area. Lots of factors at play besides competition. Remember that what grew RRs in Buffalo to their greatest extent was the constant early expansionism and with RRs one of the biggest industries in the US at the time much heavy industry supported their expansion. When they reached saturation that industry slowed/contracted accordingly and there was quite a bit of that in Buffalo. Lackawanna Steel, Gould, Wagner/Pullman, ACF, Union Car, and Taylor Signal/GRS were just a few of the major RR manufacturers in Buffalo during the heyday - and all are gone now (ACF still around but mostly gone from NYS, GRS is now Alstom in Henrietta).