New Jersey’s Subsidy Surge Has Not Subsided
Over $2 Billion in Corporate Tax Incentives Awarded in Past Three Years
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In April 2011, New Jersey Policy Perspective drew attention to the sharp uptick in corporate subsidy awards in recent years with a report titled “A Surge in Subsidies.” It found that the administration of Gov. Chris Christie had awarded $822 million in subsidies through 69 projects.
This report, a follow-up to “A Surge in Subsidies,” comes at a crucial time when state legislators are working to overhaul all of New Jersey’s incentive programs. It finds that:
• New Jersey officials awarded $2.1 billion in tax credits and grants to 170 projects over the three years from February 1, 2010 – January 31, 2013.
• The volume of subsidy awards has skyrocketed this decade: Through just 37 months of the 2010s, New Jersey has awarded $2.11 billion in subsidies – an average of $57.1 million per month. By contrast, through the entire previous decade, the state awarded $1.25 billion – an average of $10.4 million per month.
• Despite the aggressive use of subsidies, New Jersey’s post-Recession job growth lags behind the recovery experienced by the nation and neighboring states.
• Subsidies are often used by New Jersey to move jobs around the state, protect “at-risk” jobs from leaving, or to poach jobs from surrounding states.
• Existing programs are regularly revised and deregulated, making them less effectively targeted.
• Revisions being considered by the legislature have some worthy stated goals, but fall short of reining in one of the nation’s most aggressive subsidy programs.
This report sets the context for New Jersey’s subsidy surge and identifies common problems that plague incentive programs before describing the different types of subsidy programs currently in operation and, finally, analyzing the legislature’s efforts to revise the programs.
In an effort to stimulate job growth and investment in New Jersey, the state has over the past three years aggressively accelerated the pace at which it awards tax incentives to businesses that fulfill certain job obligations to New Jersey.
Through five programs, New Jersey has awarded $2.1 billion in tax credits and grants to 170 projects since February 1, 2010. The subsidies are administered by the New Jersey Economic Development Authority, and are often touted by members of both parties as effective job-creation tools.
While tax credits for businesses are not new to New Jersey (the oldest program studied here, the Business Employment Incentive Program, has been operational since 1996 and the Garden State’s rich subsidy history dates back to 1791 ), the speed and volume at which this tool is used has greatly increased in recent years.
It’s no wonder. New Jersey suffered devastating job losses due to the Great Recession, following a largely jobless recovery from the 2001 recession in the middle of the 2000s. Decisive action is clearly needed to get New Jersey’s economy back on course. But so far, efforts to spur economic growth through aggressively awarding subsidies have not borne fruit. While it is important to take the long view on economic development tools, one would expect some short-term gains to be realized by the sheer volume of awards granted in the past three years.
But New Jersey’s economy continues to limp along. As of January 2013, the state’s unemployment rate of 9.5 percent was far higher than the national rate of 7.9 percent. Perhaps more importantly, New Jersey has recovered less than half the jobs it lost during the Great Recession; New York has recovered about 125 percent, and Pennsylvania has recovered about 75 percent. And if one looks at New Jersey’s “jobs deficit” – the number of jobs needed to get back to pre-Recession levels and keep up with population growth – the state needs to add 326,800 jobs, or 8.3 percent of the state’s current number of jobs. In New York, that number is 151,200, or 1.7 percent; in Pennsylvania, it’s 257,000, or 4.5 percent.
The question for New Jersey lawmakers remains: Is putting all of New Jersey’s eggs in the tax subsidies basket the best course of action to create a strong state economy, now and in the future? While incentives will likely remain a part of the toolkit, they should be secondary to investment-oriented economic-development tools like funding high-quality affordable education, developing transportation infrastructure, creating a robust job-training program that pairs community colleges with industry, and other similar programs.
Subsidies: True Location-Decision Drivers, or Just Icing on the Cake?
In the past two decades, a number of published reports have detailed shortcomings of the policy goals associated with subsidy programs in New Jersey and other states, as well as problems with their implementation.
“Although common practice, subsidies are highly controversial,” a 2011 national report finds. “A large body of literature from academics, state auditors, investigative journalists and nonprofit research groups finds many recurring problems.”
Some of the most common problems may sound familiar to New Jerseyans who have wondered about the state’s subsidy programs:
• The tendency to give subsidies to companies that do not really need them, for projects and hiring that would have happened without public assistance.
• The role of site location consultants in pushing states and localities to bid against one another, especially for big projects, routinely resulting in lucrative subsidy packages of more than $100,000 per job.
• The failure of companies to create as many jobs or pay as high a wage as they promised when seeking the subsidy.
• The creation of poor-quality jobs that are low-paid, offer little room for advancement, and/or lack essential benefits.
• The focus on short-term job creation/retention rather than long-term economic development.
• The competitive disadvantage or tax burden shift imposed on non-participating companies.
• The strain on revenue that can result from forgoing taxes from firms receiving subsidies. This lost revenue makes it more difficult to fund vital public services like education and public safety, just as the firms’ arrival can increase the demand for those very services.
Strikingly, these kinds of subsidies are awarded “not only in the absence of evidence that they really work, but in the face of growing evidence that they do not – or at least that they are only of marginal importance to businesses’ decision as to where to locate.” (emphasis added)
Several studies have called into question the notion that tax breaks are an effective way to entice large employers to relocate by suggesting that relative tax liability is rather low on the list of factors that influence corporate relocation decisions. In fact, it has been suggested that the existence of robust public services in a given location – which are often cut as scarce treasury dollars fly out the door in the form of subsidies – are just as significant a factor as taxes, if not more so.
But one not need listen just to academics and researchers to hear these kinds of comments. Some New Jersey executives have been saying the same thing: That they, of course, will gladly take tax subsidies, but that other factors are more important to them when they think about where to locate.
Eye-care company Bausch & Lomb says the subsidies it received were not the primary reason it chose New Jersey as the headquarters for its pharmaceuticals division. “We came for the talent and the location,” CEO Brent Saunders said in December 2012. The CEO of Botox maker Allergan made similar comments in September 2012 after the company decided to open an R&D center in Bridgewater (for which, we should note, it did receive a subsidy award). “The biggest driver [of the company’s relocation decision],” said David Pyott, “is the ability of the educated, trained workforce.”
What this all suggests is the need for a more balanced approach to subsidies. Withdrawing completely from the subsidy arms race is unrealistic, save for an unlikely mutual agreement pact between many states. But subsidies need to be just a part – a small part, we suggest – of the state’s job-creation and economic-development strategies. It is crucial that New Jersey’s leaders take the long view on job creation and invest in the kinds of opportunities – high-quality education and higher education that is accessible to all, public-private partnerships centered around research institutions, as well as clean, safe communities and affordable, efficient transportation systems – that will continue to make New Jersey a magnet of research and enterprise, and an attractive place to locate a business.
Business Employment Incentive Program (BEIP)
New Jersey has been awarding grants under the Business Employment Incentive Program (BEIP) since 1996. The program diverts to the employer up to 80 percent of state personal income taxes paid by each new employee for a period of up to 10 years, even if the job existed in another state and is simply “new” to New Jersey. Companies initially remit the full withholding taxes collected from workers, but are later given a grant equal to a large portion of those remittances. The total subsidy is capped at $50,000 per worker.
The theory behind BEIP is that the state would not have realized any revenue without the new job, and that other benefits – such as sales tax revenues on increased spending by the new employee and potential property tax revenue if the worker relocates – will trickle down.
But by using many of the most lucrative BEIP grants to lure New York City firms to Hudson County’s “Gold Coast” in Jersey City and elsewhere, New Jersey is forgoing large amounts of income tax revenue without guaranteeing that much additional economic activity – beyond the occasional lunch at a food truck – will actually be created in New Jersey. That’s because many of the workers in jobs lured from New York City live in New York, and most will continue to do so; after all, the train ride from Lower Manhattan to Exchange Place is just four minutes. (One only has to survey the exodus of well-paid white-collar workers back to Manhattan from Exchange Place or Newport via ferry and PATH train during the evening rush to get a clear sense of this very real phenomenon.)
New Jersey has awarded 485 BEIP grants worth $1.6 billion since 1996. That figure covers 85,136 jobs. A 2012 national study found that New Jersey’s BEIP program was the most expensive of its kind in the nation.
Unlike many other subsidy programs, BEIP has also already disbursed large amounts of grant dollars. Through the end of January 2013, New Jersey has “spent” more than $1.3 billion in potential income tax revenue on this program, supporting a reported 101,900 jobs. In FY 2014, the program is estimated to cost the state $275 million.
Since February 2010, the state has awarded 87 BEIP grants worth $176.5 million at a potential cost of $20,572 per job.
The Business Retention and Relocation Assistance Grant (BRRAG) program was signed into law in 2004 as a revision of an earlier business retention program. It allows the state to give an annual corporate income tax credit of $3,000 per employee to businesses considering expansion or threatening to leave the state.
In 2007, the job-creation threshold at which a business qualifies for the grant was lowered from 250 retained full-time jobs to 50. And in 2010, the initial annual credit of $1,500 was doubled to its current level; other changes to the program in 2010 included allowing a qualifying business to sell unused credits to any other business for at least 75 percent of their value.
Since February 2010, the state has awarded 31 BRRAG grants worth $90.3 million at a potential cost of $8,234 per job.
Economic Redevelopment and Growth Grant (ERG)
Unlike BEIP and BRRAG, the Economic Redevelopment and Growth grant (ERG) isn’t directly tied to job creation. Instead, this subsidy is designed to encourage development or redevelopment; as a result, many of its recipients are hotels, shopping malls and similar projects.
ERG grants are given to developers for up to 75 percent of the annual incremental increase in state and/or local tax revenues generated by a project in a qualifying area (much of the state is considered a “qualifying area”). The subsidy can be applied to increases on 19 different taxes, and may extend to run for up to 20 years. The bottom line of this grant program is that it aims to encourage redevelopment in areas where traditional financing might not be feasible.
Perhaps the highest-profile subsidy ever awarded by New Jersey is the 2011 ERG grant of $261.4 million to the Revel casino in Atlantic City. The casino opened in April 2012 to much fanfare but brought in consistently low revenue as it failed to catch on and failed to revive a flagging Atlantic City tourism economy, despite a multi-million dollar marketing blitz. In March 2013, it filed for Chapter 11 bankruptcy protection.
Since February 2010, the state has awarded 19 ERG grants worth $439.5 million at a potential cost of $46,878 per job.
Urban Transit Hub Tax Credit
The program, like ERG, is not explicitly tied to job creation. It initially provided corporate income tax credits equal to 100 percent of qualified capital investments made over an eight-year period on large new commercial or residential projects with at least $75 million in capital investment (and, if commercial, at least 250 full-time workers). And like BRRAG awards, Hub tax credits may be sold to another company for up to 75 percent of their initial value.
Hub-eligible areas were initially limited to Camden, East Orange, Elizabeth, Hoboken, Jersey City, Newark, New Brunswick, Paterson and Trenton. In order to be eligible for credits, businesses or developers were required to build within a half-mile of a NJ Transit, PATH, PATCO or light rail station.
But the Hub program has been amended several times since 2008, so much so that some recent deals under the program have absolutely no connection to transit-oriented development in urban areas.
Just a year after the Hub legislation was signed, the program’s eligibility standards were significantly lowered under the New Jersey Economic Stimulus Act of 2009. This law expanded geographic requirements to include locations served by freight rail, the first big step in decoupling the Hub program from mass transit. It also lowered the capital investment threshold for commercial projects from $75 million to $50 million for businesses and developers.
In 2011, the program’s initial requirement that 20 percent of residential units subsidized by the tax credit be set aside for low- and moderate-income residents was completely dropped, while the amount residential developments could recoup from the program was upped from 20 percent of capital costs to 35 percent.
And it’s not just revisions to the Hub credits that have diluted the program’s initial intent. In fact, an entire new subsidy program – the Grow New Jersey program, which you will read about below – was created in 2012 explicitly to redirect money already allocated for transit-oriented development to development in suburban areas of New Jersey. This bill shuffled up to $200 million in tax credits from Hub to Grow, which has no transit requirements, and made bonus credits available for businesses relocating to a “project site that is or has been negatively impacted by the approval of a qualified business facility” under the Hub program.
The Grow program also increased how far an eligible Hub project could be located from a transit or freight rail location, from a half-mile to a full mile.
In dollar amounts, the Hub program has been the largest subsidy program in the last three years: Since February 2010, the state has awarded 19 Hub grants worth just over $1 billion at a potential cost of $131,100 per job (includes both “new” and “at-risk” jobs).
These include several controversial grants in North Jersey, like a $210.8 million award for Prudential to vacate its office space in Newark’s Gateway Center and build a new tower a few blocks away; a $102.4 million grant to Panasonic to move its headquarters one train stop from Secaucus to Newark; and an $81.9 million award to Goya Foods to move one mile from Secaucus to Jersey City in an area woefully underserved by mass transit.
Grow New Jersey
Grow New Jersey is the newest subsidy program in New Jersey’s arsenal. The program was created in 2011 and signed into law in January 2012; it allows businesses that either create or retain at least 100 jobs to obtain an annual tax credit of $5,000 per job. Businesses are also required to make $20 million in capital investment at the project site in order to be eligible.
The Grow program includes a “bonus” that can increase the annual per-job tax credit to $8,000 if the jobs: are in an industry deemed “desirable” by EDA; have salaries greater than the average New Jersey worker; are in a location near (or within “short-distance-shuttle service of”) public transit; or are created by a company “negatively impacted” by an earlier Urban Transit Hub grant.
The program was initially funded with money previously allocated to the Urban Transit Hub program, and was largely seen as a way to even the playing field between suburban and urban projects. Smart growth and transit advocates roundly criticized the program, arguing that by re-focusing New Jersey’s development on sprawling suburbia and exurbia, Grow would “weaken the state’s long-term economic competitiveness.”
Once the Grow program was established, it quickly began approving blockbuster grants for large businesses that were threatening to leave New Jersey.
One of the largest question marks with these types of grants is whether or not businesses – particularly large and very profitable corporations – are actually seriously considering leaving the state, or if they are simply placing a low-cost and low-risk bet that the state will blink first and award a grant for jobs likely to be kept in New Jersey anyway. As retention grants have grown in popularity in states desperate to keep corporate campuses, a cottage industry of relocation consultants has developed to assist companies with these types of applications.
The case of Burlington Coat Factory is an instructive example. In June 2012, the state approved a $40 million Grow New Jersey grant to the New Jersey-based company to expand facilities on land it already owned along Route 130 in Florence. (The company also received a separate ten-year sales tax exemption on purchases it makes for the new facility; this was estimated to be worth $1.2 million.)
The Burlington Coat Factory grant will keep 626 jobs from migrating across the Delaware River to Pennsylvania and create an additional 120 new jobs, according to the EDA. While the Bain Capital-owned clothing retailer said it was actively pursuing a site in Bensalem, Pennsylvania, would it have actually moved there if not for the Grow New Jersey grant? Perhaps. But add the fact that it already owned the New Jersey land in question to the significant costs and headaches associated with corporate relocation, and one has to wonder how legitimate the threats to flee the Garden State truly were.
Since it makes no distinction between jobs created and job losses averted, the program has retained far more jobs “at risk” of leaving the state (5,988) than it has created new jobs (1,200).
Since April 2012, the state has awarded 15 Grow New Jersey grants worth $391.6 million at a potential cost of $54,477 per job.
Overhaul on the Horizon
New Jersey legislators are currently in the process of a landmark overhaul of the state’s subsidy and incentive programs. The proposed legislation would consolidate the five programs discussed in this paper into two expanded programs with wider geographical boundaries and lower eligibility thresholds: Grow New Jersey and ERG. BEIP, BRRAG and the Urban Transit Hub programs would be phased out.
The Grow program would drop job obligations to as low as 10 full-time jobs for certain types of businesses. Technology startups would have the lowest threshold, at 10 jobs, while manufacturing firms would have a threshold of 25, businesses in “targeted industries” would have a threshold of 35, and all other firms would have a threshold of 50. The current threshold is 100 full-time jobs.
The revised Grow program would also change the amount of annual per-employee tax credits businesses would be eligible to receive. Currently, the maximum credit is $5,000, but a bonus pushes that level up to $8,000. The legislation being considered would tier the credits as such: $5,000 for projects within Urban Transit Hub municipalities; $4,000 for projects in distressed municipalities; $3,000 for projects in “other priority areas;” and $2,000 for all other projects.
It would also award slightly lower subsidies (by 20 percent) to jobs retained instead of new jobs created.
However, the revised Grow program still contains bonuses – far more of them than the program initially did – that can drive the annual per-employee tax credit up to a maximum of $10,000.
Within the broader framework of subsidy policy, the revisions being considered have some commendable components: Tightening some job-creation requirements; ending the program (BEIP) that diverts personal income taxes; treating retained jobs differently than created jobs; and lowering job-creation requirements for targeted high-quality, high-growth industries.
However, the aim of the revisions – to give all parts of New Jersey an equal opportunity to have a bite at a bigger apple – is less commendable if one considers that the apple itself is, at least in part, rotten.
Simply making New Jersey’s subsidy programs “bigger and broader,” as the governor says, does not necessarily make them smarter or better at creating high-quality, long-term jobs.
It does, however, mean that New Jersey will forgo even more revenue – the money that funds our schools, our police, our transportation networks and other public services – in the coming years.
When it comes to subsidies, New Jersey is a gambler and the businesses receiving grants are the house. The bet the state is making is that the net benefit to the state’s economy resulting from the subsidies will be more than enough to offset losses in state revenue. It remains to be seen whether that’s a winning bet for the gambler, or if the bet falls under the rubric of a longstanding Atlantic City truism: the house always wins.
Shane Smith contributed to the research and writing of this report.
$2,075,062,220 in incentives were awarded between February 1, 2010 and January 31, 2013. The awards have continued since then, but those new grants are not included in this three-year analysis. “Awarded” in this paper refers to dates when grants were first approved by the New Jersey Economic Development Authority, not when they were executed, and not when funds were distributed to awardees.
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“Paying Taxes to the Boss: How a Growing Number of States Subsidize Companies with the Withholding Taxes of Workers,” Good Jobs First,” April 2012.
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