Sen. Lesniak’s Proposals Are Common-Sense Steps To Bring More Accountability & Transparency to New Jersey’s Corporate Tax Breaks

This morning, Sen. Lesniak unveiled legislation that would bring more accountability and transparency to New Jersey’s use of corporate tax subsidies. These special tax breaks have surged to record levels this decade, with $5.4 billion approved since January 2010. This unprecedented uptick has been exacerbated by the 2013 approval of the “Economic Opportunity Act,” which removed caps on these programs and loosened standards corporations must meet to qualify for them. In 2014 alone, New Jersey OK’ed $2 billion in tax breaks, at a sky-high price to taxpayers of $80,000 per job.

This surge in tax breaks threatens the state’s economic future because every dollar of subsidy is a dollar that will not be available to pay for the true building blocks of a strong economy, like higher education, safe and efficient roads and transit, targeted small business development and great public schools.

Sen. Lesniak’s legislation echoes key NJPP recommendations to help fix a broken test the state uses to determine whether a tax break will result in “net benefits” to the economy and to place a moratorium on new subsidy approvals until statutorily required annual reports are produced by the Treasury.

“New Jersey has bet big on one answer to fix the state’s staggering economy: give big tax breaks to a few corporations, many of which use the breaks to move jobs down the road,” said NJPP president Gordon MacInnes. “This policy hasn’t worked and it ignores the proven building blocks of a strong state economy, like good schools, a talented workforce and safe, efficient roads, trains and bridges.”

“It’s time to change course, and we need to start by restoring tighter standards and increasing accountability and transparency. That’s the responsible thing to do, and we commend Sen. Lesniak for taking the leadership to make common-sense changes,” MacInnes added. “We need to step back from this big gamble and assess what has worked and what hasn’t – and at what cost. That’s why halting new subsidies until we get detailed results from old subsidies is essential.”

A Moratorium Would Help Increase Transparency

Placing a moratorium on all new subsidy awards until Treasury produces an annual report detailing the outcomes of past tax breaks, as well as the current and next-year cost to the state of all subsidies, would force legislators, the executive branch and the Treasury to quickly work together to address the “legal restrictions” Treasury says have prevented it from producing this yearly report, which should have been part of the public debate over subsidies since 2008.

This report, known as the Unified Economic Development Budget Report, is required to include information about how much each subsidy-receiving corporation has claimed in tax breaks, how many jobs have been produced, how much those jobs pay, whether the corporation or its parent company has laid off workers elsewhere in New Jersey, and other important indicators of the quality of jobs produced and the overall impact of the subsidy. The Treasury is required to produce the report as part of the governor’s budget message each year.

Just this week, the Economic Development Authority (EDA), which administers these subsidies, added some information about the outcomes of past tax breaks (number of jobs and how much in tax credits have been claimed by corporations). While this is a welcomed step in the right direction, there remains a serious need for comprehensive annual reporting on the outcomes of all subsidies, as outlined in the 2007 law creating the Unified Economic Development Budget Report.

The public call for a moratorium has been growing in recent weeks, with both NJPP and New Jersey Working Families making the case in high-profile op-eds. The Star-Ledger editorial board also followed suit and endorsed a moratorium until the required reporting is in place.

Changing the ‘Net Benefits Test’ Would Help Protect Taxpayers by Making Corporations More Accountable

Prior to 2013 legislation loosening the standards for New Jersey’s business tax breaks, a corporation’s eligibility for a subsidy in the jobs-focused Grow New Jersey program was based in part on an estimate of how much the activity generated by the break would benefit the state’s economy. In most cases, this formula – the net benefits test – estimated the economic impact over 15 years, which was the same number of years a corporation was required to uphold its end of the bargain with a certain number of jobs and/or capital investment. If the test didn’t show a benefit of 110 percent over those 15 years, a corporation was not eligible for a tax break.

But now this test estimates the economic impact for as much as 35 years while corporations are still held accountable for just 15 years. (The test’s standards have also been degraded in some cases to where corporations must show a 100, rather than 110, percent benefit over 35 years.)

As NJPP detailed in a report released earlier this week, this lopsided test piles additional risk on an already risky economic development practice. The loosest standards apply to projects in the city of Camden, and the nine deals approved in the city so far could result in a $97 million loss to New Jersey if the companies fulfilled all their contractual obligations but did nothing more. With 10 new deals for Camden and other preferred areas in the works, it is essential that this test be fixed in order to stop the bleeding and minimize future harm to New Jersey’s economy.

This legislation would start to return some common sense to the net benefits test by ensuring that the economic estimate covers a time period no longer than the time period the corporation is required to uphold its end of the deal.

Other Reforms Still Needed

Obtaining more information on the results of past tax breaks and fixing the net benefits test are important common-sense reforms, and should be a priority for all policymakers concerned about New Jersey’s economic future. But the reforms should not end there. Policymakers need to return caps to subsidy spending, make retaining jobs that are already in New Jersey a much lower priority and, more broadly, take a more cooperative approach to growing the region’s economy with neighboring cities and states.