NJPP Testimony: Exorbitant EDA Subsidies Ignore Fiscal Realities

This testimony on the New Jersey Economic Development Authority subsidy programs was delivered to the Senate Economic Growth and Assembly Commerce and Economic Development Committees on Monday, February 11, 2019.

My name is Sheila Reynertson and I am a senior policy analyst at New Jersey Policy Perspective (NJPP), a nonpartisan research organization focused on state budget, tax and economic issues. Since NJPP’s inception in 1997, we have consistently raised concerns about the overreliance on business tax subsidies and have repeatedly called for stricter oversight of this economic development strategy.

As the latest iteration of corporate tax subsidy programs winds down and in light of the comptroller’s audit of the Economic Development Authority (EDA), NJPP’s position remains the same.

Based on our long-term analysis of both corporate tax subsidies and the precarious status of the state budget, the ends simply don’t justify the means. New Jersey was already in the midst of a financial crisis when the volume of awarded tax breaks was allowed to skyrocket. Once spending caps were lifted in 2013 under the Economic Opportunity Act, the EDA approved close to $6 billion in corporate tax breaks. Last year, McKinsey & Co. report stated that New Jersey’s tax subsidy programs pay more than five times as much as peer states for every dollar it attracts and every job created or retained.

That’s the kind of short-sighted game New Jersey simply can’t afford to play; especially not at the level it has, providing overly generous and exorbitant subsidies that are significantly out of step with what we see across the country and by comparable states.

Further, putting that kind of stock in tax subsidies to spur economic growth blatantly ignores the state’s precarious financial reality. In official documents submitted by the EDA during budget committee hearings in recent years, the authority projects that this over reliance on tax subsidies may result in a loss of over $1 billion a year in revenue starting in 2020 – at precisely the same time that the state’s biggest obligations are set to cripple the state budget.

None of this was hard to predict as anyone involved in these issues understood that New Jersey would be facing these tough situations relatively soon. And yet, the choice was made to gamble away future taxpayer dollars without getting a sufficient return on the investment. This has only made it more difficult to fund vital public services and invest in our state’s most important assets.

Some changes made in 2013 were positive – like more stringent standards for subsidies given to corporations shifting jobs around the state. But on the whole, the Economic Opportunity Act greatly expanded the size and scope of these offerings while eliminating several key financial protections for taxpayers and the State of New Jersey. Since then, the EDA took some measures as a partial course correction. Now, it’s the responsibility of the executive office and the legislature to implement real reform and get these tax breaks under control again.

Here are the most important ways to bring back accountability and oversight to business tax subsidy programs on behalf of New Jersey’s taxpayers.

First, restore spending caps on the total amount New Jersey can give in subsidies per year to ensure accountability and increase the legislature’s oversight role. Strict spending caps both ensure that New Jersey has a handle on its ability to track and assess awarded projects and that the overall program is again in line with comparable states. The caps put forth by the governor’s proposal is a great starting point, though we would argue they could and should be even lower.

New Jersey must get serious about reporting requirements. This should be done in a number of ways including a legislative fix to allow the Treasury to finally release the Unified Economic Development Budget which would provide annual data on large awarded subsidies – like the number and quality of jobs created. Design and implement a robust, independent evaluation process to determine on an ongoing basis if these tax breaks are having the desired effect. Require the EDA to post a more regular and longer-term analysis, say 15-year-forecasts, of the budget impact of already-approved subsidies. Lawmakers should also eliminate tax subsidies to retain existing jobs or at the very least limit such subsides for a large number of jobs that are supposedly at risk of moving to another state as proposed by the governor.

Finally, New Jersey must restrict corporations’ ability to sell their tax credits. The very idea of a secondary market for tax credits should give the legislature pause. New Jersey’s tax subsidy program is so overly generous that it enables the sellers to receive far more money in subsidies than they actually owe in taxes. New Jersey may regard these tax breaks as an effective way to entice large employers to relocate, but for those corporations – it’s just icing on the cake. Allowing them to not only sell their tax credits but to exempt that transaction from taxation is especially egregious. That’s like taking the time to research and find the perfect wedding present for a friend only to discover they sold it at a yard sale the following year. It’s time to end this practice.

There is no shortcut or silver bullet to improving our economy. It takes a long, sustained approach of targeted investments to produce balanced growth that spreads opportunity to all corners of the state. Tax subsidies can be a tool in this strategy, but for far too long New Jersey made them the strategy while critical assets suffered from disinvestment.

The state must reverse course now by adopting strong and sufficient reforms for its subsidy programs, adopting a long view on job creation and investing in the kinds of opportunities that have been proven over and over again to grow and sustain economies: high-quality K-12 education, higher education that is accessible to all, public-private partnerships centered on research institutions, as well as clean, safe communities and affordable, efficient transportation systems. These are the things that will continue to make New Jersey a magnet for research and enterprise and an attractive place to locate a business.

Thank you for your time and consideration. I’m happy to answer any questions you may have.