Op-Ed: New Jersey Needs More Evaluation of its Business Tax Incentives

By Leigh McIlvaine and Jon Whiten

This op-ed appeared in the August 17, 2014 edition of the Times of Trenton

NJPP Op-EdIn an effort to spur economic growth in the wake of the Great Recession, New Jersey policymakers have turned almost exclusively to tax breaks and economic incentives. The state has awarded a record number of tax subsidies to a handful of New Jersey businesses, but policymakers’ neglect of common-sense evaluation of these deals threatens New Jersey’s economic future.

Since the turn of the decade, New Jersey has awarded corporations more than $4 billion in tax subsidies – an average of $76 million each month – and the pace is quickening. In the first nine months under new rules put in place by last year’s legislative overhaul of these incentive programs, $1.5 billion, or $167 million per month, has already been awarded. And since the new law eliminated any spending caps, this record-breaking spending spree is likely to continue.

Is this unprecedented surge in subsidies a good choice for the state in the long run? Without reliable information and realistic economic assumptions, this is impossible to answer. New Jersey’s lawmakers have to be sure that their tax breaks won’t undermine public education, infrastructure, public safety and other public assets that really matter to all employers. Knowing the results of prior incentives and strengthening future deals are two important steps that could give policymakers greater confidence that these subsidies won’t harm New Jersey in the decades to come.

Companies approved for subsidies don’t receive them until they meet a number of requirements, including the number of jobs they promise to create. However, without regular reporting to the public about what has become of these investments – some of them now years old – it is impossible to know if New Jersey is getting what it paid for. We know how many jobs are supposed to be created or retained, and in some cases what those jobs should pay. But we don’t know the actual results of incentive deals because, even for the older agreements, most of the information isn’t made public.

All corporations that receive at least $100,000 in state subsidies are actually required to tell the state how many jobs have been created, how much they pay, whether those jobs are full- or part-time and whether they include health coverage. The Treasury Department is required to produce a report each year containing all this information – but it has never done so. The department cites federal privacy requirements as the reason no report’s been produced since the transparency law passed in 2007. However, other states have produced similar reports that make their incentives programs more transparent without running afoul of any federal requirements. New Jersey should do the same, and quickly.

The state also needs to reform how it evaluates these deals. Last month’s $260 million subsidy award to Holtec International was based on economic activity projected to occur over 35 years, but the company is only required to stay in New Jersey for 15 years. In addition to not making any financial sense, this sort of deal structure leaves the door open for companies to take the state’s money and run, leaving New Jersey taxpayers with a loss of up to $149 million. Subsidy supporters like Lt. Governor Guadagno say the state’s economic impact test ensures that “the taxpayers are not at risk at all” due to these incentive deals. But as the details of the Holtec incentive show, that’s clearly not the case.

To fix these problems, lawmakers should change the timeline rule to protect taxpayers over the entire period of the incentive so subsidized companies aren’t allowed to leave New Jerseyans with a significant economic loss. The state also needs to be more transparent about the jobs actually created (or not) by these subsidies so it can evaluate their overall impact on New Jersey’s economy down the road.

New Jersey has committed $4 billion to a small number of businesses that claim they will create jobs and grow the economy. We hope that’s true, but taxpayers have a right to know whether public investments in subsidized companies are paying off. As the state doubles down on these tax breaks, it must also increase the level of scrutiny it applies to them.

Leigh McIlvaine is a Research Analyst with Good Jobs First, a national economic development accountability organization. Jon Whiten is the Deputy Director of New Jersey Policy Perspective, a New Jersey research organization focused on economic policy.