A Step Forward on Corporate Tax Subsidy Accountability

As we move forward, real reform must come from the legislature and governor.

Published on Dec 13, 2016 in Tax and Budget

This morning the New Jersey Economic Development Authority (EDA) took an important step toward reining in some of the excesses of the state’s corporate tax subsidy programs, heeding calls for reform that we and other advocates have made over the past few years. But the EDA’s capacity to truly reform the state’s tax breaks is limited – the real onus is on the legislature, and as the EDA’s actions today make clear, it’s high time for the legislature to act.

Specifically, today the EDA opened a public comment period for a change to the “net benefit model” that the Authority staff use to estimate the likely economic impact of a project that is applying for tax breaks. Due to 2013 legislative changes, the current model puts New Jersey taxpayers at serious and unnecessary risk because it calculates a project’s economic benefits to cover a time when there is no guarantee the project will still be in the state.

In other words, the test allows corporations to get tax breaks that assume that the approved project will still be producing economic benefits for up to 35 years even though New Jersey’s 2013 law allows the corporation to take its full tax breaks and flee the state after just 15 years. (For more background, see our May 2015 report, Risky Business:
Camden net benefits total dec 2016-01.jpg

The test is riskiest when it comes to the subsidies approved for corporations relocating to Camden. As a result, while the state touts a net economic benefit of $561 million from the 22 deals it has approved for Camden since December 2013 under the Grow New Jersey program, the reality is that New Jersey is at risk of losing $254 million on the deals because of this flawed formula.

Under the EDA’s proposed changes, the net benefits test would eliminate most – but not all – of the estimated economic benefits in the so-called “out years” (ie, the years when there is no guarantee a corporation will still be in New Jersey). There is a window in which a corporation can ink an agreement with the EDA promising to stay beyond the official commitment period and still receive the larger subsidy. While this is not ideal, we are glad to see the proposed changes also include a clawback provision, by which the state can recoup some of the subsidy it’s already awarded if the corporation breaks a promise to stay beyond the official commitment period.

The EDA is to be applauded for its actions, and NJPP appreciates the willingness of EDA leadership to continue what’s been a productive, ongoing dialogue about New Jersey’s economic development subsidies. But the real reform must come from the legislature and governor, as they write the law that governs these subsidies.

When it comes to this net benefits test, the legislature should follow the EDA’s lead and restore some fiscal responsibility and realism to the test. The easiest and most sensible way to do so would be to ensure that the net benefits test covers only the number of years the corporation is committed by statute to stay in the state, as legislation introduced by Assemblyman Troy Singleton would do.

But the legislature’s reform efforts must not stop with the net benefits test. There are many other fixes that are desperately needed. Among those at the top of the list: restoring spending caps, mandating better reporting on the outcomes of tax breaks, developing more stringent standards for subsidies given to corporations shifting jobs around the state, and restricting corporations’ ability to redeem more in tax credits than they owe in taxes.