Four Key Fixes for New Jersey’s Tax Subsidy Programs Highlighted in New National Report

Regularly forecasting budget impact, limiting annual spending, putting subsidies in the state budget and restricting corporations' ability to redeem more in credits than they owe in taxes are common-sense reforms desperately needed in the Garden State.

Published on Feb 18, 2016 in Tax and Budget

Since the start of the decade, New Jersey has approved over $6.5 billion in tax breaks to corporations in a futile effort to grow the state’s economy, even though this strategy is not proven to pay off for states in the long run. We’ve documented the excesses of these efforts and called for reforms that are getting traction in the State House. Now the nonprofit Pew Charitable Trusts has put out a report, “Reducing Budget Risks,” with solid recommendations for how states can build in more accountability and rein in costs. Among the report’s nine recommendations are four that are particularly applicable to New Jersey.

1. Regularly Forecast Budget Impact

Pew could have been describing New Jersey when it noted that “many states lack a consistent process for forecasting the fiscal impact” of subsidies.

We do have an annual report that lists the expected amount of lost revenue from tax subsidies and other tax credits. In addition, the state Economic Development Authority – which administers these subsidy programs – gives the legislature a projection of subsidies’ annual cost once a year.

But that’s not enough to give the full picture of the financial impact of subsidies that already have been approved by the state. That’s in large part because most of New Jersey’s major subsidies are given out over a 10-year span, and it often takes at least a few years for a corporation to start receiving its credits. So a longer-term approach to projecting budget impact is needed.

Using very limited data and rough math, NJPP estimates that the annual cost of these subsidies could top $1 billion in 2020 and stay at that level for at least a decade. The state should do its own projections, make them public, update them frequently and – crucially – share them with the Treasury and Office of Legislative Services, so analysts there can adjust their estimates accordingly — and there can be informed, honest discussion of whether all of this money is creating good jobs or just diverting resources from other public investments that are better ways to build a strong economy.

2. Limit Annual Spending

“One of the strongest protections against surprise increases in tax incentive costs is an annual limit, or cap, on program costs,” Pew notes. Unfortunately New Jersey has gone in the other direction. In 2013 an existing cap on the total amount of credits that could be approved was eliminated from the state’s largest program, Grow New Jersey. This enabled the explosion in tax breaks awarded – to the tune of $3.7 billion – in 2014 and 2015.

There are many ways a cap could help minimize financial risk to New Jersey. For example, policymakers could limit the dollar amount of subsidies approved by the EDA in any given year, or limit the dollar amount of tax credits that corporations could claim in any given year.

3. Put Subsidies in the State Budget

A big reason why business tax breaks cost so much is that they aren’t part of the state budget. So they don’t get the annual review that budget items get. Instead, legislation is approved establishing a tax credit over the years it costs whatever it costs. When lawmakers require that tax breaks be funded by annual appropriations in the state budget – like most government spending – they “are in control of their costs and have an impetus to reconsider their effectiveness,” Pew notes. Here, too, New Jersey is going the other way. A subsidy program previously paid via the budget was instead made into a less visible tax credit program last year.

Approving a lucrative tax credit program for corporations is an easy choice for policymakers when they don’t have to appropriate any money and can point to their efforts as having done something to help the economy (even if that’s not the case). It needs to be a harder choice.

Pulling all of New Jersey’s subsidy programs into the budget process – even if only by making legislators specify the dollars to be spent on tax credit redemptions each year – would promote debate about what are the best ways to best to foster broad prosperity in New Jersey.

4. Restrict Corporations’ Ability to Redeem More in Credits Than They Owe in Taxes

New Jersey, like many other states, allows subsidy-receiving corporations to sell their tax credits to an entity that owes the state taxes. This enables the sellers to receive far more money in subsidies than they actually owe in taxes, which is overly generous and violates the spirit behind tax breaks.

As Pew notes, some states are considering putting an end to this practice “as a way to keep costs under control.” In New Jersey, even some nonprofit corporations – which are exempt from state corporate taxes to begin with – receive subsidies and boost their own revenues by selling those tax credits to tax-paying businesses. Barring corporations from selling excess tax credits is a common-sense step New Jersey policymakers should take to rein in excessive costs.