Structure of New Emerge Tax Credit Program Must Prioritize Equity and Transparency

Comments by NJPP Senior Policy Analyst Sheila Reynertson on draft rules governing the new Emerge tax credit program.

Published on Apr 16, 2021 in Tax and Budget

The following comments on the draft Emerge program rules were delivered to the Economic Development Authority on April 16, 2021.

New Jersey Policy Perspective (NJPP) has researched and analyzed the state’s economic development programs for over twenty years. We closely monitor the tax credits awarded by the state Economic Development Authority (EDA), how many jobs created and maintained the state gets in return, and regularly compare New Jersey’s corporate subsidy programs — and the laws that guide them — against those in other states across the nation.

These comments on draft rules implementing the new Emerge program under the New Jersey Economic Recovery Act are intended to ensure the job creation program is structured and administered in an equitable and transparent manner. The following feedback focuses on seven sections of the proposed rules including application requirements, review process, community benefit agreement, and evaluation transparency.

19.31-22.3(a)5 Eligibility criteria

“The award of tax credits, the capital investment resultant from the award of tax credits, and the resultant creation and retention of new and retained full-time jobs will yield a net positive economic benefit to the State…”

Given that the EDA’s “net benefit” methodology is hidden from public scrutiny, a debate about who is most qualified to analyze them or about the standards being used to estimate the efficiency of tax incentives is seemingly impossible. The result is that the public doesn’t know if the costs and benefits are calculated in a way that accurately captures the local economy and its unique needs. Does it estimate the employment benefits, particularly the proportion of new jobs likely to go to local, unemployed residents? What effect would the wage rate have on similar local jobs? Does the analysis look at wage gains across the income distribution and per capita income growth? Can the existing infrastructure accommodate the expected job growth, and can the local government absorb the added costs that come with new residents?

Public access to this methodology should be made available. Absent that, NJPP agrees with the recommendation made by Governor Murphy’s Task Force on EDA Tax Incentives (“the Task Force”) that “the EDA implement a recordkeeping requirement that permits [an auditor] to conduct effective examinations [of the analysis used for approval decisions]. This requirement would promote transparency and accountability in the EDA’s decision-making process and promote the effectiveness and efficiency of any future audits of the EDA.”[i]A paper trail of the net benefit analysis is also in the best interest of taxpayer resources.

19.31-22.4 Restrictions

(a)“The Authority shall not enter into an incentive agreement with a business that has previously received incentives administered by the Authority unless the capital investment incurred and new or retained full-time jobs pledged by the business in the new incentive agreement are separate and apart from any capital investment or jobs underlying the previous award of incentives.”

Given the recent history of bad actors forced to rescind their tax credits,[ii] this exception should be contingent upon a record of good standing with the EDA based on the previous tax incentives awards. In fact, any company whose tax credits were subject to early termination by the EDA for non-compliance should not be eligible for future tax credit award in perpetuity.

19.31-22.5 Application Submission Requirements 

(a)1“Each application to the Authority made by a business shall include the following information in an application format prescribed by the Authority…”

Among the listed business information requirements (1.i-xiv), NJPP recommends the inclusion of the New Jersey lobbying number of the authorized agent hired to assist the business with the application process.[iii]

We understand it is common for companies that apply to the EDA for tax incentives to engage the services of professional consultants to guide companies through the complex process of applying for incentives. However, without safeguards in place, these consultants can manipulate the process for financial gain. As described in the Task Force’s final report, “one consultant fabricated and altered documents before submitting them to the EDA on multiple occasions.”[iv]

The Task Force recommended the EDA hold consultants accountable for improper conduct by requiring they adhere to a code of ethical conduct — similar to how company executives are currently required by the EDA to execute certifications prior to the company’s award of tax credits.

However, given the blatant abuse of the past, this does not go far enough. Any site selection consultant or real estate broker should instead be required to register as a New Jersey lobbyist. Since accepting “success fees” is considered overt incentive for bribery under the law, this requirement removes consultants motivated by commissions out of the process entirely.

19.31-22.7 Review of Completed Application

During the review of an application, the proposed rules as currently written do not allow the public an opportunity to comment on the business applicant and/or the proposed location before the application is reviewed by the Board. To promote additional transparency of the Emerge program and shed light on an applicant’s standing among workers and in the community, the EDA should inform interested parties of pending applications and provide the opportunity to comment in advance of the final Board meeting.

NJPP recommends two ways to keep the public informed and engaged during the application process. The EDA should create and maintain a public web-based application tracker, which is updated on a rolling basis as new applications are submitted for review.  Such a tracker should include the applicant business name, the municipality and county in which the business seeks to relocate or expand, and the date the application was submitted. The tracker should also include application status and advance notification. A public tracker for business tax incentives maintained by Louisiana’s economic development authority is an exemplary model.[v] The EDA should also provide 30 days in advance a public notice of Board meetings at which an application will be reviewed, which would trigger a comment period leading up to the final Board meeting. An example of public notices can be found at NYC Industrial Development Agencies.[vi]

19.31-22.9 Approval Letter and Commitment Agreement

(c)19 A provision requiring a community benefits agreement if the total project cost equals or exceeds $10 million.

Communities are rarely at the table of a statewide economic development strategy. A community benefit agreement (CBA) can address this, but too often the corporation receiving the tax break dictates the terms, downplaying community participation and crucial benefits that would meet their needs. Given the level of fraud that was allowed to prosper under the previous economic development legislation, the EDA must play a stronger role to ensure community voices are heard and that compliance with this type of agreement is enforced.

(d)1 “The business shall enter into a community benefits agreement with the Authority and the chief executive of the municipality or, if requested by the chief executive of the municipality, the chief executive of the county, in which the qualified business facility is located.”

New Jersey Economic Recovery Act states that “[p]rior to entering a community benefits agreement, the governing body of the county or municipality in which the qualified business facility is located shall hold at least one public hearing.” However, in the proposed rule above, the EDA interprets the term “governing body” to mean the chief executive of the municipality or county. NJPP takes issue with this interpretation as it carves out multiple perspectives found on a multi-person governing body and leaves decisions that affect the entire community to a singular mayor or county executive. NJPP recommends the rule be amended to define the governing body to mean a municipality council or board of commissioners to ensure adequate community input.

“At least one” public hearing before the establishment of a CBA has all the characteristics of a token gesture. The process of creating and monitoring a CBA needs to encourage meaningful community engagement and input. In fact, recipients of tax credits should first be put on mandatory probation for year one, and if compliance of a CBA is not established, the EDA should have the authority to rescind and recapture the tax credits.

In distressed municipalities, job training should be a non-optional main component of the CBA given its proven long-term economic impact, even if the subsidized jobs no longer exist. The EDA should also require that the advisory committee accurately reflect the demographics of the community.

Finally, the various components of the CBA should be made publicly available to community residents on the municipality website and the EDA website. These include the final terms of the CBA, the annual reports produced by the community advisory committee, notice of non-compliance and resulting forfeit of tax credits, and certifications that the CBA has been satisfied.

(d)8 “An eligible business shall not be required to enter into a community benefits agreement pursuant to this subsection if the eligible business submits to the Authority a copy of the eligible business’s redevelopment agreement and approval letter that is certified by the chief executive of the municipality in which the project is located.”

A good community benefits agreement ensures that new development serves the needs of local residents and their communities, not just developers. And the role of local elected officials can ensure community voices are heard and that economic development delivers meaningful benefits. However, this exemption allows one local elected official to sign away the CBA agreement without adequate input from community members. NJPP recommends that this exemption be certified by the municipality’s council or the county’s board of commissioners, not the mayor or county executive, in which the project is located.

19.31-22.14 Reduction and Forfeiture of Tax Credits

(f) “The Authority may recapture all or part of a tax credit awarded if an eligible business does not remain in compliance with the requirements of a project agreement for the duration of the commitment period.”

NJPP again strongly recommends that companies subject to the recapture of all or part of a tax credit due to non-compliance be banned from all EDA tax incentive programs in perpetuity.

19.31-22.19 Reports on Implementation of Program

NJPP supports a regular, independent evaluation process to effectively analyze the design, administration, and effectiveness of the Emerge program. The biennial, independently produced report with a detailed analysis of the program’s effect on a business’ relocation decision, the return on investment for the award, the impact on the state’s economy, and other metrics based on national best practices is an important tool of accountability.

NJPP recommends that the implementation reports and EDA responses to those reports be posted publicly on the EDA website to allow public scrutiny of the overall effectiveness of individual programs.

Finally, NJPP recommends the creation and maintenance of a publicly available and exportable database of projects in the Emerge program as they are approved. The most relevant information should include the name of the company, sector, city, county, award amount, eligibility period, commitment period, number of retained jobs, number of new jobs, number of construction jobs, and status of the CBA agreement, if applicable. For an example of such a database, please refer to the Travis County Financial Transparency Portal.[vii]

End Notes

[i] Governor Murphy’s Task Force on EDA Tax Incentives Third and Final Published Report, July 2020. https://www.njleg.state.nj.us/OPI/Reports_to_the_Legislature/eda_task_force_07092020.pdf

[ii] Ibid at 1

[iii] The Wall Street Journal, Meet the Fixers Pitting States Against Each Other to Win Tax Breaks for New Factories, May 2019.

[iv] Ibid at 1

[v] Louisiana Economic Development, Business Incentives, last visited April 16, 2021. https://fastlaneng.louisianaeconomicdevelopment.com/public/search/bi

[vi] NYC Industrial Development Agencies, last accessed April 16, 2021. https://edc.nyc/nycida-board-meetings-public-hearings

[vii] Travis County Economic Development, Travis County Financial Transparency Portal, last accessed April 16, 2021. https://financialtransparency.traviscountytx.gov/StarsEcoDev

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