A trusted and reliable revenue estimate is central to any fiscally responsible budget. Yet, in New Jersey, the legislative and executive branches calculate revenue for the upcoming fiscal year on separate tracks. These competing projections often cause gridlock and invite unnecessary politics into the budget-making process.
Fortunately, there are concrete ways to ensure a more realistic and transparent budget debate, starting with a “consensus” process for developing a reliable, nonpartisan estimate of how much money the state has to work with. A proposal in the Legislature would do just this — institute consensus revenue forecasting, a well-established budgeting practice utilized by 28 other states.
The proposal would establish a “Revenue Advisory Board” comprised of a representative of the executive branch, the Office of Legislative Services, and a mutually agreed-upon, qualified member of the public. The board would work collaboratively to calculate the amount of revenue the state can expect to collect in the upcoming fiscal year based on analyses of current economic conditions and outlooks. While this legislation would not change the Governor’s authority to certify revenues, it would create a public revenue projection process that actively encourages more collaboration and transparency.
However, the bill could be stronger in two ways. For one, forecasting by the year leaves policymakers unable to anticipate and respond to predictable changes beyond one fiscal cycle, making the state vulnerable to revenue shortfalls and subsequent cuts to programs and services that families rely on. A better approach would be three-year revenue estimates because they provide policymakers with more clarity for long-term planning.
Second, the bill lacks similar long-term estimates on the spending side, which is another budgeting best practice. Being aware of potential cost increases before they happen gives policymakers a firewall against year-end budget changes. By simply projecting out the next three years of some foundational spending areas, policymakers would have a better understanding of how much revenue the state needs just to keep these existing programs stable. This would give New Jersey a stronger grasp of the real costs of meeting its obligations, like the state’s contribution to the pension system, and programs like K-12 education, municipal aid, and property tax relief.
New Jersey should follow the lead of the 28 states and set a trustworthy benchmark for how much to invest in schools, mass transit, and other public services. This best practice, valued by credit rating agencies, would also give New Jersey a welcome opportunity to further retreat from its losing streak of credit downgrades.
While a more comprehensive bill would better improve the budget-making process in New Jersey, this bill is a step in the right direction. Otherwise, lawmakers remain blind to the impact of their budgeting decisions, putting the Garden State’s economic future at risk.
To read a PDF version of the full report, click here.
For the past decade, New Jersey lawmakers fixated on big-ticket corporate tax subsidies as a key driver of economic development without any sound evidence that they worked. As a result, New Jersey is now a national outlier in both the size of its corporate subsidy awards and how little the state receives as a return on its investments. Thankfully, there has been a wealth of research and analysis in this area over the past several years that can help lawmakers better understand the true impact of these programs. The findings do not paint a pretty picture, an unfortunate reality that proponents of corporate tax subsidies must reckon with. As policy analyst Jason Brainerd told a special Senate committee in September, “There is no evidence the number of economic tax incentives bear any relation to the broader performance of a state’s economy.”[i]
At least 75 percent of the time, tax breaks for corporations do not affect a business’s decision on where to locate and expand.[ii] In other words, these tax breaks are often nothing more than a colossal giveaway with no additional benefit to a state’s economy. Even when subsidies do tip a location decision, they do not pay for themselves. Relocated workers raise costs to local public services offsetting at least 90 percent of any increased revenue.[iii] Nationally, only 10 to 30 percent of those new jobs go to state residents who are not already employed, doing little to boost overall employment rates and broadly shared local benefits.[iv]
Considering these damning findings, along with the fact that New Jersey’s fiscal situation is so poor that the state cannot afford such risky and poorly performing investments, the state would be far better off redirecting its economic development strategy away from corporate tax subsidies. Instead, New Jersey should focus on investments that are proven economic drivers, like public colleges, transportation infrastructure, development of affordable homes, and providing a stronger safety net for the growing numbers of working New Jersey families and children struggling to make ends meet.[v]
If the state is going to operate a corporate tax subsidy program as part of a broader economic development strategy, there are several critical and necessary reforms that must be implemented to mitigate further fraud, waste, and abuse of taxpayer dollars. The next generation of tax subsidy policies must be carefully designed to promote inclusive, local economic growth, target the right businesses in the right areas of the state with local hire and community input requirements, and have the safeguards necessary — namely hard caps on awards and robust assessment of programs — to ensure these investments provide a positive and significant return.
The next cycle of corporate tax subsidies must also break away from overly generous tax breaks to large corporations and instead focus on promising industries in areas of the state that have the greatest need for job opportunities. Economic development dollars saved can then be redirected back into public assets that benefit all New Jerseyans and have a more proven track record of economic growth.
Governor Murphy and the legislature have released competing drafts of legislation to replace New Jersey’s now-expired corporate tax subsidy programs.[vi] The legislature enlisted former state Senators Ray Lesniak and Joe Kyrillos to craft their version of what the next generation of corporate tax subsidies should look like. The legislature’s version (hereinafter referred to as Senator Lesniak’s proposal), largely mirrors the previous iteration — the Economic Opportunity Act (EOA) — and does not address the need for good government policy in the wake of findings of fraud made by the Governor’s task force and investigative journalists. The Murphy administration’s proposal addresses some of the bigger flaws of the EOA and incorporates a few proposals found in the legislature’s bill.
Overall, both plans include important improvements like targeting industries that demonstrate real economic potential and addressing community-centered investment needs, like affordable housing and food deserts. Both offer sizable tax subsidies for redevelopment projects in economically distressed areas and for high-tech businesses like wind energy and research and development. Community benefit agreements also appear in both plans, opening the door for job training and apprenticeships, which experts say accomplish development goals in a more cost-effective manner. Nonetheless, both proposals tend to overemphasis mega-projects rather than the tried-and-true cultivation of small- and medium-sized businesses. This caveat balloons the potential overall price tag of both proposals, paving the way for more foregone revenue that could be better spent on other state investments.
What’s New in Both Proposals
In the latest iteration of Governor Murphy’s corporate tax subsidy reform proposal, he has adopted three new provisions from Senator Lesniak’s draft bill. One would offer tax credits to large-scale developments “anchored” by a nonprofit or government institution. To qualify for the tax break, the project would need to be either be located in an opportunity zone (more on that later) or designed to help a targeted industry — like biotechnology and advanced transportation and logistics — to take root. Another proposal would provide state grants to cover some rental costs of collaborative workspaces for start-up companies in technology or renewable energy sectors.[vii] Additionally, in an effort to take a more active role in addressing food deserts, Governor Murphy’s proposal establishes the designation of up to 75 areas that lack access to a grocery store to help pinpoint qualifying communities.
Senator Lesniak’s bill makes a significant push to address New Jersey’s affordable housing crisis by offering up to $100 million a year to community development or nonprofit housing organizations for developments in low- and moderate-income areas. The bill also expands the existing Film and Digital Media tax credit program, a favorite of Governor Murphy’s, by five years and removes the annual spending cap after the first year.[viii]
Overall, Senator Lesniak’s bill shies away from new reforms with one exception: any commercial developer who is more than two years behind in loan payments is automatically disqualified from applying for tax subsidies.[ix] This restriction, however, would not apply to the biggest recipients of tax subsidies: residential developers or any business looking to relocate or expand in New Jersey.
What’s the Same: The Good
Governor Murphy and Senator Lesniak align on several key reforms, a positive sign that nationally recognized best practices — and reforms promoted in previous NJPP reports — will be incorporated in the next iteration of corporate subsidy programs. Important measures found in both bills include:
Preference to industries that show promise for economic growth[x]
Bonus structure for workforce housing development (this is a requirement for newly-constructed housing)
Mandated reporting to verify outcomes
Sunset provision (except in Senator Lesniak’s food desert and historic preservation proposals)
Bonus structure for labor agreements and fair wages (only Governor Murphy’s proposal covers all programs)
Clawback formula whereby the state can recoup some tax subsidies if a corporation breaks a promise (though Governor Murphy’s formula is stronger and includes wage level protections)
Smaller subsidies for jobs retained with no loopholes
Creation of a state-run venture capital program
Requirement of fair wages for construction and building service jobs
Requirement of minimal environmental and sustainability standards that promote best practices
Mandated disclosure of tax credit sales (excluding most programs in Senator Lesniak’s proposal)
What’s the Same: The Bad
Not all of the common measures are worthy of praise, however. Several important provisions in both bills do not reflect best practices of economic development and, left unchallenged, would repeat mistakes of the past.
Overly Generous Dollars-Per-Job Caps
The removal of spending caps in the EOA enabled the per-job cost of tax subsidies to skyrocket to unprecedented levels. Throughout the 1990s and early 2000s, the per-job cost of subsidized jobs was approximately $20,000. After the passage of the EOA, this cost ballooned to over $100,000 per job created or retained.
Senator Lesniak’s proposal does little to get this cost under control. The dollars-per-job caps in his bill range from $70,000 to a whopping $150,000 for new or retained jobs for a “mega-project,”[xi] or a project in a specified New Jersey investment zone.[xii] This sort of giveaway blatantly ignores the excessive spike in corporate tax breaks over the last decade and deprives the state of revenue needed for other state investments. Governor Murphy’s job creation proposal has a cap of $32,000 per job, which is within the range of the national average but still relatively high compared to other states. Virginia, for example, successfully secured the Amazon HQ2 deal with tax breaks capped at $20,000 per job.
Over Reliance on the “Material Factor” Eligibility Criteria
Governor Murphy’s proposal requires corporations to verify they are in “good standing” with the state departments of environmental protection, labor, and treasury, and allows the Economic Development Authority (EDA) to commission a third party background check on tax subsidy applicants. These good governance reforms should help ensure tax breaks are not given to corporations with a history of polluting their communities, violating wage and hour laws, or evading state taxation. Both proposals require that the potential tax subsidy award be a “material factor” in a corporation’s decision to relocate to or expand in New Jersey. To satisfy this requirement, a corporation must submit evidence showing that if not for the tax credits it would leave New Jersey or choose to set up shop in another state.
According to national experts, however, there is no agreed-upon method to assess this factor properly, making the requirement meaningless, untestable, and as found by the Governor’s task force, highly susceptible to manipulation.[xiii] Nonetheless, Governor Murphy’s proposal doubles-down on this provision with a laundry list of required documentation certified as truthful under threat of perjury. This provision is more likely to bolster the real estate consulting industry than it is to guarantee the credibility of the applicant’s need for tax subsidies. It also provides coverage for elected officials who might otherwise come under fire for handing over tax money to corporations and developers.
Over Reliance on the Flawed “Net Benefit” Test
To protect taxpayers and ensure that tax subsidies are only awarded when the benefits clearly outweigh the costs, stricter standards must be applied to the statutory formula the EDA uses to estimate the economic benefits of any proposed tax break. The EDA’s “net benefit test” looks at the direct and indirect costs and benefits of a new business or redevelopment project. This model has gone through some internal improvements through regulation, but further legislative reform is needed to restore financial integrity and bring transparency to this test.
One noteworthy improvement to the net benefit test in both proposals was instigated by a recent finding that large tax breaks were awarded under the EOA to corporations that tipped the scales in their favor by counting exempted taxes as a benefit.[xiv] The Governor’s and Senator Lesniak’s proposals address this egregious provision by disqualifying “phantom taxes” like property tax abatements from being calculated into the net benefit test. However, Senator Lesniak’s proposal excludes the entire redevelopment program from this basic protection.
Both proposals require that the largest programs and megadeals go through a state-conducted fiscal impact analysis with the glaring exception of Governor Murphy’s job creation program, which allows a corporation to submit their own analysis with a requirement that the net positive benefit equals a predetermined percentage of the award. Given that even the EDA’s cost-benefit benefit analysis 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? The model used for the net benefit test should be made publicly available and calculated exclusively by the EDA, not the corporations vying for tax breaks, to ensure the state is not losing money on any tax subsidy deals.
Bonus Tax Subsidies for Community Benefit Agreements
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, leaving out community voices and crucial benefits that would meet their needs. Providing bonuses for businesses that enter a CBA without meaningful parameters and oversight is a recipe for manipulation and token investments that don’t contribute to the economic growth of struggling areas of the state. In the aftermath of Governor Murphy’s task force findings and multiple pieces of investigative journalism, the next generation of job creation and redevelopment program must require a truly inclusive CBA to protect communities from predatory corporate interests.
Senator Lesniak’s bill offers bonus tax subsidies to applicants of the job creation program if it and a local county or town enter a CBA based on the support or operation of a so-called “One Stop Career Center.” Senator Lesniak defines this as a clearing house of either customized job training apprenticeship programs or development of infrastructure, affordable housing and public transit. But it also includes options like “greenspaces” or “other community amenities,” providing a giant loophole for corporations to do the bare minimum in exchange for a bonus tax credit of $5,000 per job. The proposal contains no protections to ensure the corporation’s compliance of the CBA, opening the door to abuse or fraud.
For the most part, Governor Murphy’s proposal gets this right by making a CBA a requirement in both the job creation and redevelopment programs. The agreement may include job training, employment, youth development, and free services to underserved community members. Prior to entering a CBA, the county or town would be required to hold at least one public hearing to give the affected community a chance to voice their needs. The resulting CBA must include the establishment of a community advisory committee to oversee implementation and compliance. Should the developer break the agreement, Governor Murphy’s proposal includes clawback provisions to protect the affected community and New Jersey taxpayers.
Given the level of fraud that was allowed to prosper under the previous economic development legislation, the EDA must be given a stronger role to ensure community voices are heard and that compliance with this type of agreement is enforced. “At least one” public hearing before the establishment of a CBA has all the characteristics of a token gesture. The process needs to encourage meaningful community engagement and input. In fact, recipients of tax subsidies should first be put on mandatory probation for year one, and if compliance of a CBA is not established, the EDA would have the authority to rescind and recapture the tax subsidies. Job training should be required as a main component of the CBA given its proven long-term economic impact, even if the subsidized jobs no longer exist. The CBA proposal should also require that the advisory committee accurately reflect the demographics of the community and prohibit any advisory committee members from having a financial interest in the project or deriving any form of income from the corporation receiving the tax credits.
Tax Subsidies for Businesses Located in a Qualified Opportunity Zone
Created by the 2017 federal tax law, the opportunity zone (OZ) provision allows investors to defer tax on capital gains by putting those gains into funds that invest in properties or businesses located in designated communities. After a certain number of years, investors get more tax breaks, including a permanent tax exemption on capital gains on their OZ investment. Governor Murphy’s proposal dips its toes into this new provision by offering bonus tax subsidies to developers or businesses that invest in an opportunity zone. Senator Lesniak’s plan fully endorses the concept in both the job creation program and a mega-project proposal.
If the OZ tax break is truly intended to improve the lives and opportunities of low-income residents of the zones, it should target investments that focus on that goal. Instead, it encourages investors to abuse the provision.[xv] That’s because the provision was enacted with nearly no government oversight and very few restrictions. This no-strings-attached policy has drawn predatory capital into neighborhoods most at-risk of displacement. Members of Congress including Senator Cory Booker, who helped create opportunity zones in the first place, have called for an investigation into the program by the federal Government Accountability Office.[xvi] New Jersey should not subsidize real estate projects already poised to get a hefty federal tax break without assurances that they will help — not push out — current low-income residents. The state should regard investors looking for more tax breaks in opportunity zones as the least in need of state assistance and redirect these tax credits to small-to-moderate-sized businesses. Better yet, drop “opportunity zones” from the proposal and replace it with recognized qualifiers, like investment zone or qualified incentive tract, to describe areas of the state in need of economic investment.
Massive Tax Subsidies for “Transformative” or “Community-Anchored” Projects
Both proposals allow for so-called mega-deals by setting aside $50 million to $100 million in tax breaks that do not count against annual spending caps. Mega-deals, as defined by Good Jobs First, provide at least $50 million in tax subsidies to either large-scale development projects or well-established corporations with a large workforce.[xvii]
Over the past two decades, New Jersey has rewarded 30 mega-deals, more than half (16) of which received nine-figure awards, including Fortune 500 companies Prudential Financial, Subaru of America, and JPMorgan Chase Bank.[xviii] Given the mounting evidence that such large-scale tax subsidies do not pay for themselves, megadeals are a risky investment for New Jersey, a state struggling to pay its bills as the cost of already-approved tax subsidies explode.[xix]
These deals also help wealthy corporations avoid the competitive subsidy application process and parachute into a community without a thorough impact analysis. Similarly, opportunities for collaboration with research institutions, teaching hospitals, colleges or universities are plentiful and already market-driven. Let these assets speak for themselves without offering sweeteners like covering 100 percent of project costs or offering up to $250 million in tax subsidies.
Tax Credit Buyback Option
Both proposals would allow the Division of Taxation to buy back unused tax credits from businesses that don’t need them to lessen their tax bill — at a deep discount. Effectively, this allows businesses to convert tax credits into cash grants valued at 75 percent of the awarded credit. Such a provision should not be entertained without full transparency of all sellers and buyers.
What’s Missing
Hard Caps on Job Growth Programs and Commercial Redevelopment
New Jersey’s corporate tax subsidies have always included annual limitations on cost — until the passage of the Economic Opportunity Act of 2013. Bypassing such an important cost-control mechanism opened the door for enormous tax breaks for the next several years. As the state committed billions in lost tax revenue to already profitable corporations, the state simultaneously cut funding for public schools, NJ Transit, property tax relief, colleges and universities, and affordable housing — all proven drivers of widespread economic growth.
Senator Lesniak’s bill commits to annual spending caps for some programs but, most alarming, they are absent in the two largest programs: commercial real estate development and the job creation and retention program previously known as Grow NJ. This policy design contradicts extensive research that shows corporate tax breaks do not translate into more economic growth, and is based on the disproven notion that New Jersey must offer limitless tax incentives in order to compete with other states. Caps must be a central component of the next generation of corporate tax subsidies because they make New Jersey’s economic development policies less costly to the state budget and create more job opportunities for New Jersey residents.
Governor Murphy’s bill features annual spending caps for every program. However, the redevelopment program allows for some flexibility, making it vulnerable to the political pressures of a proposed megadeal and, in the end, costly to New Jersey taxpayers. In fact, the proposal has over $800 million worth of exemptions over the lifespan of the legislation to support up to six potential large-scale development projects and removes caps altogether for a qualifying wind energy support facility. These projects may not all come into fruition, but their presence undermines the Murphy administration’s top priority of reining in subsidies and abiding by realistic expectations of what a state government can do to foster economic growth. The Governor’s recent support of lifting the annual cap of the Film and Digital Media tax credit program demonstrates this willingness to revise what should be a non-negotiable budget item.[xx]
Shorter Award Timeframes
Senator Lesniak’s proposal allows for subsidy awards to be paid out annually for 10 to 20 years, depending on the program. This measure ignores research that shows corporations generally don’t consider tax subsidies ten or more years out as valuable as those offered within a shorter timeline, like one to five years.[xxi] They also absolve current lawmakers from the future costs while giving them political credit for new jobs. Offering shorter timeframes means New Jersey can control the cost of subsidies and better predict when a business will redeem them. In contrast, the Murphy administration’s job creation and retention proposal includes this best practice by imposing a maximum timeframe of five years. Most of the other proposals in the Governor’s plan have one-year timeframes.
Recurring Evaluation by an Independent Entity
Lawmakers must fully commit to establishing a regular, independent evaluation process to effectively analyze the design, administration, and effectiveness of the state’s subsidy programs. Both proposals require a biennial, independently produced report with a detailed analysis of the tax subsidies’ 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. However, Senator Lesniak’s bill fails to require such a report for the job creation program, the same proposal that has no annual spending cap. This key reform should be a requirement for every program to ensure accountability and fiscal responsibility. But to ensure objectivity, a biennial performance audit should be produced by the state Comptroller or a public advocate rather than a subcontracted college or university given that academic institutions are eligible for and have benefited from these tax subsidies in the past, and that public universities depend on the legislature for state aid.
Other Important Reforms Missing in Both Proposals to Further Bolster Accountability
Mandated annual forecasting/multi-year cost projection The Treasury must release the Unified Economic Development Report (UEDR), an annual report that enumerates the direct costs and indirect loss of revenue from tax breaks with detailed information about larger tax subsidies and the types of jobs they created. The EDA should also be required to release an annual 15-year forecast of the cost of each program to better estimate long-term future revenue losses.
Addition of hiring information in the UEDR To better ensure local and representative hiring, the Treasury should analyze the match between a business’s labor needs and the labor force potential in the relevant geographic area.
Requirement to put investment into state budget Putting tax subsidies into the budget process as a line item would promote a better debate about the best ways to foster broad prosperity in New Jersey. This would take corporate subsidies out of the abstract and explicitly state what they are costing the state and its taxpayers.
Requirement that application consultants register as lobbyists Tax subsidies support a cottage industry of real estate consultants working on commission to help corporations navigate through the application process and get the biggest tax breaks possible. Requiring these consultants to register as lobbyists means the disclosure of their identity, compensation terms and other contractual details which takes away the monetary incentive.
Regional corporate tax subsidy policy Implementing a corporate tax subsidy ceasefire with neighboring states would end the costly practice of giving tax credits to companies within the same metro area and demonetize the blackmail tactics corporations deploy in exchange for tax subsidies.
Update: This report was updated on December 5, 2019 to clarify that the cap exemptions in Governor Murphy’s Aspire NJ proposal are for the 5-year life of the program, not annually.
[ii] Prepared testimony of Dr. Timothy J. Bartik, Senior Economist, W.E. Upjohn Institute for Employment Research before New Jersey State Senate Select Committee on Economic Growth Strategies, September 2019. https://research.upjohn.org/presentations/60/
[vii] Targeted industries listed in Senator Lesniak’s rental assistance proposal: advanced computing, advanced materials, biotechnology, electronic device technology, information technology, food technology, life sciences, medical device technology, health care technology, logistics technology, mobile communications technology, agricultural technology, and renewable energy industries.
[ix] Senate Bill No.1576: Prohibits awarding of economic development subsidy to business if payment of principal and interest on previously awarded loan or loan guarantee is greater than 24 months overdue. https://www.njleg.state.nj.us/2018/Bills/S2000/1576_I1.PDF
[x] Governor Murphy’s job creation proposal targets advanced transportation and logistics, advanced manufacturing, aviation, clean energy, life sciences, information and high technology, finance and insurance, and non-retail food and beverage businesses. Murphy’s mega-development proposals target wind energy, food deserts and R&D. Targeted industries listed in Senator Lesniak’s mega-project proposal: biotechnology, life sciences, pharmaceuticals, aeronautics, clean energy, advanced manufacturing, large-scale food and beverage production, advanced transportation and logistics, finance, financial technology, insurance, media, information technology, machine learning, and artificial intelligence.
[xi] “Mega” means a business other than a warehouse or distribution business at which the business intends to employ at least 1,000 new or retained full-time jobs and having a capital investment in excess of $100 million.
[xii] “Investment zone” means means a distressed, densely populated municipality or a government-restricted municipality.
To read a PDF version of the full report, click here.
As the Great Recession gripped the country over a decade ago, states like New Jersey had to make tough choices to balance their budgets. They relied on a mix of tax increases, budget cuts, and tapping into savings to close budget gaps and ride out significant reductions in tax revenue collections. Nationally, state tax revenue has recovered overall, but each state’s recovery varies widely and many states still lag behind.
Nearly one-fifth of states still collect less revenue than before the economic downturn, more than one-third have smaller rainy day funds, and almost half spend less from their general fund budgets than a decade earlier. Unfortunately, New Jersey checks all of these boxes, putting the state’s precarious financial health at greater risk should another recession hit. To put it another way, the Garden State has yet to fully recover, making New Jersey one of the least prepared states to weather a future economic downturn.
To better understand why New Jersey continues to struggle while states with similar economic profiles have fully recovered and then some, New Jersey Policy Perspective (NJPP) commissioned graduate students at the Edward J. Bloustein School of Planning and Public Policy to examine the matter. This report assesses the policy choices made before and in response to the Great Recession by New Jersey and five comparable states: Connecticut, Illinois, Maryland, Massachusetts, and North Carolina.
Using a set of performance indicators, the practicum group tracked how each state prepared for, and recovered from, the Great Recession using information collected through document and database analysis and interviews with state and national budget and policy experts. Because each state had its own unique experience in the past decade, no one policy decision could be identified as making or breaking a state’s recovery. Nonetheless, the report finds a number of important trends, such as:
States with policies in place to rationalize debt usage before and during the recession were less likely to borrow for operational expenses and pension funding
Reliance on non-recurring revenues and borrowing during and before the recession often exacerbated budgeting challenges in future years
States with a well-funded Rainy Day Fund were able to get through the recession with less borrowing, fund transfers, and spending cuts
States with already low bond ratings were more likely to use debt financing during the Great Recession
Pension/OPEB liabilities and structural deficits greatly limited states’ flexibility and posed challenges to maintaining services and investments
States that raised taxes during the recession and sunsetted them before their economies fully recovered generally had to deal with budgetary shortfalls in future years.
This report was prepared for New Jersey Policy Perspective (NJPP) by a practicum of graduate students from the Rutgers University Edward J. Bloustein School of Planning and Public Policy under the advisement of Dr. Cliff Zukin: Alex Barree, Vineeta Kapahi, Rafay Kazmi, Benjamin Levy, Jeehye Min, and Emilia Piziak.
A decade after New Jersey made deep cuts to its public colleges and universities, state funding continues to lag behind pre-recession levels and students are struggling to cope. Students who already face the greatest racial and economic barriers to higher education are particularly at risk of being harmed by rising tuition and fees, and subsequently, rising student loan debt. This jeopardizes not only their futures, but that of the entire Garden State.
New Jersey is one of 19 states that slashed funding for higher education by more than 20 percent per student between 2008 and 2018,according to a new report by the Center on Budget and Policy Priorities. State lawmakers spent 22.6 percent, or $2,278, less per New Jersey student between 2008 and 2018, far outpacing the national average decline of 13 percent or $1,220 per student.
Years of cuts have helped drive up the cost of a college degree, imposing the greatest burden on families of color and those with low and moderate incomes. In New Jersey, the average tuition grew by 18.3 percent, or $2,121, between 2008 and 2018. For students priced out of attending college, the costs are much greater in the long-term as they will not benefit from the greater lifetime earnings that come with having a college degree.
Growing tuition and fees costs also make up a growing share of New Jersey residents’ household income. In 2017, the average price of attendance accounted for 20 percent of the median household income. For Black and Latinx households, the price of attendance accounted for 32 percent and 29 percent of households income, respectively.
Higher tuition and fees can result in sticker shock, where students are dissuaded from enrolling in college even if the net price (including financial aid) doesn’t rise. Increases to costs of attendance also reduce campus diversity, especially among students of color and those from households with low incomes.
Public colleges and universities are important factors in the future success of New Jersey’s students, communities, and the broader economy. Affordable higher education opens the door to widespread opportunities, while being plagued by insurmountable student loan debt does not. Reinvesting in higher education will help ensure that the benefits of higher education are broadly available to all, not just for those who can afford it.
It’s no secret that economic inequality is one of the defining policy issues of our time — but just how bad is it? Last month, the Census released new data showing the gap between those at the top and everyone else is at the highest level ever recorded. Thanks to a new op-ed in the New York Times, there is now striking evidence that shows that inequality is not only widening, but it’s driven in part by the U.S. tax code.
In the new op-ed, David Leonhardt looks at changes in the total tax rate — including local, state, and federal taxes — since 1950. He finds that over the past 70 years, the richest among us have had their total tax rate drastically cut while everyone else has seen their tax rate increase. In fact, for the first time in modern history, the 400 richest Americans pay a lower tax rate than any other income group.
For the millions of everyday New Jerseyans who work hard and make sacrifices to make ends meet, this chart represents infuriating truths. It represents an economic system that benefits those at the very top at the expense of everyone else. It represents a broken political system where policies are written by and for the wealthiest individuals and corporations. It represents decades of austerity, where tax cuts diverted critical funding away from programs and services that benefit the public good, like education and infrastructure. It also represents that inequality doesn’t just happen by accident — it is choices made over the course of decades by those in power.
New Jersey has seen a similarly alarming reduction in taxes for the wealthiest among us over the past decade.
The future prosperity of New Jersey depends, in large part, on investments that we all contribute to through taxes. Together, we repair our roads and bridges, fund our public schools, preserve public parks, and expand mass transportation, all through taxation. However, in an era of budget shortfalls, in large part contributed by the wealthy and corporations not paying their fair share in taxes, we are not able to fund the programs and services that make New Jersey thrive. To reach our goals and help every New Jerseyan succeed, we need to restore fair taxation on the wealthiest among us so we can all prosper together.
Earlier today the Senate Select Committee on Economic Growth Strategies heard testimony from recipients of corporate tax subsidies under the Economic Opportunity Act. In response to today’s hearing, New Jersey Policy Perspective (NJPP) releases the following statement.
SHEILA REYNERTSON, SENIOR POLICY ANALYST, NEW JERSEY POLICY PERSPECTIVE:
“Today’s hearing does nothing to discount the testimony of national experts and economists from earlier this month. The facts remain that New Jersey’s corporate subsidies are a national outlier, as the state spends way more than it should for every job created. At the rate New Jersey pays in corporate subsidies — $196,388 per job to Subaru and $235,902 per job to American Water Works — taxpayers will never break even. This is a failed approach to economic development.
“Instead of providing data on job creation, the companies that testified today touted their philanthropy work. In an era of runaway economic inequality, charity is no substitute for paying taxes. Lawmakers must rein in the state’s corporate tax breaks with hard caps, shorter timeframes, and greater oversight.”
Read NJPP’s latest report on reining in corporate subsidies: https://www.njpp.org/budget/reining-in-corporate-tax-subsidies-a-better-economic-development-playbook-for-new-jersey
To read a PDF version of the full report, click here.
When the Economic Opportunity Act was signed into law in 2013, New Jersey signaled to corporations that it was “open for business.” The idea was, by offering overly generous corporate tax subsidies, more companies would choose to expand in or relocate to the Garden State. This, in turn, would create more jobs for New Jersey residents, providing a much-needed boost to the economy.
Instead, by removing oversight safeguards and caps on awards, the economic development legislation enabled an unprecedented spike in corporate tax breaks with questionable benefits, depressing future tax revenue for years to come. Today, New Jersey is a national outlier in both the size of its corporate subsidy awards and how little the state receives as a return on its investments.
For years, New Jersey lawmakers fixated on big-ticket corporate tax incentives as a key driver of economic development without credible evidence that more is better — and little attention to the collateral consequences or opportunity costs.
But times have changed. High-profile debacles like FoxConn in Wisconsin and Amazon’s infamous HQ2 search have undermined the public’s perception of this costly strategy, both across the nation and here in the Garden State. Now is the opportune time for reform.
The next iteration of New Jersey’s economic development strategy must embrace two strategies. First, pivot away from overly generous tax breaks — with little oversight — to large corporations, and instead tailor the programs toward new companies within promising sectors in locations that have a greater need for job opportunities. Second, and more importantly, redirect the bulk of economic development dollars back into the public assets that benefit all employers and have a proven track record of making New Jersey an attractive place to grow a business: customized job training, safe roads and bridges, affordable homes, child care, and high-quality public schools from pre-Kindergarten through college.
To rein in New Jersey’s corporate subsidies, lawmakers should implement the following reforms:
Goals driven by national best practices
Hard caps on annual and per-job awards
Shorter award timeframes
Local hiring agreements
Strict reporting and evaluation criteria
Stronger net benefits test
Restrict sale of tax credits
Mandatory labor protections
Community benefit agreements
Prohibit awards to documented “bad actors”
By reining in New Jersey’s corporate subsidies and implementing best practices from across the nation, lawmakers can spend less and get more. They can grow an economy that truly generates prosperity for workers, their families, and their communities.
New Jersey’s Corporate Subsidies: Big Cost, Small Return on Investment
On the heels of the Great Recession and under a new administration, New Jersey lawmakers put all their eggs in one basket — corporate tax subsidies — to help jump-start the state economy. In 2010, Governor Chris Christie’s first year in office, New Jersey approved $353 million in corporate tax subsidies, a whopping 163 percent increase from the year prior. The price tag of corporate tax breaks surpassed $1 billion for the first time in state history in 2013. At the end of that year, the Economic Opportunity Act of 2013 (EOA) removed all meaningful caps and safeguards from the state’s corporate subsidy programs, opening the door for enormous tax breaks for the next several years. Meanwhile, as the state committed billions in lost tax revenue to already profitable corporations, the state simultaneously cut funding for public schools, NJ Transit, property tax relief, colleges and universities, and affordable housing — all proven drivers of widespread economic growth.
Awards and subsidies of this size are woefully out of sync with economic development strategies in other states. Whereas the average per job cost of corporate tax incentives hovers around $33,000 nationwide, New Jersey’s unrestricted spending spree on subsidies led to a record breaking $105,192 per job price tag in 2015.[i] Today, the cost still exceeds $80,000 per job.[ii] In Camden, where special provisions in the EOA allowed for bonus awards, the average spending on tax subsidies totals a whopping $215,000 per job.[iii] In some deals, New Jersey agreed to tax breaks worth more than half a million dollars per job.
This overreliance on corporate tax subsidies flies in the face of economic development best practices and ignores New Jersey’s precarious fiscal condition. In testimony delivered to a senate committee on economic growth strategies, national experts agreed that corporate subsidies like New Jersey’s have questionable benefits for the public good.
According to Dr. Timothy Bartik, Senior Economist at the W.E. Upjohn Institute for Employment Research, at least 75 percent of incentives have no effect on job creation.[iv] Worse, corporate subsidies rarely, if ever, pay for themselves because nearly all revenue gained from job creation is offset by necessary public costs used to mitigate its impact. Jackson Brainerd, a policy specialist from the National Conference of State Legislatures, reiterated this position, stating “there is no evidence that the number of tax incentives offered bears any relation to the broader performance of the state’s economy, and there’s quite a bit of evidence that tax incentives often fail to achieve their stated goals and have a negative impact on state fiscal health.”[v]
Of the $11 billion in tax subsidies approved since New Jersey began offering them, an outstanding majority have yet to be redeemed. The state’s biggest subsidy programs — Grow New Jersey Assistance (Grow NJ), Economic Redevelopment & Growth (ERG), and Urban Transit Hub Tax Credit (HUB) — awarded approximately $8 billion in subsidies. Yet fewer than 9 percent of those tax credits have been distributed to corporations that met their qualifying goals, according to the state Comptroller.[vi]
That means the drag on New Jersey’s finances has yet to be fully realized. Starting in fiscal year 2020, already-approved tax breaks are estimated to cost New Jersey over $1 billion annually in foregone tax revenue.[vii] That figure is likely to grow in future years as more subsidies granted under the EOA are redeemed.
A New Approach to Economic Development: 10 Key Reforms
To improve the quality of New Jersey’s corporate incentive programs, it is vital for lawmakers to pursue a more fiscally responsible approach to economic development that reins in the volume and scope of subsidies. This is especially important considering the state’s ongoing struggles meeting its past and current budgetary obligations.
New Jersey should also consider implementing a regional corporate subsidy ceasefire agreement with neighboring states that share a labor market. Modeled after the Kansas City pact, this innovative interstate agreement sets a powerful precedent for the tri-state area, where corporations often threaten to cross state lines in exchange for millions in tax credits.[viii] When tax credits are given to companies that ultimately move within the same metro region, no new jobs are actually created, as they’ve merely shifted to a different address. A ceasefire agreement would end this costly race to the bottom and demonetarize the blackmail tactics made by corporations in exchange for tax subsidies. A resolution introduced by Senator Joe Cryan could be the vehicle for a more regional approach to economic development.[ix]
1. Goals Driven by National Best Practices
Before addressing the design, implementation, and oversight of its tax subsidy programs, policymakers should first take a step back and take a long view of the state’s role in large-scale economic growth. Is the goal of the state’s economic development strategy to encourage new job creation? How important is it to play the defensive strategy of keeping jobs from leaving the state? Should the main focus be on boosting economic activity in distressed areas, increasing the state’s supply of affordable housing, or investing in young, fast-growing companies? Should subsidies be earmarked for sectors that show the greatest potential for growth in the Garden State?
Once the goals are clarified, policymakers would better serve the public good by abiding by the so-called “rule of 98 and 2.”[x] Businesses typically spend less than 2 percent of their total costs on state and local taxes. The other 98 percent consists of variables such as labor, occupancy, raw materials (or other inputs), IT, marketing, administration fees, and logistics. New Jersey should treat their economic development dollars in the same manner: de-emphasize large awards for a tiny percentage of corporations and, instead, invest heavily in the basics that benefit businesses across the state like development of an educated workforce with quality K-12 and higher education, reliable infrastructure, affordable homes, and specialized job training programs.
2. Hard Caps on Annual and Per Job Subsidy Awards
New Jersey has offered corporate tax subsidies as an economic strategy since the 1990s, and though each iteration was slightly different, they always included annual limitations on cost — until the Economic Opportunity Act of 2013. Under the EOA, the job creation program had a spending cap, though it was repeatedly lifted by the legislature. Bypassing such an important cost-control mechanism opened up a Pandora’s Box of already wealthy corporations taking advantage of generous tax breaks with lax oversight. If the Grow NJ program included a hard $200 million spending cap per year, New Jersey would have awarded $4 billion less in tax breaks over a seven-year period — a whopping 74 percent savings.
Research by the Pew Charitable Trusts highlights that well-designed tax subsidy programs utilize annual cost limits to address long-term affordability upfront and keep annual costs more predictable.[xi] Governor Murphy’s proposed subsidy programs feature annual spending caps, though the larger programs allow for some flexibility that could prove costly.[xii] The Murphy administration’s jobs-based program, NJ Forward, has an annual soft cap of $200 million with the option to lift the cap by as much as $100 million. The real estate subsidy program, NJ Aspire, has a spending cap of $100 million allocated through biannual applications, with some large-scale projects excluded from the cap. Three other proposed programs have annual caps of $60 million or less.
To both increase the legislature’s role in oversight and restore the public’s trust in how government invests tax dollars, spending caps should be on the smaller side without exception. Allowing flexibility as proposed in NJ Forward is excessively subjective and vulnerable to the political pressures of a proposed megadeal. Similarly, a proposal introduced by Senator Singleton would give the legislature the authority to enact spending caps on a year-to-year basis for tax credits that foster job creation or retention based on EDA projections.[xiii]
If these programs were instead funded by appropriations, like most government programs, it would give the governor and lawmakers more control of their costs. It would also create another opportunity for lawmakers to understand the size and scope of the state’s corporate tax subsidy programs and hopefully encourage a healthy debate about the right level of funding and how to improve their effectiveness. Although an appropriations process is far more common for cash incentives than it is for tax incentives, it can work for tax incentives, too, according to the Pew Charitable Trusts. For example, in Florida’s budget each year, lawmakers set how much money will be available for several of the state’s programs, including cash and tax incentives. This isn’t a new strategy for New Jersey; the former Business Employment Incentive Program (BEIP) was subject to annual appropriations in the state’s budget.
The removal of spending caps in the EOA also led to skyrocketing per-job costs. New Jersey’s average award per job since the end of 2013 is $81,300. In Camden, the average is $200,570 per job. Taxpayers subsidized 250 new jobs linked to the Philadelphia 76ers new practice facility for an astonishing $328,000 per job, while 395 new and retained jobs at Holtec cost $658,228 each. At such a price, taxpayers can never break even. That is, workers at such firms are never going to pay $300,000 or $600,000 more in state and local taxes than public services they and their families consume. Considering these egregious costs, New Jersey’s outsized subsidy levels should be cut in half, at least, as measured by dollars-per-job. The Murphy administration’s proposal includes a sensible dollars-per-job cap ranging from $2,400 to $6,400 per year, which is more in line with at least 16 other subsidy programs across the country that impose caps of less than $10,000 per job.[xiv] This best practice helps to avoid giving mega-tax breaks to just a few companies without adequate evidence that the economic benefit will eventually pay for them.
3. Shorter Award Timeframes
New Jersey currently allows projects to qualify for corporate tax subsidies that are paid out over the course of 10 to 20 years, which is much longer than necessary and out of sync with best practices. Research shows that corporations are far less persuaded by money that they are promised a decade from now.[xv] Offering shorter timeframes means a state can spend less on subsides and more easily predict when business will earn or use the awarded credits while receiving the same benefits. The NJ Forward program, the Murphy administration’s job creation proposal, includes this best practice by imposing a timeframe of three years with a built-in two-year extension, if necessary.[xvi] The proposal also requires businesses to document performance indicators while committing to maintain their operations in the state for twice as long as their award timeframe. Further, the Murphy administration’s proposed historical preservation and environmental cleanup programs have one-year timeframes. With shorter timeframes, New Jersey can be better assured it is “moving the needle” on corporate decisions while avoiding long-term budget problems.
4. Local Hiring Agreements
Under the EOA, the EDA awarded large-scale tax subsidies to “distressed municipalities” to encourage investment, business development, and employment in those areas. New Jersey’s designated Growth Zones include Atlantic City, Camden, Passaic, Paterson, and Trenton. However, the overwhelming majority of these awards — over 85 percent — went to Camden without specifically tailored requirements to ensure local hiring.
Thirty-six projects were approved since 2013 without any meaningful guarantee to Camden residents that local hiring would be a priority. Instead, the subsidized jobs were typically filled by workers who commute across city limits, while the vast majority of construction jobs associated with 25 subsidized projects were taken by workers from outside the city.[xvii]
This further debunks the trickle-down philosophy underpinning the state’s economic development strategy. Simply targeting subsidies in a “distressed municipality” does not guarantee jobs, let alone good paying ones, for local residents.
Tax subsidies for distressed local labor markets must be tied to first source hiring agreements and customized job training to encourage prioritized hiring of unemployed and underemployed local residents.
Research demonstrates that this targeted strategy has social benefits that endure even if the initial job is short-lived.[xviii] In other words, efficiently run job training programs may give New Jersey a better return on investment than reducing the tax burden of corporations. The Murphy administration’s proposal offers bonuses in its job creation program to encourage local hiring.[xix] But local hiring should instead be a requirement.
5. Strict Reporting and Evaluation Criteria
Based on the selected findings of the state Comptroller’s audit and the EDA Task Force, major flaws persist in the state’s monitoring of tax subsidy recipients and evaluation of the EDA’s overall effectiveness. In 2007, the state mandated a report — the Unified Economic Development Budget (UEDB) — to provide important and detailed information about larger tax subsidies and the types of jobs they created. That report has never been produced. While there have been annual reports on tax breaks produced since 2010, the UEDB would provide a more comprehensive look at the state’s subsidy programs. The EDA has taken steps to produce a similar annual report, but it is not enough given the mounting evidence of mismanagement, or worse, corruption.[xx] The Treasury Department must release the annual UEDB report going forward.
Policymakers must first assess why New Jersey has a track record of failing to monitor and enforce its performance standards before crafting effective and enforceable reform measures. The assessment criteria in the Murphy administration’s proposal includes annual reporting by award recipients on the number of new and retained jobs, along with their salaries.[xxi] Self-reporting like this should be paired with real-time data from the Departments of Labor and Treasury to ensure accuracy and oversight.
Lawmakers must also fully commit to establishing a regular, independent evaluation process in order to effectively analyze the design, administration, and effectiveness of the state’s subsidy programs. The recent studies from the Bloustein School at Rutgers University and the Comptroller are not enough. Pew’s research shows that states benefit significantly from recurring evaluations. This is evidenced by thirty states utilizing this sort of evaluation process, with many states acting on the findings to reform their tax subsidy programs.
The Murphy administration’s proposal includes a biennial, independently produced report with a detailed analysis of the tax subsidies’ 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.[xxii] However, rather than relying on a sub-contracted college or university for such a report, a biennial performance audit produced by the Comptroller would be much more effective as it is less likely to invoke any concerns over conflicts of interest.
Finally, lawmakers must get a better handle on the budgetary impact of already-approved subsidies, i.e., of cumulative tax credit liabilities. Without this data, policymakers are left in the dark when the costs of tax subsidies begin to rise, leaving them unprepared for increases or ill-equipped to change the design of the programs. Right now, at the request of the Office of Legislative Services (OLS), the EDA voluntarily provides 5-year fiscal impact estimates of already approved awards on the state’s budget.[xxiii] Should OLS cease to ask for this information, there is no guarantee that the EDA will continue to supply such data. This is especially concerning for New Jersey given the enormous long-term obligations the state has incurred since the EOA was enacted. Policymakers would benefit from an annual forecast of the cost of each program in addition to data on maximum liabilities. Not only should this forecast be required by law to ensure transparency, but it should more closely match the lifespan of the approved tax subsidies to generate a better estimate of long-term future revenue losses. A multi-year forecast requirement is not included in the Murphy administration’s proposal.
6. Stronger Net Benefits Test
Lawmakers need to build upon the EDA’s changes to the “net benefits test,” which is the statutory formula used to estimate the economic benefits of tax subsidies. As a basic taxpayer protection, a strong net benefits test restores a sense of fiscal responsibility and realism that has been sorely lacking since the passage of EOA. The EDA’s “net positive benefit” test has since been improved to cover the time period a business commits to maintaining the awarded project. However, there are loopholes that allow projects within a specific place, particularly Camden, to water down this provision.[xxiv]
The clawback formula in the net benefits test has also been improved administratively, but it does not apply to every project administered by the EDA. It is imperative that carve-outs for this provision be eliminated.
The legislation guiding the EDA can be significantly improved to deliver better outcomes for workers and communities with the following recommendations: codify stringent tax subsidy standards for retained jobs, close all job retention loopholes in EOA, and place a cap on the percentage of tax subsidy dollars awarded for job retention (e.g.,10 percent of gross tax credits).
7. Restrict Sale of Tax Credits
It sounds counterintuitive, but most New Jersey tax credits are not claimed by the companies to which they were awarded. Why? Because the “tax credits” are so large, they greatly exceed the companies’ tax liabilities. When this happens, a recipient firm is legally allowed to sell its award to other businesses for cash on a secondary marketIn fact, most recipients of tax subsidies in New Jersey do just that. The buyers are usually large corporations that have substantial tax liabilities and can use the credits, dollar for dollar, to reduce their tax bills. So these “tax credits” are not tax breaks for the recipient companies; they are actually cash gifts to them. Since 2011, over three-quarters of the corporations that received tax credit awards sold their tax credits, and at a significant discount.[xxv] This practice then leaves the state Treasury to contend with front-loaded corporate tax revenue shortfalls; it does not learn of tax credit sales until the new owner files to cash them in.
The sale of tax credits would still be allowed under the Murphy administration’s proposal, but with a nod toward better transparency by making these transactions publicly available on the EDA website.[xxvi] If the ultimate beneficiary of a tax credit award is not disclosed, then the state’s largest tax expenditures for economic development are hidden. In some cases, a 10 percent sales tax would be applied, helping close revenue gaps caused by the companies cashing the credits in. These are important first steps, but more should be done to restrict a practice that benefits corporations more than New Jersey taxpayers. For starters, the 10 percent sales tax should be applied to the sale of all tax credit awards, and documented “bad actors” should be barred from purchasing tax credits on the secondary market (see below).
8. Mandatory Labor Protections
Under the EOA, applicants of Grow NJ were offered a bonus of up to $1,500 per job if the average salary was either more than the existing county average or more than the average salary in one of the Growth Zone cities (Atlantic City, Camden, Trenton, Passaic, and Paterson). Offering bonuses as a way to further an important policy objective, such as creating jobs that pay a living wage, is an insufficient approach. In fact, the EOA had originally mandated that building services workers (such as custodial and security staff) on any project or development that received tax credits could be paid no less than the prevailing wage for that industry or sector. It was the only part of the Economic Opportunity Act of 2013 conditionally vetoed by then-Governor Christie.
A bill introduced by Senator Singleton would reinstate this provision, while the Murphy administration’s proposal goes further, including not just building workers but also construction workers.[xxvii] Still, policymakers should be more proactive to ensure that all new subsidized jobs have salaries that are above existing market averages for the geographic area, industry, or occupation.
Policymakers should also mandate other labor protections that play a key role in fostering a strong and healthy state economy in New Jersey. For example, companies that receive tax subsidies should be required to implement fair work schedules and production quotas, provide affordable healthcare, and guarantee workplace safety standards. These priorities are critical because when workers have rights, wages go up, poverty rates go down, the use of government benefits programs decreases, workers’ safety improves, and economic stability and prosperity prevails.
9. Community Benefit Agreements
The Murphy administration’s reform proposal features bonus structures to encourage community benefit agreements to generate local employment, good paying jobs, innovative technology, incubator development, and more.[xxviii] However, offering bonuses does not go far enough in advancing critical policy priorities.
Lawmakers should eliminate bonus options as a tactic and instead require community benefit agreements for all projects to encourage strong environmental standards, job training, targeted labor protections, affordable housing set-asides, and market-based wage standards. This model allows community groups to have a voice in shaping a redevelopment or job creation project by pressing for community benefits that are tailored to their particular needs. The fulfillment of commitments made to the community by the award recipient would need to be submitted to the EDA in order to certify their compliance with the community benefits agreement.
10. Prohibit Awards to Documented “Bad Actors”
Currently, the EDA has rules in place which prohibit corporations from receiving tax subsidies if they have violated certain state and federal laws. However, the process of vetting applicants properly has proven to be faulty based on recent reports of awards going to corporations that should have been disqualified from the very beginning.[xxix] Again, staff at the EDA need better training to ensure tax dollars are not benefitting bad actors. Additionally, the scope of what constitutes disqualification should be expanded. Senators Cruz-Perez and Singleton have introduced a bill that would deny tax subsidies to businesses that are two years or more delinquent on a previously awarded loan.[xxx] Other types of bad corporate practices that should lead to disqualification include parking profits offshore to avoid federal and state taxes and any violation of federal law in the last five years.
Endnotes
[i] Prepared testimony of Dr. Timothy J. Bartik, Senior Economist, W.E. Upjohn Institute for Employment Research before New Jersey State Senate Select Committee on Economic Growth Strategies, September 2019. https://research.upjohn.org/presentations/60/; NJPP analysis of New Jersey Economic Development Authority public data, accessed via the EDA website. The data is up-to-date through the August 2019 EDA meeting.
[ii] NJPP analysis of New Jersey Economic Development Authority public data, accessed via the EDA website. The data is up-to-date through the August 2019 EDA meeting.
[iv] Prepared testimony of Dr. Timothy J. Bartik, Senior Economist, W.E. Upjohn Institute for Employment Research before New Jersey State Senate Select Committee on Economic Growth Strategies, September 2019. https://research.upjohn.org/presentations/60/
[ix] New Jersey Senate Resolution Number 158, Urges governors of New Jersey, Delaware, New York and Pennsylvania to collaborate on tax incentive agreement similar to Kansas and Missouri’s agreement.
[x] Greg LeRoy, Executive Director, Good Jobs First, Testimony before Governor Murphy’s Task Force on New Jersey’s Economic Development Authority Tax Incentives, July 9, 2019.
[xvii] Philadelphia Inquirer, NJ Tax-break Projects Hired Just 27 Camden City Residents for Construction Jobs, A State Analysis Found, September 2019. https://www.inquirer.com/business/nj-tax-breaks-camden-jobs-construction-economic-development-authority-20190912.html?__vfz=medium%3Dsharebar
[xxx] New Jersey Senate Bill Number 1576, Prohibits awarding of economic development subsidy to business if payment of principal and interest on previously awarded loan or loan guarantee is greater than 24 months overdue, https://www.njleg.state.nj.us/2018/Bills/S2000/1576_I1.PDF
Tim Bartik of the Upjohn Institute testifying at the Senate Select Committee on Economic Growth Strategies on Thursday, September 5, 2019 (Screenshot courtesy of NJTV News)
Earlier today the Senate Select Committee on Economic Growth Strategies heard testimony from national experts on economic development best practices and potential reforms to New Jersey’s corporate subsidy programs. In response to today’s hearing, New Jersey Policy Perspective (NJPP) releases the following statement.
BRANDON McKOY, PRESIDENT, NEW JERSEY POLICY PERSPECTIVE:
“Today’s testimony confirms what NJPP and critics of the state’s corporate subsidy programs have been saying for years: New Jersey must rein in and reform its tax credit programs with hard caps and stronger oversight. The testimony from national experts also calls into question the overall merit of corporate subsidies, as these tax credits are not nearly as beneficial to the state’s economy as many have claimed.
“Continuing to provide tax incentives to already profitable corporations is a wasteful pursuit that damages the state’s finances and fails to benefit the public good. New Jersey would be far better served by investing in its workforce and crumbling public assets.
“This is a watershed moment in the ongoing debate over the future of New Jersey’s corporate subsidy programs, as national experts agree that the status quo is ineffective, costly, and unsustainable. Today’s hearing provides lawmakers with a strong framework to reform the state’s approach to economic development. They owe it to taxpayers to get it right.”
Racial barriers to economic opportunity have played a substantial role in determining today’s income and wealth distribution, in which households of color are overrepresented at the bottom while non-Hispanic white households are heavily overrepresented at the top. According to a new report by the Center on Budget and Policy Priorities (CBPP), the tax code can affect different races and ethnicities in widely disparate ways, and tax policy changes can either widen or narrow racial disparities.
Overtly racist policies like slavery and confiscation of Native American lands laid the foundation for the deep economic disparities that exist today. The legacy of these policies — combined with racial discrimination today in areas such as housing, employment, and law enforcement — makes it harder for people of color to make economic gains and build wealth.
The cumulative harm of policies that reinforce the legacy of white supremacy is evident in the accumulation of wealth. White households — representing 65 percent of all households in the United States — own 87 percent of the nation’s wealth, and the wealthiest 10 percent of white households own nearly two-thirds of the nation’s wealth. This did not happen by accident, but as a result of centuries of public policy decisions.
Fortunately, there are ways to reform the federal tax code that advance racial equity and reduce income and wealth disparities. This starts with raising significantly more revenue from those who earn the most income and have the most wealth. New revenue could then fund investments that improve economic opportunities for those who earn and own the least.. Regressive, unproductive tax breaks can also be overhauled, while those that are already efficient and inclusive, like the Earned Income Tax Credit (EITC) can be bolstered.
State and local tax policies are also a powerful tool for widening or narrowing racial disparities. Even state and local tax policies that appear “race neutral” are anything but, as they actually further exacerbate racial disparities. When state and local policymakers design tax policy and decide how to distribute public resources, they effectively choose whether to push back against this history and attempt to rectify existing barriers, or continue with the status quo.
History shows that many of the key tax policy decisions of the past, including supermajority requirements for raising revenue, property tax limits, and adoption of sales taxes often reinforced already profound barriers faced by people of color. In addition, tax administration practices — such as property tax assessments and valuations — were also frequently done in ways that worsened racial inequities.
The good news is that state and local policymakers can implement solutions now that would make a difference, reducing barriers for people of color and improving equity. Fiscal policies that tax the most well-off households to a greater degree, raise revenue for investments that boost opportunity for communities of color, and remove artificial revenue-raising constraints are effective strategies for moving in the right direction.
In New Jersey, there is a path forward to enhance racial equity through the tax code by adding new brackets for top earners and taxing inherited wealth in a more progressive manner. These reforms could fund targeted public investments like K-12 education, higher education, and job training programs, all of which are essential to reducing deeply-rooted racial barriers.
Welcome to NJPP’s FY2020 Budget: Rapid Reaction, your source for commentary and data analysis on next year’s budget. The transcript below was taken from the Jersey Shore — just teasing, we were in NJPP’s conference room — and has been lightly edited.
Lou (Louis Di Paolo, Communications Director): On Sunday, Governor Murphy signed the Fiscal Year 2020 budget, marking an end to another lively “budget season.” Averting a shutdown, the governor ultimately signed the budget passed by the legislature a few weeks ago, meaning no millionaires tax, with some key changes. Specifically, Governor Murphy line-item vetoed $48.5 million in legislative priorities and put another $235 million of spending in a “lock box,” meaning the funds can only be appropriated once the revenue is guaranteed to be there. He also made a deposit into the state’s rainy day fund, which was empty for over a decade.
On the spending side, the state will make another record pension payment, boost funding for NJ Transit, and continue to ramp up funding for public K-12 schools. The budget funds other things, too, but we’ll get to that below. Overall, this is a responsible budget that invests in assets proven to build an economy that works for everyone.
But that’s enough from me — let’s jump right into it.
My first question is for Sheila, and it’s about the rainy day fund. What is it and why is it so important that the state finally deposited money in it?
Sheila (Sheila Reynertson, Senior Policy Analyst): A robust and well-designed rainy day fund can give New Jersey the flexibility it needs to weather the revenue impact of economic downturns or the next major climate change disaster. But for over a decade, New Jersey has had trouble maintaining this emergency fund. Before the Great Recession, the fund held $735 million, or roughly 2.2 percent of annual state spending, which was well below the national average. Then in 2009, the state withdrew the fund’s entire balance in response to the recession—and has made zero deposits since then.
New Jersey was one of only three states (KS, MT) with an estimated zero balance in their rainy day funds at the end of fiscal year 2017. That is a dangerous habit given the fact that all indicators point to another economic slowdown on the horizon. It’s also a habit that credit rating agencies consider a clear-cut symptom of the state’s continuing structural imbalance, insufficient revenue and poor budgetary planning.
New Jersey’s finalized 2020 budget finally turns the page on this risky chapter with the first rainy day fund deposit in 11 years. The $401 million will be kept in a separate fund that can only be accessed in response to economic changes to avoid unexpected drastic cuts to programs.
Lou: That’s great news. So how prepared is the state for the next economic downturn? Extra points if you can incorporate a gif into your answer.
Sheila: Still not that prepared. It’s a good start, but the state needs to continue making deposits like this one well into the future. National budget experts, namely the Center on Budget and Policy Priorities, recommend states build up their rainy day funds to at least 15 percent of their annual budget. This one-time deposit isn’t anywhere close to that.
Here’s a live look at New Jersey if a recession hits and this $401 million is all we have saved:
Lou: Extra points for Sheila! So while we’re not totally prepared for the next recession yet, this is a great start that should be commended. To reiterate one of your points, this is the first time in *over a decade* that New Jersey is taking steps to prepare for the next downturn. And if history has taught us anything, it’s that revenue shortfalls, and the subsequent cuts to public programs, disproportionately harm those struggling to make ends meet and communities of color.
Ray, can you elaborate on what next year’s budget does for these communities? Other than the rainy day fund, of course.
Ray (Raymond Castro, Health Policy Director): First, I am so impressed that the governor and the legislature agree that New Jersey must protect and lift up families struggling to make ends meet. There are many initiatives in this budget that help the working class, the very poor, children, seniors and people with disabilities. This is particularly needed given the enormous income and racial disparities in our state (and big shout out to our friends at the New Jersey Institute for Social Justice for reporting on the wealth gap).
New Jersey will not be able to compete in the 21st century until everyone has equal opportunity; we are only as strong as our weakest link. We all should all feel good about this budget because without these supports, far fewer New Jerseyans will ever make it to the middle class and NJ will not prosper as it should. The budget does not nearly meet all of the needs in the state, but there is no question that New Jersey is moving in the right direction.
Sheila: We’re definitely moving in the right direction! Anyone else listen to Gossip?
But before I get the song stuck in my head, Ray, can you name a few initiatives that received a boost in funding? The more specific the better.
Ray: There is an impressive list, but in terms of supporting working families, there was an increase in funding for preschool, a boost to the state Earned Income Tax Credit (which is now one of the highest levels in the nation at 39 percent), more funding for housing assistance, and a bump in aid for community colleges. There is also funding for nursing homes and child care centers to increase staff salaries to reflect the increase in the minimum wage. The budget also requires that the state come up with ways to increase enrollment in the state exchange that will become operational in 2020 and make insurance more affordable.
For the very poor, there was an increase in funding for Temporary Assistance to Needy Families, which will benefit 20,000 children who live in deep poverty. This increase was especially needed because the state has among the lowest grants for families in the country.
There was also an increase in charity care for hospitals that serve low-income New Jerseyans who cannot afford insurance. That will also help to maintain the financial solvency of these hospitals. Also, up to 125,000 SNAP (food stamp) beneficiaries will receive more in nutritional assistance thanks to a slight increase in funding for energy assistance, which qualities them for more in federally funded assistance. That will disproportionately benefit seniors and people with disabilities who have difficulty documenting their energy assistance needs.
Lou: I know this is year two for Governor Murphy, but I can’t help but think what a difference a new administration makes. After the state cut programs like these to the bone, it’s good to see New Jersey is once again investing in ordinary families instead of the wealthy and well-connected. Sheila, any other big appropriations you want to highlight?
Sheila: Absolutely. The biggest winners include NJ Transit, which received an additional $50 million, as requested in the Legislature’s budget. After years of having its operational budget shamelessly raided, more than $457 million has been allocated to the state-run public transit system for FY 2020. It is not nearly enough to fix the damage done during the previous decade, but it’s definitely a step in the right direction. Bumping up my op-ed on this from last year in case anyone’s interested.
The budget includes a record-breaking pension payment of $3.8 billion for public workers and a larger commitment toward property tax relief for senior citizens and the disabled. Finally, the Governor agreed to include an extra $50 million in state aid for costs associated with extraordinary special education as requested by the Legislature. These increases reflect New Jersey’s need to meet its obligations and provide assistance to communities struggling with property taxes.
One important increase that seems to be flying under the radar is the Governor’s decision to include the Legislature’s request to expand Medicaid coverage from 90 days to 180 days after the last day of pregnancy. As far as I can tell, New Jersey is the first state to do so. This appropriation is directly linked to the state’s renewed commitment to addressing its dismal racial disparities in maternal health. Reports from national and regional maternal mortality review committees have consistently indicated that the limited Medicaid coverage after the birth of a child is not enough to serve low-income people who disproportionately suffer from common maternal health complications like hypertension, diabetes and depression. Nearly one in five maternal deaths occur between six weeks and a year following childbirth. Of these deaths, 58 percent are considered preventable. Doubling the eligibility timeline to 6 months is an important component of improving maternal health outcomes in New Jersey and it should be widely celebrated and replicated in other states.
Ray: That’s definitely flying under the radar. Thanks for flagging it for us, Sheila.
Lou: This is why I enjoy having these conversations. I really appreciate you both (and the rest of our colleagues, of course) for digging through the budget line by line so other folks don’t have to.
For those working in the Trenton bubble, you’d think Governor Murphy and legislative leadership were miles apart with their budget priorities, but this list shows that’s not the case. They’re all committed to building New Jersey’s economy from the bottom up and the middle out. That definitely gets lost in a lot of budget reporting.
Before we get to their biggest disagreement (spoiler: it’s the millionaires tax), can we talk about the state health exchange? I know this wasn’t technically in the budget, but the bill had to be passed before lawmakers left for summer break so the state could meet an important federal deadline.
Ray, what can you tell us about the state health exchange? What does this mean for New Jersey’s health care landscape?
Ray: The establishment of the state exchange is enormously important for working families in New Jersey and to defeating the Trump administration’s sabotage of the Affordable Care Act. The legislature and the Murphy administration were in general agreement that such an exchange was greatly needed to be run by the state, but they differed in the details which got ironed out just in time.
By taking over the federal exchange, the state will be able to double the length of the open enrollment period, expand outreach, reduce premiums and decrease the number of residents who are uninsured. It can do all that without any increase in state funds. That is because the fees (about $50 million) that insurers in New Jersey send to the federal government to operate the exchange will instead stay here to fund the state exchange.
In addition, there are over 300,000 uninsured NJ residents who are not participating in the federal exchange, so even if a small percentage of them enroll in the state exchange, the state will see a major increase in premium subsidies which is totally funded by the federal government.
Lou: New Jersey is cementing its position as a national leader in health care policy. I’m not sure there’s another state that has better responded to the Trump administration’s sabotage of the Affordable Care Act. Again, this is a testament to what New Jersey can accomplish when the governor and legislative leaders unite behind a common goal.
But let’s pivot to the biggest point of contention in this year’s “budget season.” We all know that Governor Murphy wanted a millionaires tax in the budget, but legislators weren’t behind it. Instead, they took a page out of the Christie playbook and balanced their budget with rosy revenue projections.
The governor dealt with this in a novel way, putting $235 million in spending prioritized by legislators in a “lock box.” That way, the appropriations will only go out if the revenue exists. Seems like the fiscally prudent thing to do, while also creating some incentive to finally pass a millionaires tax in lame duck. Sheila, what are your thoughts?
Sheila: My first thought is, will you understand this lock box reference? Were you even born before the Bush-Gore election?
Lou: I do not get the reference. I was in third grade, by the way. Definitely not old enough to vote. But back to the question. Thoughts on the lock box?
Sheila: This was a well-played strategy. It gives the Legislature the green light on its funding priorities and allows the governor to use his executive power to hit the pause button until there is a better understanding of where the state economy is headed. It sends a strong message that relying on rosy projections has fallen out of favor and signals to credit rating agencies that the state will implement responsible budgeting practices with or without the cushion of new revenue. The question remains about which priorities are in this “lock box” and at what point will they be reevaluated for funding.
Ray: Agree on all fronts. I’m anxious to see what made it into the box.
Lou: Same here. But I mostly love that the state is moving away from gimmicks and rosy revenue projections. If the state wants to make new investments — which is should — it needs the revenue in place to pay for them. So, the millionaires tax didn’t make it into the budget, but it’s still super important. Do you think it happens in next year’s budget?
Sheila: Honestly, it could happen even sooner. That’s the beauty of the lock box; it creates an incentive for lawmakers to get serious about raising revenue, independent of the craziness of “budget season.” Remember, New Jersey is one of only a few states that still brings in *less* revenue than before the Great Recession. This is proof that New Jersey has a revenue problem, not a spending problem.
Given that the legislature passed a millionaires tax five times under the Christie administration, it is the most logical route toward creating new, sustainable revenue. Plus it remains extremely popular among voters of all political persuasions.
Lou: Well, Donald Trump isn’t a fan. I’m sure you saw his tweet congratulating lawmakers for not passing it?
I can’t imagine this pat on the back was welcomed by legislative leaders. Reaction?
Sheila: It was like Christmas in July!
But strategically, it would have been more helpful a month ago. Lol
Ray: Should I be on Twitter?
Lou: Yes.
Sheila: Yes.
Lou: So it’s settled. Ray, we’re making you a Twitter account! But we should be wrapping this up. Closing thoughts? Opportunities for next year? Plans for your Fourth of July weekend?
Ray: The opportunities for next year are unlimited. NJ has already been ranked number one in the nation in combating the Trump administration’s sabotage of the ACA. Next year, and in the year after, the state needs to focus on operating one of the best state exchanges in the nation with the goal of universal health care coverage. To do that, the state will need to be creative in how to reach the uninsured who are already eligible for federal assistance but are not participating. However, it must also make those New Jerseyans who are not eligible for federal assistance eligible. That includes middle-class families who have incomes that slightly exceed eligibility limits and those who are not eligible because of their immigration status.
That will require considerable state resources, but New Jersey can start with children as those costs will be offset by a decrease in state funding for charity care in hospitals and other savings down the road. Also, New Jersey needs to be much better at reducing total health care costs, which will also reduce state expenditures. It should start with lowering prescription drug costs, which have become unaffordable even for middle class families. The state also needs to start taxing entities in a way that discourages unhealthy behavior and use those revenues to provide comprehensive coverage for all New Jerseyans.
Lou: Fourth of July plans?
Ray: My wife and I are celebrating our anniversary! We got married on July 4th so we would also see fireworks on our anniversary.
Lou: That’s adorable. Congrats, Ray! Sheila?
Sheila:Tubing on the Delaware with 5 families!
Lou: You are both making me feel really lame for not having any plans — yet. But back to the budget. Final thoughts, Sheila?
Sheila: In the end, New Jersey passed a budget that funded its most important obligations and made strides toward investing in the true drivers of a state economy — all without relying on gimmicks and rosy revenue projections. It managed to cut about $1 billion in spending through collective bargaining, make a long overdue deposit into its rainy day fund and have a bit of a cushion in case revenues come in short.
What was strikingly different this budget season was the renewed public interest in Trenton politics after the release of the Comptroller’s audit of the Economic Development Authority and the subsequent task force investigation. The EDA story has it all: insider lobbying, potential fraud and misuse of taxpayer dollars. I think the budget process benefited from the unfolding EDA story as it put Trenton in a bigger spotlight than it’s used to. That’s a good thing, the more the public is engaged with the budget season the more likely the state’s priorities will reflect the values of the many, not just the few.
The law that governs the corporate tax subsidy programs expired at the end of June and the Governor has clearly stated he will not sign the Legislature’s bill to simply expand the law for another 7 months without major reforms. Stay tuned for that showdown!
[Brandon enters the chat]
Brandon (Brandon McKoy, President): Hey team! What did I miss?
Lou: The Knicks didn’t get Kevin Durant. Or Kyrie Irving.
