Topic Category: Tax and Budget

EDA Task Force Exposed Culture of Corruption

Posted on by Sheila Reynertson

In response to today’s task force hearing on New Jersey’s economic subsidy programs, NJPP releases the following statement calling for a moratorium on Christie-era subsidies and meaningful reforms to prevent future abuse: 

SHEILA REYNERTSON, SENIOR POLICY ANALYST, NJPP: 
“New Jersey Policy Perspective commends Gulsen Kama for shining a light on the fraudulent tactics that have flourished under New Jersey’s tax subsidy programs. Kama’s testimony exposed a culture of corruption that has robbed the state of critical taxpayer dollars. This first hand account detailed just how easy it is to cheat the system and lie on applications for tax credits. Today’s hearing should give lawmakers pause about the integrity of existing corporate subsidy programs. The need for reform has never been more pertinent.
“The hearing also exposed the cottage industry of relocation firms and consultants that help corporations cheat on their EDA applications. In her testimony, Ms. Kama described how a consulting firm produced a detailed, yet bogus portfolio of out-of-state relocation options even though her employer was finalizing plans to move to a new office in Jersey City. This calls into question the value of offering tax subsidies for job retention and further highlights the need for a moratorium on tax credits given out under the Christie administration.”
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EDA Whistleblower Suit Describes Corruption, Plain and Simple

Posted on by Brandon McKoy

In response to a report by WNYC suggesting the Christie administration pressured officials at the New Jersey Economic Development Authority (EDA) to give out fraudulent awards, NJPP releases the following statement calling for a moratorium on EDA awards and a full investigation by the Attorney General:  

BRANDON McKOY, PRESIDENT, NJPP:

“These allegations describe corruption, plain and simple, and taxpayers should be furious. For years, NJPP and advocates for good governance have questioned the overly generous tax subsidies awarded by the Economic Development Authority, but the allegations in this whistleblower lawsuit extend far beyond lax oversight and into fraudulent, and possibly criminal, conduct.

“New Jersey taxpayers deserve to know that decisions are made with their best interests in mind, not what’s best for a few select corporations. We call for a full moratorium on EDA subsidies awarded under the Christie administration and a full investigation of these claims by the New Jersey Attorney General.

“Further, as lawmakers consider renewing the state’s tax subsidy programs, they must pursue broad reforms that have been proposed by NJPP and Governor Murphy, including hard caps on annual and per-job awards, tighter reporting requirements, and targeting awards to emerging industries and home grown businesses.

“Only a full and complete investigation, combined with robust reforms that follow best practices, will enable the state to regain the trust of the public.”

NJPP has long-advocated for reforming the EDA. A full list of possible reforms is included in this 2017 report: It’s Time for New Jersey to Rebalance the Economic-Development Scales

New Jersey Budget Should Include Millionaires Tax

Posted on by Sheila Reynertson

This testimony on the FY2020 New Jersey budget was delivered to the Assembly Budget Committee on Monday, March 20, 2019.

Good morning, Chairwoman Pintor Marin and members of the committee. Thank you for this opportunity to speak before you today. My name is Sheila Reynertson and I am a senior policy analyst at New Jersey Policy Perspective.

A decade after the Great Recession, New Jersey continues to struggle to bounce back. Revenue streams have chronically fallen short of spending needs leading to gimmicky fixes and funding raids. The Rainy Day Fund has been empty since 2009, a risky situation should New Jersey be slammed by another recession. Massive tax cuts for the wealthy and corporations have harmed the lives of everyday families and small businesses in many important ways, including higher college tuition costs and more expensive NJ Transit commutes.  

We approach the 2020 budget with two clear objectives in mind. First, raise sufficient revenue to meet the state’s necessary obligations, invest in the critical public assets that make New Jersey an attractive place to live and do business, and provide support for the most vulnerable members of our communities. Second, bring responsible budgeting practices back in vogue.

The centerpiece of Governor Murphy’s budget calls for applying the highest tax rate of 10.75 percent to annual earnings over $1 million, raising much needed new, sustainable revenue. We support this proposal and legislative leaders who have repeatedly passed it in the past should have no problem doing so today.

New, sustainable sources of revenue like the millionaire’s tax allows property tax relief programs to keep up with the cost of living, offering meaningful support to seniors and those living on a fixed income. That in turn frees up resources to help New Jersey’s neediest families by increasing the Work First NJ grant for basic assistance again this year. Renewable sources of revenue help lawmakers wean themselves off risky budgetary practices — like using the state surplus as a slush fund — that have contributed to 11 credit downgrades. It frees up resources for universal representation to help keep New Jersey families together in this age of extreme xenophobia. It helps fund the Earned Income Tax Credit increase, one of the most effective anti-poverty tools and recently found to be even more cost effective than originally thought. And, of course, sustainable revenue allows New Jersey to continue making critically important investments in state assets that all families rely upon every day like NJ Transit and institutions of higher education.

Concern that voters oppose taxing millionaires should be calmed by a diverse array of state-level polls consistently demonstrating strong support for a true millionaire’s tax among likely voters.

Any worry that wealthy taxpayers will flee New Jersey should be dismissed by peer-reviewed research findings, the vast majority of which show that raising the state income tax has a negligible effect on relocation decisions. The number of New Jersey taxpayers with incomes over $500,000 has consistently grown even as income tax rates on wealthy households have been increased twice. The share of these taxpayers grew an astonishing 450 percent, between 1994 and 2016, the most recent year for which data is publicly available. Millionaire tax flight is a myth, and that fact doesn’t go away when lawmakers hear anecdotal stories from estate planners.

What should worry representatives is that the top 1 percent of earners in the Garden State, who earn an average $1,582,000 a year, make 24.3 times more than what the bottom 99 percent makes. This level of inequality ranks New Jersey as 9th worst in the nation.

These high earners take home one fifth of all income made in the state. This is not far off from the state’s historical high, which peaked just before the Great Depression during the last Gilded Age. Yet today’s wealthy households in New Jersey pay a smaller share of their income in state and local taxes – 9.8 percent – than those in the middle 20 percent who, on average, earn $66,000 a year – 10.1 percent.

The millionaire’s tax, coupled with a strong commitment to phasing out gimmicky revenue raisers, ending raids of dedicated funds, and replenishing New Jersey’s surplus is the definition of a disciplined approach to this year’s budget. We also encourage the legislature to further this work by enacting consensus budget forecasting as a first step toward creating a comprehensive roadmap for sound long-term budget planning. Long-term planning that includes multi-year revenue and spending projections and more transparency might raise questions and issues that one-year budgeting intentionally avoids and, optimistically, break the cycle of accounting games and gimmicks that have dug New Jersey into this deep financial hole.

I’d like to close my testimony by addressing one last concern that some committee members may have. There is an assumption that a millionaire’s tax will somehow be unfair because New Jersey’s highest earners are already paying more in federal taxes with the loss of SALT deductions. However, nothing could be further from the truth. According to modeling conducted by the Institute on Taxation and Economic Policy, the top 1 percent of New Jersey taxpayers would still receive a sizable tax cut – from $2,500 to $3,200 – even with the SALT cap and Governor  Murphy’s proposed millionaire’s tax because other changes in the federal tax law are so disproportionately generous to wealthy households, like the corporate tax cut and the higher estate tax threshold.

Thank you for your time and attention.

Budget Address FY 2020: Rapid Reaction

Posted on by Louis DiPaolo

Welcome to NJPP’s Budget Address FY2020: Rapid Reaction, your source for commentary and data analysis on Governor Murphy’s address. The transcript below was taken from a conversation in NJPP’s conference room — over half eggplant, half plain pizza — and has been lightly edited.

Lou (Louis Di Paolo, Communications Director): Earlier today Governor Murphy kicked off the start of “budget season” with the unveiling of his fiscal year 2020 budget proposal. In his address, the governor outlined his $38.6 billion spending plan and renewed investments in public education, NJ Transit, affordable homes, and much, much more. The proposal also makes the largest pension payment in state history.

The governor’s budget is grounded in big savings in public employee health care benefits and new revenue in the form of a true millionaires tax. As Sheila Reynertson states in NJPP’s response statement, this budget is a “fiscally sound vision that invests in New Jersey’s greatest assets while lifting up the most vulnerable families in the state.”

But that’s enough from me — let’s jump right into it. What did everyone think about Governor Murphy’s budget address? Let’s start with Ray since he has to leave us soon for a meeting.

Ray (Raymond Castro, Health Policy Director):  I’m very impressed that Governor Murphy is so concerned with the most vulnerable people in New Jersey. However, it is also clear that much more needs to be done in a state with one of the highest costs of living in the US.

Lou: Definitely a fair assessment, but can you elaborate more on that? Two part question: what do you think this budget does especially well, and where does it come short?

Ray: It makes improvements in housing assistance, preschool funding and maternal health. However, we also need to expand NJ FamilyCare to all of the remaining 78,000 uninsured children in New Jersey and continue to partially restore the massive cutbacks in Temporary Assistance to Needy Families which helps about 25,000 poor children.

Lou: Those are important caveats and points I’m sure we’ll be flagging for legislators throughout the budget season. What are your thoughts, Sheila and Brandon?

[Ray has left the chat]

Sheila (Sheila Reynertson, Senior Policy Analyst): It is clear to me that fiscal responsibility and creating opportunities for those who are struggling to get by in the Garden State are top priorities in this year’s budget. From growing the state surplus to securing sustainable savings in public employee health care delivery to weaning the state off raiding of dedicated funds, this proposal is obviously laser focused on improving the fiscal health — and the credit ratings that come with it — of state government.

But equally, it is a proposal that takes seriously the role government can play in investing in all New Jersey families. Increased investments in education, college tuition aid and community college grants were expected, but it was thrilling to hear about state dollars being used to improve access to long-acting birth control and support efforts to reverse New Jersey’s dismal infant mortality rates among Black women.

Brandon (Brandon McKoy, President): Like Sheila, I’m very happy to see this budget include a significant surplus. This will make two straight years of NJ budgets having a surplus, something that hasn’t happened in a long while. It’s really important that as the budget goes through the legislature, the surplus is protected. Oftentimes legislators will look at such a large amount and try to skim some of it for other purposes, so we’re going to be working hard to keep this surplus intact because it will help our long-term fiscal standing.

Lou: Can we talk more about the budget surplus? It’s not exactly a sexy topic, so can one of you explain why this is so important for New Jersey’s fiscal health? Also, bummer Ray left for his meeting right before the pizza showed up.

Sheila: It’s great to see the governor budgeting a $1.1 billion surplus for this fiscal year. It gives the state a healthy cushion against unexpected budget gaps and a hedge against a potential national recession or another Superstorm. The governor asked the audience “to find the last time we had consecutive years of billion-dollar-plus surpluses.” The answer? 2009 – but it was quickly wiped out in reaction to the Great Recession. And despite a slow recovery, New Jersey has failed to replenish the surplus reserve fund. Instead the previous administration leaned on it to fill budget gaps year after year. By the end of Governor Christie’s term, New Jersey didn’t have enough reserves to last a single day compared to the US median of 20.5 days.  

Brandon: I love surpluses, but can we talk about the millionaires tax already?

Lou: No, we can’t. Just kidding, of course we can.

Brandon:

Sheila: You should just copy and paste your twitter thread, Brandon. It’s not like anyone read it.

Brandon: Hey! Lots of people read my twitter thread. Here’s the proof!

But in all seriousness, the governor’s proposal to apply the millionaires tax to — wait for it — all millionaires is totally appropriate and really modest, especially when you take into account the high rate of economic and racial inequality that exists in New Jersey. For context, last year the state implemented a 10.75% tax rate for earnings over $5 million a year. Now it’s time to make sure all millionaires pay that tax rate. They’re all easily in the top 1% in New Jersey, and right now that group is taking home 19.7% of all income earned in the state, averaging an annual salary of $1.6 million. Meanwhile, those in the bottom 99% earn just $65,068 per year, on average.

Applying the millionaires tax to all millionaires would certainly help raise sustainable revenues that help us invest in our assets, but even more importantly it helps tackle the high level of economic inequality in the state. New Jersey ranks 9th worst for economic inequality nationally, so there’s definitely lots of space for improvement and we need to do more to address the issue.

Sheila: No way to top that. Except to say that using the new federal limit on the deductibility of state and local taxes (SALT cap) as an excuse NOT to increase income tax on earnings over $1 million ignores the facts.The truth is New Jersey’s highest-income households – those with annual incomes over $1 million – get a windfall from the new tax plan, even with the limit on SALT deductibility. That’s because for New Jersey’s wealthiest families, the average federal tax cuts from other changes in the law are notably larger than the average size of the impact from the loss of SALT deductibility (looking at you, massive CBT cut). There is no reason for legislative leaders to back off of long-held plans to make New Jersey’s income tax fairer and raise much-needed new revenue to invest in schools and property tax relief, especially after a decade of major tax cuts that disproportionately benefit the wealthiest.

Lou: For the folks at home who don’t follow New Jersey budgeting as closely as we do, can one of you briefly explain why having new sources of revenue is so important?

Sheila: The short answer is New Jersey has suffered from years of trickle-down economic policies. In just the last decade, New Jersey dolled out $13 billion in tax cuts for the wealthy and corporations on top of $11 billion in tax subsidies to corporations who promise to move into or expand in the state. That means less dollars for vital services. The state should be an active participant in helping the economy grow and flourish – something it can’t do if left to struggle with keeping the lights on or keeping up with rising costs. And that hurts everyone. See more on this history of disinvestment in my blog post from Monday.

Lou: But what about all the millionaires fleeing New Jersey to go to low tax states? I heard this trope in at least one of the televised responses to the governor’s address.

Sheila: Yeah, that’s not a thing.

And when I ask for concrete evidence on “tax flight” I generally get nothing or worse… *anecdotes*. Meanwhile, several comprehensive studies on whether tax policy affects relocation decisions draw the same conclusion: millionaire households overwhelmingly choose to live where they have family connections, work and business opportunities, and an established social network. State income tax rates have only a very limited impact on their residence decisions.

Brandon: It’s all about quality assets. That’s why we constantly advocate for the state to increase revenues — not just as a means to address income inequality, but also to invest in our unique and critical assets. Like Sheila says, people come to New Jersey to make their fortunes and wealthy people stay here because we have the assets and features that are central to them being successful. That’s why we need to do all we can to make sure that NJ Transit is fast and on time, that our public schools continue to be top notch, that our communities are attractive and affordable.

We already have a location that is the envy of the country, we’re smack dab in the middle of the most productive economic region in the world. Under the previous administration, transit, public education, and property tax relief were all cut significantly. We need to learn the lesson from those mistakes and secure a budget that enables those necessary investments to be made — this budget helps us get there in a big way.

Lou: All great points.

Sheila: Can you tell we talk about this a lot?

Lou: Not one bit. But you having Cristobol Young’s “The Myth of Millionaire Tax Flight” prominently displayed in your office bookshelf definitely gives it away.

Sheila: That picture is shockingly on brand.

Lou: It definitely is. But here’s my follow up question: if people decide to stay here based on the states assets, does the governor’s budget put enough funding behind them? I’m thinking of early and college education, housing, transit, etc. — you name it.

Sheila: Well, we know this budget builds on last year’s commitment to rebuild investments in K-12 education with an additional $200 million, $68 million more for pre-K expansion and NJ Transit with another $100 million. These are all smart moves. The proposal also restores $59 million for the Affordable Housing Trust Fund and gives the new free community college fund a $33.5 million bump. It was good to see pumps for both Tuition Aid Grants and the Educational Opportunity Fund too. These may seem like small potatoes in a $38.6 billion budget but one can’t underestimate how much of an impact they make in people’s economic future.

Lou: It seems like we generally like this budget, but where does it fall short? I know that it doesn’t go nearly as far as we’d like in terms of taxing wealthy — looking at you, estate tax — but what else is missing?

Brandon: Yea, so while we like the proposal to apply the top income tax rate of 10.75% to all millionaires, it’s fair to say that there should be separate brackets above (and even slightly below) $1 million. I’d suggest having those at $1 million pay 10.75%, then add another bracket at $2.5 million and another bracket at $5 million. This would help address income inequality even further and raise more revenue for investments. The millionaires tax proposal is good, but these changes would make it even better.

Sheila: We could even add brackets at $250,000 and $750,000. It’s insane that $75,000 in earnings is taxed at the same rate as $499,999. Really?

Lou: What about on the spending side? What could be better? And for this, let’s make it a rapid fire round: ready, set, go!

Sheila: There’s a small increase in funding for universal representation, which is a program that provides legal representation for undocumented New Jerseyans facing deportation. The bump is to $3.1 million this year, up from $2.1 million last year, but to fully fund the program would require about $18 million and we’d like to see that full investment made.

Brandon: There’s the Civic Information Consortium, an effort to improve local journalism that’s received a lot of praise from stakeholders across the country. The governor signed the legislation to make the consortium real into law last year, but the $5 million it needs to operate wasn’t appropriated. Making sure it gets that $5 million this year would be a big deal.

Lou: Anything else?

Sheila: The Child Care Tax Credit returns for a second year, but it remains a largely symbolic gesture due to the way it is designed. Right now the tax credit doesn’t really help those who need it the most – low-income families who pay little to no federal taxes. I am thrilled to have this tax credit on the books, I just wish it had more teeth.

Brandon: There’s an increase in the earned income tax credit (EITC) to 39% refundability this year, up from 37% last year. That’s really important and is going to help strengthen the EITC, but it would be even better if we expanded the eligibility of the EITC to more people. Right now you have to be over 25 years old to qualify for it, but there’s a bunch of people under the age of 25, both with and without children, who would benefit significantly from this credit. In fact, New Jersey’s own Congresswoman Bonnie Watson Coleman is proposing federal legislation that would reduce the age eligibility for EITC to 18 years old, something that California has done, so there’s already some precedent.

Lou: I said rapid fire… That’s a very long-winded answer.

Brandon: But EITC is important! It’s the best program we’ve ever had at combating poverty.

Lou: Fair point. I’ll let this one slide. Final thoughts? Anything we didn’t cover?  

Sheila: I appreciated Governor Murphy calling out the awful Title X gag rule proposal on the federal level and positioning New Jersey as a champion of evidence-based reproductive health policy.

Brandon: The governor made quick mention of the need to get the state’s corporate tax subsidy programs under control. He’s made some good proposals for reform, including capping the amount of subsidies that can be awarded in a given year. This would really help us add some more stability and predictability to the state budget, and it would improve our standing with the ratings agencies. The legislature has shown that it’s not too interested in the governor’s proposals, but they would be wise to support them so here’s hoping that they make the right decision.

Lou: Thanks, team! This was fun.

Brandon: There’s 1 slice of pizza left … can I have it?

Lou: Of course, you’re the one who ordered it. Cowabunga, dudes!

NJPP Statement: Governor Murphy’s Budget Sets Foundation for Shared Prosperity

Posted on by Sheila Reynertson

Earlier today Governor Murphy delivered his second budget address, where he outlined his fiscal year 2020 budget. In response to the Governor’s address, NJPP’s Sheila Reynertson calls the budget proposal a fiscally sound vision for New Jersey.

SHEILA REYNERTSON, SENIOR POLICY ANALYST, NJPP:

“The budget outlined by Governor Murphy sets a foundation for shared prosperity and fiscal health. It pairs significant cost savings with continued investments in critical programs and services, while also committing to a healthy surplus that will safeguard the state from future economic downturns or natural disasters. Simply put, this is a fiscally sound vision that invests in New Jersey’s greatest assets while lifting up the most vulnerable families in the state. Further, we commend Governor Murphy for centering his speech on the state’s role in providing opportunities to help New Jersey families thrive in a variety of ways, including increased funding for affordable homes, expanding free community college, covering birth support for Black mothers, and increasing the Earned Income Tax Credit.

“We also applaud Governor Murphy for his commitment to tax fairness and his inclusion of a true millionaires tax in his budget proposal. Given the state’s growing income inequality, racial disparities, and lopsided tax code, asking New Jersey’s wealthiest individuals to pay a little bit more is the definition of fairness. This overdo change in the tax code will impact less than one percent of tax filers, many of whom just received a generous tax break from changes to the federal tax code. The additional funds from a millionaires tax will help to fund the state’s property tax relief programs and allow the state to continue investing in services that benefit all New Jerseyans.”

It’s Time to Face the Music, Jersey: We’ve Been Robbed

Posted on by Sheila Reynertson

Tomorrow, Governor Murphy will kick-off what is affectionately known as “budget season” with his fiscal year 2020 budget address. It’s the time of year when we at NJPP fire up our spreadsheets, crunch numbers, and engage in a healthy debate about New Jersey’s path to a stronger state economy and more sustainable future.

But let’s be clear about one thing from the onset: Since 2010, New Jersey has had to make do with far less as a result of $13 billion in cumulative tax cuts — that primarily benefited the wealthy and large businesses — by the former governor with an eye on a presidential run and a misguided belief in trickle-down economic policies. Add to that the 2013 overhaul of New Jersey’s corporate tax subsidy program, which handed out an astonishing $11 billion worth of tax credits to corporations with little to no oversight.

Given New Jersey’s outsized spending obligations and lagging revenue, we expect Governor Murphy will make the case for building upon last year’s accomplishments by investing in valuable assets and fixing long-standing disparities in the tax code that exacerbate inequality. In fact, it has now been confirmed that an income tax increase on on earnings over $1 million will be a key component of the Governor’s budget.  

And it should be. Pushing for a bold, progressive budget with new revenue sources and a commitment to New Jersey’s long-term wellbeing is absolutely justified. Here’s why.

New Jersey has not been able to pay all its bills for 15 years straight because it doesn’t collect enough revenue to cover its expenses. In fact, the Garden State currently has the biggest gap between its revenue and expenses of any state in the country. This didn’t just happen by accident. For decades now, New Jersey has turned a blind eye to its financial woes. State leaders raided reserves, took on debt, and deferred payments on its obligations just to make ends meet for another year.

Credit rating agencies took notice and responded by repeatedly “dinging” New Jersey for its over-reliance gimmicky fixes and shameless money grabs of dedicated funds. Those lower credit ratings now make it more expensive to borrow funds for long-term projects.

The Great Recession and Superstorm Sandy certainly didn’t help matters much. And then another tragedy struck.

Just as New Jersey was beginning its laborious journey out of the recession, the wealthiest among us and large corporations were granted gifts that keep on giving — at the expense of the  state’s ability to provide key services and invest in its assets. First, the wealthy were given a $800 million tax cut when the 2008 millionaire’s tax was allowed to sunset. Then, businesses were given $660 million in tax cuts.

Come 2016, a package of tax cuts that benefited the wealthy, and left crumbs for everyone else, was enacted as an unnecessary tradeoff for raising the gas tax. The deal to replenish the Transportation Trust Fund (TTF) eliminated New Jersey’s estate tax, allowing approximately 4,000 of New Jersey’s wealthiest families to collectively enjoy over $500 million in tax cuts. And the sales tax decrease, which disproportionately benefits New Jersey’s highest earners and spenders, translates to over $600 million less in the state’s general fund.

Worse, these cuts became fully phased in at precisely the same time that corporate tax subsidies began to balloon in cost. In essence, New Jersey has sacrificed revenue it is in no position to give away to begin with. When 2013 reforms stripped spending caps on the tax subsidy program, the cost per job (retained and new) drastically increased from $17,000 in the 2000s to $78,000 post-overhaul. If awarded corporations cash in their tax credits, the Treasury may come up short by $1 billion a year for the next three fiscal years, at least.

All told, the entire package of Christie-era tax cuts and subsidies for corporations deprives the state government of $3 billion in essential revenue in this upcoming budget season and well into the future.

And everyday New Jerseyans will pay the cost. It is our commutes to work, our roads, our children’s schools, and our pocketbooks that suffer. Governor Murphy has an opportunity to make the difficult and visionary choices that will lead us to a better financial future. This is the budget season to think big and bold — and protect New Jersey’s future.

Exorbitant EDA Subsidies Ignore Fiscal Realities

Posted on by Sheila Reynertson

This testimony on the New Jersey Economic Development Authority subsidy programs was delivered to the Senate Economic Growth and Assembly Commerce and Economic Development Committees on Monday, February 11, 2019.

My name is Sheila Reynertson and I am a senior policy analyst at New Jersey Policy Perspective (NJPP), a nonpartisan research organization focused on state budget, tax and economic issues. Since NJPP’s inception in 1997, we have consistently raised concerns about the overreliance on business tax subsidies and have repeatedly called for stricter oversight of this economic development strategy.

As the latest iteration of corporate tax subsidy programs winds down and in light of the comptroller’s audit of the Economic Development Authority (EDA), NJPP’s position remains the same.

Based on our long-term analysis of both corporate tax subsidies and the precarious status of the state budget, the ends simply don’t justify the means. New Jersey was already in the midst of a financial crisis when the volume of awarded tax breaks was allowed to skyrocket. Once spending caps were lifted in 2013 under the Economic Opportunity Act, the EDA approved close to $6 billion in corporate tax breaks. Last year, McKinsey & Co. report stated that New Jersey’s tax subsidy programs pay more than five times as much as peer states for every dollar it attracts and every job created or retained.

That’s the kind of short-sighted game New Jersey simply can’t afford to play; especially not at the level it has, providing overly generous and exorbitant subsidies that are significantly out of step with what we see across the country and by comparable states.

Further, putting that kind of stock in tax subsidies to spur economic growth blatantly ignores the state’s precarious financial reality. In official documents submitted by the EDA during budget committee hearings in recent years, the authority projects that this over reliance on tax subsidies may result in a loss of over $1 billion a year in revenue starting in 2020 – at precisely the same time that the state’s biggest obligations are set to cripple the state budget.

None of this was hard to predict as anyone involved in these issues understood that New Jersey would be facing these tough situations relatively soon. And yet, the choice was made to gamble away future taxpayer dollars without getting a sufficient return on the investment. This has only made it more difficult to fund vital public services and invest in our state’s most important assets.

Some changes made in 2013 were positive – like more stringent standards for subsidies given to corporations shifting jobs around the state. But on the whole, the Economic Opportunity Act greatly expanded the size and scope of these offerings while eliminating several key financial protections for taxpayers and the State of New Jersey. Since then, the EDA took some measures as a partial course correction. Now, it’s the responsibility of the executive office and the legislature to implement real reform and get these tax breaks under control again.

Here are the most important ways to bring back accountability and oversight to business tax subsidy programs on behalf of New Jersey’s taxpayers.

First, restore spending caps on the total amount New Jersey can give in subsidies per year to ensure accountability and increase the legislature’s oversight role. Strict spending caps both ensure that New Jersey has a handle on its ability to track and assess awarded projects and that the overall program is again in line with comparable states. The caps put forth by the governor’s proposal is a great starting point, though we would argue they could and should be even lower.

New Jersey must get serious about reporting requirements. This should be done in a number of ways including a legislative fix to allow the Treasury to finally release the Unified Economic Development Budget which would provide annual data on large awarded subsidies – like the number and quality of jobs created. Design and implement a robust, independent evaluation process to determine on an ongoing basis if these tax breaks are having the desired effect. Require the EDA to post a more regular and longer-term analysis, say 15-year-forecasts, of the budget impact of already-approved subsidies. Lawmakers should also eliminate tax subsidies to retain existing jobs or at the very least limit such subsides for a large number of jobs that are supposedly at risk of moving to another state as proposed by the governor.

Finally, New Jersey must restrict corporations’ ability to sell their tax credits. The very idea of a secondary market for tax credits should give the legislature pause. New Jersey’s tax subsidy program is so overly generous that it enables the sellers to receive far more money in subsidies than they actually owe in taxes. New Jersey may regard these tax breaks as an effective way to entice large employers to relocate, but for those corporations – it’s just icing on the cake. Allowing them to not only sell their tax credits but to exempt that transaction from taxation is especially egregious. That’s like taking the time to research and find the perfect wedding present for a friend only to discover they sold it at a yard sale the following year. It’s time to end this practice.

There is no shortcut or silver bullet to improving our economy. It takes a long, sustained approach of targeted investments to produce balanced growth that spreads opportunity to all corners of the state. Tax subsidies can be a tool in this strategy, but for far too long New Jersey made them the strategy while critical assets suffered from disinvestment.

The state must reverse course now by adopting strong and sufficient reforms for its subsidy programs, adopting a long view on job creation and investing in the kinds of opportunities that have been proven over and over again to grow and sustain economies: high-quality K-12 education, higher education that is accessible to all, public-private partnerships centered on research institutions, as well as clean, safe communities and affordable, efficient transportation systems. These are the things that will continue to make New Jersey a magnet for research and enterprise and an attractive place to locate a business.

Thank you for your time and consideration. I’m happy to answer any questions you may have.

 

Audit of EDA Should Make Taxpayers Furious

Posted on by NJPP Staff

This morning the New Jersey Comptroller released its long-awaited audit of the New Jersey Economic Development Authority (EDA), an important step toward reining in some of the excesses of the state’s corporate tax subsidy programs. On the heels of the report, Governor Murphy released his proposed reforms to the programs. For the last two decades, NJPP has reported on and advocated for reforming the state’s corporate subsidy programs.

SHEILA REYNERTSON, SENIOR POLICY ANALYST, NJPP:

“Today’s audit of the EDA is the latest in a long line of findings, both by state government and independent organizations like NJPP and McKinsey, that New Jersey’s lavish corporate subsidy programs operate with little oversight and no evidence of spurring economic growth. Every New Jersey taxpayer should be furious knowing that the state has handed out billions of dollars in corporate tax breaks — with no real strings attached — while simultaneously cutting funds for public schools, NJ Transit, and state colleges and universities.

“The state’s failure to produce annual reporting, as required by law, is an insult to taxpayers who expect state dollars to be sufficiently monitored. The lack of oversight and monitoring undermines the integrity of a tax subsidy program, and more importantly, trust in state government. By their very design, the state’s incentive programs favor corporate interests over the well-being of the state’s economy and its working families.

“The need for robust reform of corporate subsidy programs has never been clearer, and the proposals outlined today by the Governor are a critical first step in the right direction. Specifically, the state should place strict annual caps on the state’s largest subsidy programs as a mechanism to improve accountability and oversight.”

Reforms Proposed by NJPP

Other reforms NJPP would like to see the legislature adopt include:

  • Implementing more robust reporting requirements on incentive outcomes

  • Developing more stringent standards for subsidies given to corporations for shifting jobs within the state

  • Restricting corporations’ ability to redeem more in tax credits than they owe in taxes

Read more here: NJPP: It’s Time to Rebalance the Economic-Development Scales

Opportunity Lost: Consequences and Shortcomings of the Fiscal Year 2019 Budget

Posted on by Sheila Reynertson

To read a PDF version of this report, click here.

New Jersey’s fiscal year 2019 budget, the first of Governor Murphy’s administration, signaled a much-needed reversal after nearly a decade of austere fiscal policy. After years of neglect, assets critical to New Jersey’s economic success, like K-12 schools, public transit, and county colleges all received modest increases in state funding. However, this year’s budget falls short in one key area that has plagued the state and its finances for three decades: there are simply not enough stable, long-term sources of new revenue to sustain these increased investments. Failing to implement adequate revenue streams is a missed opportunity that will make it more difficult for the state to meet its current and future obligations, including public employee pensions, corporate tax subsidy payouts, and payments to bondholders and debt service. This year’s budget could have – and should have – marked a new era for New Jersey’s finances, but it ended up kicking the proverbial can even farther down State Street and makes next year’s budget an even more dramatic test.

There’s one glaring difference between this year and next: in 2018, the elected officials participating in the budget process did not have to worry about a June primary or November general election. In 2019, every member of the General Assembly wanting to remain will be focused on re-election and less interested in making tough decisions to fund important investments. Instead, they’ll likely hope that the temporary hike in corporate tax rates (the most unpredictable and variable of the major taxes), accompanied by new taxes on ridesharing services, e-cigarettes, and what appears to be a surprisingly low tax rate on the proposed legalization of marijuana, will be adequate to meet New Jersey’s neglected needs. Revenue collections for the FY 2019 budget were above target in September, but lawmakers should not assume or rely upon such robust returns in the future.

Now that the dust has settled on New Jersey’s FY 2019 budget debate, one thing is certain: there is a lot more cleaning up to do. Though this year’s budget is the largest dollar amount ever, it is still a budget stretched thin. Many departments are making do with yet another year of flat funding and, even with the slightly increased budget surplus, New Jersey is still in no position to withstand another recession or extreme weather event like Hurricane Sandy. The state cannot afford to build another budget based on political convenience. There is simply too much at stake.

First the good news.

New Jersey’s FY 2019 budget is the most progressive document to come out of the state house in a decade. Despite significant compromises on funding sources, most of the policy initiatives championed by Governor Murphy during his gubernatorial campaign remain intact, and many of the progressive priorities of the legislature received support.

These top priorities include overdue investments into state assets that are proven to help economies grow. After years of financial neglect and passing operating costs onto commuters, New Jersey Transit got a boost of $242 million earmarked to improve services and the reputation of the state-run transportation network. New Jersey’s K-12 public schools received a $402 million increase in funding, and a noticeable overhaul of the school funding formula will help update how districts receive state assistance in response to changing demographics. By shifting additional funds to historically under-funded districts, New Jersey can support one of its most important assets – and the state’s children – in a more equitable way.

This year’s budget also acknowledges the importance of investing in New Jersey families by embracing progressive policies that lift up young children, young adults and working parents struggling to make ends meet. It includes an overdue expansion of pre-K education with an $57 million investment to enhance preschool programs for more than 4,000 3- and 4-year olds in qualifying districts.

For those entering college, there’s $27 million for a new tuition-free community college program, removing barriers to higher education for students in low-income households. Additionally, over 500,000 low-income workers will see the first of three annual increases in their Earned Income Tax Credit (EITC), one of the best policy tools for lifting families out of poverty. And approximately 70,000 New Jersey families who make below $60,000 are now eligible for a new tax credit to help offset the cost of child and dependent care, an enormous expense for working parents.

For those families who are struggling the most acutely, New Jersey has finally increased funding for its cash assistance program for the first time in 31 years. The program also dropped the punitive family cap provision, an outdated deterrent that only served to punish Temporary Assistance for Needy Families (TANF) recipients for having children while receiving cash assistance.

These investments were made possible with over $1.5 billion in additional revenue from a variety of new sources, including: a new 10.75 percent tax on multimillionaire income over $5 million (raising $280 million), a temporary corporate tax surcharge averaging 2 percent over the next four years ($425 million), expanding the sales tax to include internet purchases ($188 million), and a one-time general tax amnesty initiative ($200 million). A variety of new revenue streams, including new taxes on e-cigarettes, short-term housing rentals, and ride-sharing services, were also included in the budget, raising an additional $120 million. And a new rule that closes corporate tax loopholes will boost corporate business tax revenue by at least $110 million.

On the surface, these new revenue sources are an essential ingredient of Governor Murphy’s progressive vision. For example, in an era of runaway income inequality a new tax bracket on New Jersey’s earners with $5 million and more in annual income is long overdue. With $280 million more in income tax revenue, the state can provide a slight increase to its property tax relief programs which suffered in recent years from repeated cuts and delayed payments. Closing loopholes that multi-state corporations use to avoid taxation evens the playing field for all businesses operating in New Jersey. And a last-minute U.S. Supreme Court decision finally opens the door to taxing internet purchases made by New Jersey shoppers in other states, further modernizing the tax code. But because this funding package was built on a foundation of political horse-trading and compromise, it simply doesn’t have the durability and strength to help the state rebuild its key assets and invest in long-term initiatives.

Here’s why.

First, the new revenue sources lack the kind of long-term sustainability that New Jersey needs to face its neglected, underfunded obligations while also investing in assets and programs that support economic growth. To move away from instability and meaningfully combat inequality, New Jersey must think beyond temporary taxation and one-shot gimmicks.

Take, for example, the new income tax bracket of 10.75 percent on household earnings over $5 million. This new tax is much narrower in scope than the original proposal, which would have applied to households earning over $1 million and would have raised $765 million a year. The final policy spared approximately 31,000 wealthy households from a state income tax increase, even though these same households were just gifted unexpected federal tax breaks from Republicans in Congress on top of making outsized income gains since the end of the Great Recession.

The budget claims to address the generous federal tax breaks given to large corporations with an average two percentage point corporate business tax surcharge at the state level. The new tax is expected to raise $425 million the first year, improving the state’s ability to adequately fund the kinds of things that all businesses operating in the Garden State depend on: an educated workforce, public safety, and reliable transportation networks. But the tax policy has one fatal flaw – the surcharge expires in 4 years, opening the state to another large budget hole at precisely the moment New Jersey will begin paying off its flamboyant corporate tax subsidy program to the tune of $1 billion a year.

The rest of the budget’s new revenue sources consist of one-offs like the tax amnesty initiative and a mixed bag of smaller “sin” taxes on e-cigarettes, recreational marijuana and sports betting. These sources may bring in millions but, in the grand scheme of things, they are barely noticeable given New Jersey’s financial woes.

Major tax policy decisions made over the course of three decades contributed to this situation. To regain the stature of a state committed to paying for its obligations and fostering a fair and prosperous economic future, New Jersey must embrace meaningful and bold tax reform beyond short-term housing rentals and online sports betting.

Missed opportunities.

New Jersey could easily begin steering the ship back to safer waters by modernizing the state sales tax, a critical source for funding higher education, health care, public safety and other important public services that a thriving state economy requires. The state needs to both broaden the tax base to include more services, especially those used by higher income households, and return the sales tax rate to 7 percent. That gimmicky reduction passed in 2016 put an undetectable amount of extra cash into the pockets of most New Jersey working families. In exchange, it left an enormous hole in the state’s budget. The cost of the cut is about $600 million a year and is expected to reach $735 million by 2026.

For decades, New Jersey helped to close the wealth gap by levying both an estate tax and an inheritance tax and investing the resulting revenue in important assets like NJ Transit, public colleges and health care initiatives that benefit everyone. Unfortunately, state legislators agreed to phase out New Jersey’s estate tax as part of the 2016 gas tax deal. That change, which affected just 4 percent of estates, now costs New Jersey about $500 million a year, handicapping the state’s ability to make crucial investments while further enriching the heirs of New Jersey’s wealthiest families. Eliminating this tax gave estates that are valued at more than $5 million an average tax break of $1.1 million. Then, just one year later, the GOP tax plan lifted the threshold of the federal estate tax from $11 million to $22 million. Decades of uneven income and wealth growth have put the wealthiest residents miles ahead of everyone else. Now the tax code has only made it worse.

By restoring the estate tax with a higher threshold, New Jersey could regain the lion’s share of estate tax revenue it has collected while ensuring that the wealthiest heirs pay their fair share at the state level. For example, reinstating the tax on estates worth more than $1 million would recoup 93 percent of the tax revenue. However, if New Jersey is to depend on the inheritance tax as its only source of taxation of inherited wealth, then policymakers should make it fairer and more adequate by expanding the types of heirs required to pay the tax and ensuring that only New Jersey’s wealthiest heirs pay the tax. Creating an exemption up to $1 million would keep this tax fair and help guard against the deepening trend of concentrated wealth.

Policymakers ought to level the playing field and allow small businesses a better chance of competing with larger companies while raising the revenue necessary to help the entire economy thrive – not just the shareholder set. And federal changes that have drastically cut corporate taxes mean that New Jersey needs to do even more to ensure that all businesses have a fair shot while preventing larger corporations from gaming the system. New Jersey lawmakers should get creative while at the same time taking a defensive stance against tax breaks that hurt the state’s ability to provide public services and make investments that actually help the economy grow.

First, rein in corporate subsidy programs. In the aftermath of the GOP tax law, New Jersey must seriously consider the repeal or reform of the 2011 business tax breaks, like restoring the minimum tax on large pass-through entities to offset the new federal tax credit. Finally, policymakers ought to enact a financial transaction tax. Taking these bold actions could raise over $300 million a year in new corporate business revenue, while relieving long-term budget pressures that will plague New Jersey for years to come if not addressed.

Strategically protecting and investing in assets is what drove New Jersey’s thriving economy for decades. But since the early 1990’s, that enterprising and stable environment has eroded as political leaders of both parties neglected to maintain those assets through fair and equitable taxation. Obviously one budget won’t fix this trend, but New Jersey’s economic and financial freefall can’t begin its reversal with a year-to-year band-aid approach either. It’s time to restore equity to the state’s tax code while raising the resources needed to invest in assets and opportunities that drive economic growth for all of New Jersey’s families and businesses.

Revenue Certification Reform is Long Overdue

Posted on by Gordon MacInnes

This testimony, on SCR-132, was delivered to the Senate Budget and Appropriations Committee on Monday, July 23, 2018.

Good afternoon.  My name is Gordon MacInnes, President of NJ Policy Perspective. I appreciate this opportunity to testify on this very important change to New Jersey’s Constitution.

NJPP – along with our national partners at the Center on Budget and Policy Priorities – has long supported the adoption of a consensus process for estimating state revenues. We are heartened to see the Senate President and his colleagues propose this first step toward establishing a joint legislative and executive branch Revenue Certification Board. More than half of the states – 28 – have adopted this sensible budget forecasting framework, which ensures both greater financial discipline and more robust and relevant debate about a state’s true financial condition.

Given the shaky record of New Jersey’s budgets, its second-lowest credit rating and the consequences of flawed revenue projections, a change in the revenue forecasting process is long overdue. Consensus forecasting is much more likely to mitigate the negative impact of short-sighted politics on budget-making and it may improve New Jersey’s prospects among the major bond rating agencies – an important priority following 11 credit rating downgrades in just eight years.

Take Connecticut as an example, one of the states to most recently adopt consensus forecasting after years of wasted time arguing over the best revenue estimates. Since new rules took effect in 2009, the legislature and governor have come to a consensus before the mandated deadline of November 10 each year and have used updated estimates to make mid-year appropriations adjustments.

Now consider current practices in New Jersey. Here, budget-making is an opaque and unnecessarily dramatic affair. Year after year, the Governor delivers the budget message in the winter.  The Legislature holds 30+ hearings in the spring summoning each cabinet officer and inviting interested organizations and citizens to offer their pleas and suggestions of the Governor’s proposal.  Then, the real budget negotiations take place behind closed doors in small rooms frequently in the very last hours of the fiscal calendar, and deals are struck without sufficient understanding of the agreements and their expected impact. The final budget is not even available for review and inspection by the legislators who must approve it, never mind interested citizens and lobbyists.

Adopting responsible and shared forecasting is a model of good governance and a smart framework for restoring sensible practice to budget-making. It is a key characteristic of states with high bond ratings, and Moody’s even includes the measure as one of the five “Financial Best Practices” it uses to rate states.

While we are heartened to see the concept of a revenue forecasting board being proposed, we strongly oppose the notion that such an important change requiring an amendment of the state constitution should be adopted with such scant notice or public review. The proposed change cannot possibly serve its meritorious purpose in New Jersey’s down-to-the-wire, secretive budget-making tradition.

Consider for a moment the adoption of this year’s budget.  After months of public hearings, the 2019 budget’s proposed revenue increases were tossed aside in the backroom negotiations. The legislature’s alternative budget was introduced on June 18 and passed by both houses on June 21. Following 9 days of negotiations, the governor’s line-item vetoes were accepted on July 1.

Now, consider how a three-person revenue board would manage to serve the purposes of SCR-132 if their first glance at substantial changes in proposed revenues was not possible until June 18.  Yes, the treasurer’s representative and OLS budget and finance director could work full-time around the clock to try to determine the longer-term consequences of a temporary corporate tax increase, but would they and the public member have sufficient time to prepare a helpful analysis that would be given any consideration by the legislative leadership in time for the July 1 deadline to be met? Obviously not.

Legislative leadership should slow this sudden and historic shift in the constitutional budget directives until next year so that the unanswered issues and questions can be addressed with calm deliberation. Otherwise, the same practices that have put New Jersey in such a deep financial hole will undermine and prevent any benefits expected from SCR-132.     

In the meantime, we recommend enacting a comprehensive roadmap for sound long-term budget planning including not only a thoughtfully designed revenue certification board, but also multi-year revenue and spending projections and greater transparency. In fact, the legislature passed a bill in late 2015 that incorporates these very budget practices: A4326/S2942 made it to Governor Christie’s desk where he vetoed it. It is a sound bill that deserves to be sent to the governor’s desk once again and we urge the legislature to do so.

We support bringing transparency to the budgeting process because it may raise questions and issues that one-year budgeting intentionally avoids and provides an opportunity to finally break the cycle of accounting games and gimmicks that have contributed greatly to New Jersey’s financial crisis. But pushing for a resolution that changes our constitution and demotes the governor’s revenue certification authority requires a comprehensive evaluation process that also values the participation and input of the public before moving forward to the ballot.

Thank you for your time.

 

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