New Jersey Moves to Rein In Wasteful Tax Breaks for Businesses

Mel Evans/AP Photo

Camden, one of New Jersey’s poorest cities, seen here from the Delaware River waterfront, is a frequently cited example of how tax incentive programs fail local residents.

New Jersey has some of the most generous state business tax incentives in the country. The law that codified these incentives—the Economic Opportunity Act (EOA)—is set to sunset, and New Jersey lawmakers are scrambling to renew them: $11 billion in incentive programs are currently scheduled to expire in early 2020. But on August 23, Governor Phil Murphy issued a conditional veto of the legislation and, instead, called on state lawmakers to act on the sweeping reforms he proposed in late 2018 before he would sign a renewal into law.

As the Garden State re-evaluates its controversial incentive programs, some tax reform advocates have been inspired by a recent tax incentive cease-fire between Kansas and Missouri. Five New Jersey state legislators called for a similar interstate truce for the New Jersey–New York–Pennsylvania labor market that would end the tristate competition for jobs that use increasingly generous tax breaks to steer new businesses to one particular state.

Kansas and Missouri share a border and a single labor market, and have had a notorious business rivalry. The recent truce ends the two states’ efforts to lure businesses and jobs across state lines with tax breaks for corporations based on the number of jobs created. Tax reform advocates say that virtually no jobs are created and, instead, the tax base is eroded as a small number of companies game the system, ultimately leading to a net loss game, as I previously reported for the Prospect. A truce would end this waste of resources, as states would stop trying to outdo each other by offering more and higher tax breaks that deplete state coffers and reduce revenue streams for public services.

Murphy, a Democrat, has expressed openness to the idea of an interstate truce. His conditional veto allows him to oppose parts of the bill and propose amendments. Should the legislature pass the bill with the proposed amendments, it will be presented to the governor again for his signature. Sheila Reynertson, a senior policy analyst for the New Jersey Policy Perspective, an economic policy think tank, says she thinks such a truce would be helpful. “In theory, a cease-fire agreement is a great way to redefine ourselves as part of a larger ecosystem, especially if you look at it as labor markets.” She continues, “We just have very porous borders when it comes to where you live and where you work. Let’s start treating that as a norm, and let’s stop letting corporations play games.”

Business tax incentives, even in the cases where they do create jobs, are expensive—and until recently, there were few tools at states’ disposal that would enable state economic-development officials to forecast the costs of these programs. “It really is important for states to have high-quality independent evaluations of their incentive programs,” says Josh Goodman, a senior officer at Pew Charitable Trusts. “What our research shows is, even just a few years ago, most people had no idea how effective their incentive programs would be.” Fiscal protections, such as caps on the amount of incentives given out and improved forecasting, are essential tools for states in deciding how to manage their incentive programs.

Incentives work best when they bring new businesses to economically distressed areas that hire local residents, especially the unemployed. As Goodman explains, that means that it matters if the businesses that come are “high-impact,” that is, have national and international markets that will help expand and grow the local economy.

Nonetheless, some businesses will take advantage of the incentives, and not hold up their end of the bargain. “If you incentivize businesses that pay below-average wages, you could become potentially poorer off,” explains Goodman—because the local average wage falls. Businesses that come to these impoverished areas ideally are ones in industries that pay higher wages.

Camden, one of New Jersey’s poorest cities, is a frequently cited example of how tax incentive programs fail local residents. The EOA was supposed to incentivize a new supermarket to come to Camden and help rescue the city from its status as a food desert. The proposed ShopRite would be the first full-service grocery store in the city in decades. But when the EOA was finally passed, no supermarket was ever built, and residents questioned the true intentions of lawmakers in drafting tax incentive programs.

The economically distressed city has been the recipient of lots of tax incentives that encourage businesses to relocate. The businesses came, but the jobs did not. A report in July showed that Camden had a severe revenue shortfall and that the tax incentive programs were a major part of the problem.

There are new towers and parking lots right on the city’s Delaware River waterfront, but few if any of the jobs go to Camden residents. These commercial complexes even include dining options, helping to ensure that the workers who now commute into Camden do not venture out offsite to frequent local businesses.

Camden residents see the tax incentive programs as designed to help big business, not local residents. Dava Salas, who lives in Camden, spoke to a Politico reporter. “All these tax initiatives weren’t meant for us,” she said, and to the reporter interviewing her, “I’m sorry to say this, it was meant for people, like you, who lived outside the city.”

The EOA dates back to Republican Chris Christie’s time as governor in 2013, and a lot of muckraking journalism points to language changes when the bill was written that were designed to benefit the Camden businesses, business partners, and political allies of New Jersey Democratic power broker George Norcross (who currently does not hold elected office). According to ProPublica’s and WNYC’s Nancy Solomon and Jeff Pillets, of the $1.6 billion in tax breaks for companies making capital investments in Camden, at least $1.1 billion went to companies with ties to Norcross.

Since taking office in 2018, Murphy has been shining a light on the tax incentive programs, arguing that these programs have had little accountability and have granted more tax subsidies than they should have because state officials failed to audit company reports.

State legislators’ obligations to Norcross as head of the state Democratic Party machine have ensured that the EOA has escaped much criticism. But Murphy—who self-funded his gubernatorial campaign—owes nothing to Norcross, and he has been openly critical of the EOA.

“Right from the beginning, [Murphy] really didn’t play into the hands of party bosses,” says Sue Altman, New Jersey state director for Working Families. A lot of people in Trenton are secretly applauding Murphy for standing up to George [Norcross].”

Some see the state legislators’ support for an interstate truce as a way to avoid criticizing the EOA, while paying lip service to progressive reforms. This is the first time these state legislators are taking a stance on the state’s corporate subsidies—and it’s partly because of the EOA’s ties to Norcross.

But New Jersey is still responsible for contracts entered into under the EOA—which amount to billions—over the next ten years. The state is in no position to be giving out such big tax breaks given budget forecasts that show future shortfalls. Like many states, New Jersey’s pension fund contributions have fallen short of the amounts required to pay the cost of benefits to retirees. On August 28, state Senate President Stephen Sweeney said that New Jersey was “in worse shape” than any other state, despite Moody’s giving New Jersey a better rating than Illinois, Bloomberg’s Danielle Moran and Elise Young reported.

But tax incentives are popular with voters, explains Tim Bartik, senior economist for the W.E. Upjohn Institute. Voters don’t necessarily understand how high the costs of these incentives are, nor how much of the money is wasted and how that might impact the public services they get with their taxes, he says. “These things are popular, so you need an alternative to the just-say-no approach,” Bartik says. “My alternative is to target these things [in] distressed areas, limit the amount, and substitute a lot of this in infrastructure and other services instead of tax subsidies.”

New Jersey’s incentive programs are integrally linked to how competitive the state is in the regional labor market compared to powerhouses like New York and Philadelphia. But the tax incentives don’t necessarily bring economic growth, says Reynertson. Opponents of tax incentives say that tax breaks are only a tertiary concern for companies deciding where to move. The ability to move goods and services and the educational level of the local workforce are more important, they say. “It’s very politically convenient to say you brought in 200 jobs by offering a tax subsidy, but there’s so much more that can help a state to continue to grow that often gets ignored in these conversations,” Reynertson says. Stopping competition via tax incentives would be fiscally important for a state like New Jersey. “[The truce is] something New Jersey should be spearheading, we’re a state that’s in no position to be gamed,” she adds.

Ultimately, business tax subsidies are less of a factor for new and expanding businesses. But they are politically easy to sell and, in the case of New Jersey, have enriched some businesses and individuals. Altman of Working Families worries that the border truce debate could be a distraction from the bigger issue of business tax incentives that don’t work—and an easy way out for legislators who don’t want to oppose a party boss like Norcross outright. “The future of New Jersey’s tax incentive program cannot rely on interstate truces,” Altman says. The appeal of state and local subsidies to lure businesses is declining for residents, as the Amazon HQ2 sweepstakes boondoggle in New York illustrated, and interstate truces may only partially solve this problem.

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