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Tax credits are a reliably effective tool routinely deployed by states to seal the deal on new facilities, expansions and relocations. A state’s willingness to forgive up to 10 years worth of business taxes can wrap a $100-million bow around a Fortune 500 firm’s decision to move its corporate headquarters across state lines.
At first glance, these credits may seem like a painless method for inducing growth, since technically they involve no expenditure of tax dollars. The price tag for other, more tangible, economic development lures — like new infrastructure, development grants, workforce training programs, etc. — can run into millions of dollars.
The real impact of magically wiping out years of anticipated revenue is rarely a matter for public discussion. After a big deal is inked, ground is broken, a gleaming tower is built and, as new job holders queue up to buy their morning coffee, the overall impact of the project on a state’s balance sheet is buried in the minutiae of a footnote in an annual state budget report read only by the green-eyeshade types who wrote it.
But in an era of fiscal austerity and staggering debt loads, there are signs that the practice of awarding lucrative tax credits to seal development deals no longer may be exempt from the kind of intense scrutiny–fiscal and political– that almost always is applied to other “adjustments” (read tax increases) that impact on the flow of revenue into a state’s treasury.
An eyebrow-raising report issued this week by New Jersey Policy Perspective, a public-interest lobbying group, reveals that NJ has awarded an astounding $4 billion in tax breaks and credits in the past four years as the closing juice for some of the largest business development deals in the Garden State. This is nearly four times the total amount ($1.2 billion) of tax credits doled out in NJ for the previous 10 years.
Under Gov. Chris Christie, New Jersey has fully embraced tax credits as a game-changer in the decades-long David-and-Goliath battle for jobs with its big brother across the Hudson River. The results are impressive: during Christie’s tenure as governor, a parade of financial sector titans and other industry leaders have grabbed the bait and planted their flags in NJ, including JPMorgan Chase, Forbes and RBC Capital.
Gov. Christie also has deployed hefty tax breaks to keep some big players who already had deep roots in NJ from even thinking about relocating. Most notable were a whopping $250-million inducement to Prudential to rebuild its NJ headquarters a couple of blocks from the existing HQ in Newark and a reported $102.4 million in credits to facilitate Panasonic’s nine-mile move down the Turnpike from Secaucus to Newark.
According to the NJ Policy Perspective report, the average tax-credit subsidy package offered by New Jersey has risen to nearly $76 million from $10.1 million over the past four years; the group estimates that the average amount of per-job tax forgiveness has correspondingly risen to about $48,000 from $16,430 during the same period.
Viewed strictly through the prism of economic development triumphs or failures, we have no problem adding our voice to the cheering section for these big-ticket deals in our home state. NJ is still on the road to pre-Recession employment levels; the sooner we get there the better. But when you put $4 billion in tax-credit commitments into the context of the state’s current and long-term fiscal outlook, the picture gets complicated.
New Jersey is facing an estimated $2.7-billion revenue gap in the state budget over the next two years, including about $800 million in current-year revenue. State officials reportedly underestimated the impact of federal tax policy changes in 2013 and thus overestimated the revenues they’d be collecting.
This shortfall may force Christie to backtrack on one of the signature achievements of his first term: comprehensive pension reform that involved painful concessions from state workers in exchange for what seemed like an iron-clad pledge from the governor to end Trenton’s habit of postponing state payments into the pension fund–usually the first fix applied to an NJ budget deficit. In the opening salvo of his battle with the Legislature over how to close the looming budget gap, Christie proposed slashing this year’s pension payments.
Even if we don’t consider NJ’s budgetary woes (which we hope are temporary) in evaluating the value of the state’s aggressive use of tax credits, there’s a longer-term problem in the Garden State that makes it harder for anyone who wants to justify the heavy use of these tax breaks as essential job-creation tools.
The July/August issue of BF will feature our 10th annual State Rankings Report, which includes a ranking for Best Business Tax Climate. The Tax Foundation’s annual State Business Tax Climate Index is one of the most reliable benchmarks for grading the states on this. The best thing we can say about New Jersey’s performance in the State Business Tax Climate Index is that it’s been very consistent: the Garden State has finished in the bottom percentile (49th or 50th) for as long as we can remember.
We’re not going to bore you with the granular details of the regressive business tax structure that produces this dismal result year after year. [It should be noted here that Gov. Christie inherited this Byzantine system from his predecessors, and the annual cost of state services for the nine million residents of NJ is about $30 billion].
But in the context of a debate about the value of a state’s tax-credit incentives, the state’s tax structure itself should be part of the discussion. The process of offsetting regressive taxes with generous tax breaks–without addressing the inherent structure–is like riding a merry-go-round and assuming the music will never stop.
Food for thought in a debate which no doubt will continue. We’ll keep you posted.
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