New Jersey Gov. Phil Murphy is targeting tax incentive programs as a potential source of revenue for the cash-starved state.
The new Democratic governor said in his first budget address on March 13 that $8 billion in corporate tax credits handed out by the New Jersey Economic Development Authority under former Gov. Chris Christie have added another barrier to the state’s growing fiscal challenges. One of his first acts after getting sworn was signing an executive order directing the state comptroller’s office to audit the NJEDA’s tax incentive programs going back to 2010. The current program is set to expire in 2019.
“These massive giveaways, in many cases imprecisely directed, will ultimately deprive us of the full revenues we desperately need to build a stronger and fairer economic future,” said Murphy while proposing his $37.4 billion budget to the state legislature. “We were told these tax breaks would nurse New Jersey back to health and yet our economy still lags.”
The Jan. 19 executive order directed Comptroller Philip James Degnan to examine the Grow New Jersey Assistance Program, the Economic Redevelopment and Growth Grant Program and other programs that have existed under the NJEDA since 2010 when Christie took office. The audit is aimed at comparing the economic impact from projects that received the tax breaks with the jobs and salaries they created.
“The audit directed by Governor Murphy is an important opportunity to evaluate the effectiveness of the State’s existing incentive programs,” NJEDA spokeswoman Virginia Pellerin said in a statement. “We are working closely with the Office of the State Comptroller and look forward to receiving their report later this year as we work to implement Governor Murphy’s vision for a stronger and fairer New Jersey economy.”
The $8.4 billion of tax breaks NJEDA approved under Christie compared to $1.2 billion of subsidies awarded during the previous decade, according to New Jersey Policy Perspective, a liberal think tank that opposes the corporate incentives program. NJPP argued in a report last year that the tax giveaways have hampered New Jersey’s budgetary flexibility to fund vital investments such as transportation and schools.
“Better evaluation is a critical part of comprehensive subsidy reforms that can usher in a more responsible approach to economic development in the Garden State,” NJPP vice president Jon Whitten said in a statement. “A new direction is urgently needed, because the state can’t afford this subsidy largesse – both in terms of its direct, long-term drain on the state’s coffers and in terms of the opportunity costs created by having such a lopsided and flawed economic-development strategy.”
New Jersey has the second lowest bond ratings among the states following 11 downgrades under Christie, driven largely to revenue shortfalls and rising pension liabilities. The state’s general obligation bonds are rated A3 by Moody’s Investors Service, A-minus by S&P Global Ratings and A by Fitch Ratings and Kroll Bond Rating Agency.
“It’s always a good idea for a new administration to see what the tax incentives program is like and what potential revenue they are missing out on,” said Fitch Ratings analyst Marcy Block.
Fitch noted in a March 22 report that Murphy’s budget proposes $2 billion in revenue growth including $1.5 billion from tax increases. Block said Murphy’s plan to move the state’s sales tax back up to 7% from the 6.625% level it dropped to under Christie is a “positive step” that would provide $581 million in additional revenue, but said that proposed new spending would leave little wiggle room in the budget.
“These increased revenues would go to new spending and leave the state with still slim reserves and reduced flexibility to respond to future economic downturns through revenue raising,” said Block in her report. “The state has significant spending pressures not only due to the demands of underfunded retiree benefit liabilities but also because natural revenue increases resulting from modest economic growth in recent years have gone primarily towards the phased-in growth in annual pension contributions.”
Regina Egea, president of the Garden State Initiative, said she supports restructuring New Jersey’s corporate incentive program in a way that would better drive economic activity. She said both the NJEDA as well as incentives offered by counties and municipalities should also be reexamined to determine if abatements are being awarded based more on job creation or capital investments.
“The odds are very low, I believe, that these total dollars are being presented to the market in a way that maximizes New Jersey’s growth, particularly in key industries,” said Egea. “It seems to me that if New Jersey integrated, or at least coordinated ‘layers’ of incentives in order to maximize these extremely valuable investment dollars, our economy will grow on a steeper trajectory.”
Murphy emphasized that while he opposes many tax breaks handed out under the former administration, a $5 billion incentives program that the NJEDA’s Grow New Jersey Program is offering Amazon to build its planned second headquarters in Newark would be a positive for the state. The e-commerce giant placed Newark among last fall on its short list of 20 municipalities it is considering for a new facility that could house up to 50,000 employees. The city of Newark is also offering $2 billion in tax breaks of its own to create $7 billion in total subsidies.
“This would be a transformative moment for our state,” said Murphy in his budget speech about the prospects of Amazon arriving in Newark. “It could literally spur billions of dollars in new investments, in infrastructure, in communities and in people.”
Murphy noted that nearby Massachusetts has grown jobs at a rate seven times greater than New Jersey in recent years despite only spending $22,000 in economic incentives per job compared to $160,000 for each job in New Jersey. He said that other priorities beyond taxes are important to lure businesses such as investments in education, workforce housing and infrastructure.
“Even with these heralded gifts, our economic growth has trailed almost every other competitor state in the nation in literally almost every category,” said Murphy in his budget speech. “Massachusetts and our other competitor states are providing businesses a greater value for money and with that value in hand they are cleaning our clocks.”