Monday, June 27, 2016

The Phantom Budgetary Salvation: Cutting Tax Incentives


From time to time, one idea that pops up as a pathway out of New Jersey's deep budgetary quagmire is cutting or eliminating corporate tax subsidies.  I've seen this from repeatedly from public sector unions like the NJEA,  the liberal think-tank New Jersey Policy Perspective, and now gubernatorial candidate Phil Murphy.

See Minute 42:40 of the video below for the example of Phil Murphy where he discusses the cumulative underfunding of state aid, juxtaposes it with the roughly equal "cost" of tax subsidies, and appears to suggest eliminating tax subsidies as a solution to chronic state aid underfunding.  Murphy uses the $7 billion he believes NJ has "spent" on tax subsidies as a way to "fully fund" state aid without the more politically difficult choices of raising taxes or redistributing state aid.

Ok, the elimination of corporate subsidies is so extreme that I'll give Murphy the benefit of the doubt that he misspoke and doesn't want to completely eliminate subsidies in order to fund state aid.    Even the New Jersey Policy Perspective doesn't completely want complete elimination of subsidies.  BUT, in case Murphy actually does want to eliminate subsides to fund SFRA, this is a economically unwise, politically infeasible, and would deprive the state of its major mechanism for encouraging Smart Growth and urban revitalization.



October 2016 Update: Phil Murphy again says he will pay for his agenda by cutting tax incentives.  See 1:20 at the Ewing Town Hall.

Background

Indeed, as Murphy says, there has been a surge in tax breaks since Christie became governor, with nearly $7 billion approved (not "awarded") since January 2010 compared to only $1.2 billion in the previous decade.  This huge increase is only partly because of Chris Christie's own embrace of tax incentives; it is because the legislature nearly unanimously expanded the state law on tax incentives in the New Jersey Economic Opportunity Act of 2013.

However, to suggest that NJ would have had another $7 billion if we did not have a tax incentives program is incorrect for multiple reasons and ignores the positive externalities that tax subsidy-facilitated development has.

First, the $7 billion in tax incentives as only been approved, not awarded. The incentives are given out over long durations, usually a decade, and only after certain investment and job creation benchmarks are met.

The amount of tax breaks actually awarded under Christie is far less than $7 billion, as Al Koeppe, the chair of the Economic Development Authority explained in May 2015 (when the amount approved was only $5 billion):

While the [Economic Development Authority] board's approval represents the opportunity for a project to realize tax credits, companies and developers must then prove that they have satisfied specific legislative requirements before they receive any funds. Since all of the programs were designed by the N.J. Legislature to be performance-based, this means that approved projects must first generate new tax revenue, complete capital investments and/or hire or retain employees to receive the approved benefits. 
To date, very few developers or corporations have received tax credits under the state incentive laws. In fact, of the $5 billion EDA has approved for projects under the Urban Transit Hub Tax Credit, Economic Redevelopment and Growth and Grow New Jersey Assistance programs since 2010, a combined total of $63.2 million has actually been paid out to date.
Based on the statutorily-required independent certification of actual capital investment and job creation/retention tied to these projects, this $63.2 million has resulted in private investment of $732.3 million, the creation of more than 1,920 new permanent jobs and an estimated 3,129 construction jobs.  [my emphasis]
These tax subsidies will become a budgetary problem in a few years when the tax breaks mature, but had the companies followed through and left New Jersey, not expanded here, or not relocated here in the first place, New Jersey would not have been able to tax them either, since New Jersey cannot tax nonexistent business activity or a business that is located in another state.  In other words, New Jersey is fiscally screwed either way.

When NJ gives out a tax incentive to get a relocation the loser is the state the company was formerly located in (usually New York).

Even over the long term, the only way someone could believe that a cessation of tax incentives could mean another $7 billion for the Treasury is to assume that every single previously out-of-state business that got a tax incentive to relocate to NJ would have done so without an incentive and every single NJ business that got an incentive to stay in NJ was just bluffing about leaving.  Given the high-profile departures in recent years of BMW, Hartz Mountain Industries, several pharmaceutical companies, (half of) Pearson, and Sealed-Air, I don't think every company that threatens to leave is lying about it  Goya admitted it would have gone to Suffern, NY if it hadn't gotten $90 million in state and local tax incentives; Panasonic has admitted it would have definitely left.  Thomson Reuters would have moved 450 jobs to Carrollton, Texas.  IDT would have certainly left too.

L-R,
Boston mayor Martie Walsh and Mass. gov.
Charlie Baker knew Boston was an attraction
for GE, but they still gave GE record-setting tax
breaks to relocate to Boston.  
Ironically, Phil Murphy often uses the example of GE's relocation from Connecticut to Massachusetts to argue that a "high-tax" state can still thrive if it offers certain things, like a high quality workforce (Massachusetts is actually a medium-tax state, not a high tax state.

What's ironic about this is that even though Boston and Massachusetts thought that Boston would be a good fit for GE, they still gave GE $145 million in tax incentives over 20 years.  

It's also bizarre of Murphy to condemn tax incentives because his own website calls for tax incentives and grants for technology companies (even though NJ already has something like this too!) and a new plan for tax incentives for college loan forgiveness.

Positive Externalities: Tax Subsidies Are Often Urban Subsidies

Don't get me wrong, sometimes the company is lying about wanting to leave the Garden State and New Jersey ends up giving up tens of millions just to get a company to relocate within New Jersey, but sometimes these relocations can have positive externalities anyway.

It's little admitted among critics of tax subsidies that these subsidies are usually urban and Smart Growth subsidies and go disproportionately to New Jersey's struggling cities and/or transit hubs.

For instance, New Jersey gave a $210 million incentive given to the Prudential to get the Prudential to build an office complex on Military Park in Newark.


On economic grounds, this looks like a really bad deal for New Jersey,  at $21 million per year for 400 jobs, this works out to $52,500 per job.   It's especially suspect in economic terms since the Prudential is too invested in Newark to leave. All the Prudential did was move some employees from existing office buildings at the Gateway Complex to Military Park. Although the Prudential did promise to hire another 400 people, it might have done this anyway and just rented more office space in or around Newark.

But those are the bad aspects about this deal.  In exchange for the $210 million in tax incentives, the Prudential built a $444 million office complex for 3,000 employees where there had previously been abandoned buildings and an ugly surface parking lots for decades.  The Prudential donated millions to fix up neglected Military Park into a gorgeous urban space.  The construction of the new Prudential building has spurred redevelopment nearby in Newark, like the historic and abandoned Hahne's Building, whose development was first seriously proposed in 2002 and yet stalled for years until the Prudential itself moved next door and stepped forward with financing.

And if you don't believe me that Newark development needs tax incentives, just go walk up to Broad Street station, where there are literally acres of completely vacant property.


And the tax incentive only lasts for ten years.  It's not like the Pru is going to abandon the building after that or Hahne's will revert to being an empty shell.  The Prudential's headquarters on Broad Street has been in use for fifty years and why shouldn't these new office buildings last just as long?

And the Hahne's building next to the Prudential is another subsidy recipient, getting $40 million in tax incentives.

What does the state get for that $40 million?  First, it leverages that money into a $174 million investment.  The Hahne's renovation closes what was a large gap in Newark's central downtown, northern downtown, and Rutgers-Newark.  The Whole Foods will be stimulative to future development and there will be hundreds of jobs at the Whole Foods and other retail there.  There will also be 160 apartment units, of which 40% are earmarked for affordable housing.  Suburbanites take nice supermarkets for granted, but Newark is a "food desert" and a Whole Foods is a "holy grail."

As Mayor Ras Baraka said at the groundbreaking for Whole Foods and the Hahne's conversion:
The Hahne’s Department Store is one of the legendary buildings of our historic downtown and today’s groundbreaking is another step in the transformation of Newark’s core.  For nearly three decades, this structure has stood vacant, but now it is becoming an integral and dynamic part of our efforts to transform Newark’s downtown into a 24/7 neighborhood.  (source)
[Hahne's has] always been graffiti. It's always been boarded up, representing a phase of people leaving the city of Newark. Reopening it means people are coming back to the city of Newark (source)

The Hotel Indigo in Newark
is in a formerly near-abandoned
office building.

There are many examples in NJ of "corporate welfare" being used for historic preservation.  For instance, the Hotel Indigo, which opened in a Cass Gilbert-designed office building that had been vacant for decades, benefits from large subsidies from the Urban Enterprise Zone Loan Fund, First Mover Loan, a Redevelopment Area Bond, Historic Tax Credits, and New Market Tax Credits.  Since the building is so historic, so underused, and the boutique hotel is an asset for Newark, isn't it worth it?



Camden has also been a major beneficiary of these tax subsidies, where various businesses have gotten over $1.2 billion to relocate and the state is subsidizing a separate $1 billion megadevelopment built by Liberty Property Trust that will provide millions of square feet of office space and hundreds of apartments.

On one hand, this is a negative, we're talking about over $1 billion in lost taxes, but isn't anything that provides jobs in Camden a good thing?  (Does any critic have any better ideas for how else to revitalize Camden?)

Overall, the overwhelming majority of tax subsidy projects by dollar valuation are in poor cities.

New Jersey also gives up a huge amount of tax money to get businesses to relocate or expand around transit hubs, ie, to foster Smart Growth.  (In order to qualify for Grow New Jersey subsidies a project must meet Green Building Standards too.)

Through the state's Urban Transit Hub Tax Credit program, businesses can receive tax writeoffs for locating near public transit in thirteen cities.  After Panasonic relocated from Secaucus to Newark, 60% of its employees started taking the train to work.

Ironically again, Phil Murphy constantly talks about NJ's public transit infrastructure and how expansive our public transit networks are, but just because a place has a public transit infrastructure doesn't mean that people can use it if their workplace is nowhere near public transit.  Smart Growth makes it more likely that people will be able to use PT by encouraging PT business relocation.  It's not enough to have good public transit network, people have to have the ability to use it.  


The Bad Stuff:

Interstate Subsidy War
Goldman Sachs got $164.3 million to build
this tower in Jersey City. Goldman got $200 mil
for another tower in NYC.

States would probably be better off if none of them had subsidy programs, but these subsidy programs aren't going away and even if they did, New Jersey would still be at a competitive disadvantage to states that have lower taxes than we have.

I agree that these tax breaks need to be better scrutinized.  I also believe that the destructive interstate job poaching between New Jersey and New York has to be reduced.  Goldman Sachs should not be allowed to repeatedly play New Jersey and New York off against each other to get bigger and bigger tax breaks.  Neither should Pearson.  Neither Should BNY Mellon.

Every time New Jersey offers a tax incentive to a New York business, New York tries to match the incentive.  Fewer New Jersey businesses threaten to go to New York (Goya being an exception), but New York gladly offers them subsidies whenever they ask and New Jersey has to make a counteroffer.  Whenever businesses play the two states off each other, either New York or New Jersey loses tax revenue and other taxpayers have to make up the difference.

Unfortunately, the value of subsidies is increasing nationwide and regionally, meaning that for NJ to cease subsidies would be a dangerous unilateral disarmament.  See below for the increase in Connecticut's subsidies:

Source: http://trendct.org/2016/02/17/tracking-government-subsidies-to-businesses-in-connecticut/


Trenton Picks and Chooses Winners and Losers

It's inaccurate to think that these subsidies are a statewide program.  They aren't.  Trenton picks and chooses where businesses can locate or developers can build to get a subsidy. So it's a program for certain towns and counties of New Jersey and oftentimes the towns that are eligible are politically chosen.  If anyone wants to see the power of George Norcross and the South Jersey Machine, just studying the subsidy laws in New Jersey is enough.

Specially benefiting certain parts of New Jersey might be defensible if this policy always promoted Smart Growth in transit hubs or redevelopment in genuinely distressed cities but that's not consistently true.

These are the "Qualified Incentive Areas" for Grow NJ, the state's biggest subsidy program:

Current areas in which GrowNJ incentives are available are:

  • Priority Area 1 and Priority Area 2 
  • Any urban, regional, or town designated center under the State Development and Redevelopment Plan.
  • An area zoned for development or redevelopment in the Meadowlands.Area owned by the New Jersey Sports and Exposition Authority. 
  • Pinelands regional growth area, town management area, a pinelands village.
  • Military and federal installation area established pursuant to the pinelands CMP
  • Area designated for development, redevelopment, or economic growth within the Highlands Region 
  • Federally owned land approved for closure under any federal Base Closure and Realignment Commission 
  • Vacant commercial building having over 400,000 square feet
Ok.  So this program is about containing sprawl except when it isn't.

I support subsidies for redevelopment in struggling cities like Camden, Trenton, Passaic and Paterson, all of whom have special status under current tax subsidy law.  I even accept subsidies for places which aren't struggling, but are true transit hubs, like Jersey City and Hoboken, but the lists of qualifying towns are not totally rational.

 For instance, Hoboken (!), Harrison, and Weehawken qualify as "Distressed Municipalities," but Prospect Park, Jamesburg, East Newark, and Woodlynne do not.  How does this make any sense?  These towns, as non-Abbotts, are doubly disadvantaged since their school aid is inadequate and their tax rates are high.  Hoboken and Weehawken are also "Urban Aid Municipalities," which qualifies them for subsidies for real estate development.  Hoboken is NJ's richest large town and has a small tax burden, how is this fair?  Harrison and Weehawken aren't that distressed either.

Camden qualifies for the most generous subsidies of any town; projects there have to meet a lower cost:benefit ratio to get subsidies than anywhere else in New Jersey.  The New Jersey Policy Perspective claims that some Camden projects could be net losers for New Jersey.

Special subsidies for Camden may be justified, but there are also special subsidies for Paulsboro which is undeniably an example of Steve Sweeney using his power to enrich his constituents at state expense (Paulsboro is in Sweeney's district.)

Likewise, the list of towns that qualify as "Transit Hubs" is also political and arbitrary: Bridgeton, Camden, East Orange, Elizabeth, Hoboken, Jersey City, Mount Holly, New Brunswick, Newark, Paterson, Salem City, Trenton, West New York.

Bridgeton, Salem City, West New York, and Mount Holly don't have train stations.  Meanwhile, busy train locations like Edison (Metropark), Princeton Summit, Dover, and South Orange are not on the list. Irvington, which has a major bus hub, is also not on the list.

And just because a business is located near public transit doesn't mean that employees will use public transit.  If parking is limited and there are multiple train lines converging at the location,  like there are in Newark, Hoboken, and Jersey City, then a high percentage of employees will take PT, but if these factors are not in place and the business is a half mile from a train station or bus stop, few employees will take public transit.

There is also a blatant South Jersey bias (legally defined as Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Ocean or Salem counties) that I think is unjustified. The number of jobs that a project has to produce to get subsidies in South Jersey is lower than it is in the rest of NJ.   Projects in those South Jersey counties in areas designated "in need of redevelopment" (ie PILOTed) is lower than in the rest of the state.  South Jersey towns with high "revitalization indexes" qualify for extra subsidies too that towns in the rest of NJ with equally high revitalization indexes would not qualify for.

Furthermore, sometimes when a subsidized project provides jobs it doesn't mean there is a net increase in jobs for New Jersey because sometimes the business will be in direct competition with other New Jersey businesses.  The Hahne's/Whole Foods subsidy is defended based on the 200 jobs that will be at the Newark Whole Foods, but these jobs will presumably come at the expense of other supermarkets.  It's not like subsidizing a supermarket makes people buy more food; only new housing development can accomplish that.  Whole Foods is still a massive boost for Newark and perhaps reduce Newark's massive spending-power leakage, but we have to be skeptical about some of the jobs claims made on the project's behalf.

Pre-2013 NJ's tax incentives also disproportionately rewarded big companies since the state would always give into a company threatening to take 1,000 jobs out of New Jersey but might ignore a company threatening to take only 20 jobs out.   From the mid-1990s to 2013, the state gave out incentives to over 500 companies, but half of the money went to only 22 companies.

After the 2013 subsidy reform this tendency may be less pronounced, but I haven't seen any comprehensive data.


Conclusion

Despite the political inclusions, usually this program gives subsidies to Smart Growth locations and poor cities.  As NJ Future summarized:

Since the passage of the Economic Opportunity Act [of 2013], New Jersey's two remaining economic development incentive programs the Grow New Jersey Assistance Program (Grow NJ) and the Economic Redevelopment and Growth Program (ERG) appear to be functioning reasonably well at steering economic growth into "smart-growth" locations where infrastructure is already in place to accommodate it, and away from open space and farmland. They also continue to direct almost two-thirds of their awards (both in terms of number of projects and dollar amounts) to the state's most fically and socioeconomically distressed cities, towns, and inner-ring suburbs. The focus on steering economic development into transit-accessible locations appears to have been somewhat diluted by the loss of the Urban Transit Hub Tax Credit and its exclusive focus on such locations, although part of the explanation for this may be an increase in the number of awards being given to industrial projects, which are not optimal uses for land near transit stations.

What would happen probably if New Jersey stopped giving out tax incentives is that there would be less business investment overall and significantly diminished investment in New Jersey's struggling cities and transit hubs.  Overall, the Treasury might not be in much better shape.

Tax incentives will always be controversial since we in the public can never know if a business really would have left New Jersey had it not gotten a tax break.  The value of Smart Growth and historic preservation are subjective too, but to me they are worth it.  Any walk around downtown Newark, Paterson, Camden, or Trenton will show that these cities have vast swaths of underused property and beautiful, yet decaying, historic buildings.

And as I said before, even the very liberal New Jersey Policy Perspective doesn't appear to support completely eliminating subsidies.  They favor an annual cap, but overall their position is critical, but nuanced.

Ceasing tax subsidies to fund SFRA might make sense in a campaign where a candidate wants to denounce "corporate welfare," but it doesn't make economic and budgetary sense since every state in the country has its own tax subsidy program and for NJ to unilaterally stop is to just to surrender jobs to rival states who have no qualms about giving subsidies to the richest companies in America, as Connecticut just gave $52 million to Bridgewater Associates.

Someone needs to tell Phil Murphy that there is no painless way to produce fair school funding in New Jersey.  Fairly funding schools will take a combination of tax increases and redistribution.  While tax subsidies can be made fairer and maybe reduced, there's no pot of gold in eliminating them.

I'm honestly not sure Phil Murphy wants to do with subsidies, but the NJEA's position is clear that it wants suspension:
NJEA Secretary-Treasurer Sean M. Spiller and NJEA Vice President Marie Blistan joined New Jersey Working Families today in calling for a moratorium on subsidies to corporations from the New Jersey Economic Development Authority (EDA) until it can be demonstrated that such giveaways produce any positive results for everyday New Jerseyans....

This trickle down concept hasn’t worked and we keep going back to it,” Spiller said. “We see 38 percent of our families struggling to meet basic needs. We see the number of students living in poverty skyrocketing—up 20 percent since 2008.”

Spiller noted that while Gov. Christie is busy handing out subsides to the wealthiest in New Jersey through the EDA, he is not living up to his obligations under the pension funding law he signed in 2011. Known as Chapter 78, that law was Christie’s promise to fund the pension systems to their actuarially required levels over a period of seven years. After following the law for two years, Christie stopped paying the legally required amount, thus violating his own law.

Someone should remind the NJEA that other states have subsidy programs too, New Jersey's taxes are high to begin with, not every subsidy is evil "corporate welfare," and businesses do relocate.

And how is the NJEA not saying to Camden "Drop Dead" since redevelopment there would be nil without subsidies?

Phil Murphy ought to be more balanced than the NJEA leadership and he may not be serious but eliminating subsidies, but if he does want to stop subsidies he has an uphill political fight, since eliminating tax subsidies would be opposed by business groups, South Jersey Democrats, urban Democrats, and probably unions.  I thus don't see eliminating subsidies as politically viable.

Sadly, I continue to await a serious school funding (and pension funding) proposal from New Jersey's leading candidate for governor.  

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