Wednesday, November 23, 2016

Phil Murphy Speaks About State Aid and Says Nothing

Phil Murphy just gave a speech at the New Jersey Education Association's annual conference at which he came down on several major issues in state education, such as his plans to eliminate the PARCC, implement a moratorium on new charters, veto any renewal of Chapter 78, and to fully fund the pension system without any changes to employee and retiree health care. 

The key moment of Murphy's paean to the NJEA was
As my mother would say, you are known by the company you keep, and I’m keeping really good company right now … It means a lot to me to be on the same team as NJEA.
Phil Murphy with his "team," the NJEA Leadership
Same team as the NJEA?  Did Murphy seriously say that with a straight face? does he realize his own kids go to the Rumson Country Day School and Phillips Andover, which have no union representation whatsoever?

Anyway, Murphy expressed his allegiance to the NJEA very clearly, but when it came to state aid, Murphy spoke without saying anything.

On school funding 
There is one (school-funding) formula that has been blessed by the state Supreme Court, and that’s where I’d go back to start. I know it needs to be tweaked and updated, but I’d go back to that. This governor has underfunded that formula to the tune of about $8 billion in his seven years in power, and whether by coincidence or by design, that is about the same amount of money he has put out in tax incentives to come or to keep them … He has clearly put corporations and their tax rates ahead of kids and their education. We need to turn that back on its head.
"TWEAKS"?  How can a system that allows 52 districts to get over 200% of their recommended aid while 141 get 50% or less just be in need of a "tweak"?

It needs a total upheaval.  

What "tweaks" and updates does Murphy think need to be made?
  • Does he want to make the NJEA's preferred "tweak," which is having the state pay for charter students and cutting district transfers to charter schools? 
  • Does Murphy agree with Abbott extremists like the Education Law Center and Bruce Baker, who believed that SFRA's weights for high-FRL districts were too low?
  • Does Murphy agree with Vincent Prieto and some special education activists, who want the state to fund special education based on the number of special education students a district claims? 
  • Does Murphy agree with Steve Sweeney, Jack Ciattarelli, the NJ Senate, the NJSBA and support redistributing Adjustment Aid?
  • Does he agree with Jack Ciattarelli and Steve Sweeney on the need to end how tax abatements distort state aid?  
We have no idea.  Murphy is speaking without saying anything. As usual, he doesn't even use the word "SFRA."

Murphy's statement echoes Vincent Prieto's equally vacuous statements on state aid, where he emphasizes that the current school funding law has the Supreme Court's "blessing."

Why New Jersey Has No Choice on Tax Incentives

So we have no clue about how Murphy wants to "tweak" state aid, but Murphy, echoing the NJEA itself, does suggest something of a funding source - the elimination of tax incentives.
Goldman Sachs Put Itself Before NJ
Schoolchildren and Took $160
Million in Tax Credits from NJ
Alone. It has taken hundreds of
millions more from other
states.

Murphy's rhetoric that Christie has "put corporations and their tax rates ahead of kids and their education" is powerful, but it is a highly mendacious promise since, as governor, Murphy will not be able to eliminate tax incentives.

First, as I've written before, New Jersey's tax subsidies are often urban- and transit-specific, so ceasing tax incentives means redevelopment in Paterson, Trenton, Camden, and Newark would cease.  Eliminating tax incentives is

"GOVERNOR TO NEWARK REDEVELOPMENT: DROP DEAD."

Second, the reason it is necessary for New Jersey to offer tax incentives is because states are at war with each other for jobs right now and their weapon is tax incentives.

New Jersey in particular has to offer tax subsidies because our tax rates are the country's highest.

New Jersey has poached businesses from other states (mostly New York) and other states have poached businesses from us. Hertz' departure from New Jersey to Florida was facilitated by $84 million in incentives. Sealed-Air's move to North Carolina was facilitated by $36 million in tax incentives.  Georgia got Mercedes for cheap -- only $23 million.

In all of these cases the savings aren't just taxes, but overall costs of employment. Mercedes will save 10% - 20% a year in Georgia.

Businesses (especially in services) are mobile and, either through the necessity to compete against businesses in low-tax states or else their CEO's ideological preference for low taxes, they can and do migrate to or expand in low-tax environments.  The tendency to move or expand in low-tax environments exists in businesses that purport to be enlightened and not just about their profitability. Tesla opened its "Gigafactory" in Nevada because it got $1.3 billion in subsidies.   Apple took $1 billion to build a data server farm in North Carolina. The New York Times is quite a liberal paper, but it took $29 million in tax breaks for its Midtown headquarters.

Elon Musk, interestingly, said that the $1.3 billion Tesla got for its "Gigaplex" didn't really matter so much as it showed "Nevada cared."

First of all, it is important to point out Nevada is not paying for [the Tesla Gigaplex]. The $1.3 billion or so which is the maximum tax incentive that Tesla could get over 20 years, so an average of, like, maybe, $50 or $60 million a year, is a tiny fraction of what this factory’s output will be. So at the 50 gigawatt level this is like a $5 billion a year factory output. We think it will probably be at least two, probably three times that number. So that’s like $15 billion a year. You compare that to the tax incentive of $50 million, it is point-three, point-four percent. It doesn’t move the, I mean, it was important that Nevada offer that package just to show that they cared. It doesn’t move the needle on economics. I hope people understand that. I try to belabor this point ad nauseum because some of the articles that have been written give the impression that Tesla got this $1.3 billion check from Nevada. No, what we got was a concession that sales and use tax on equipment in the building, we are not going to be charged that for some period of time. So, it is really a very tiny affect on the economics of the factory. But if the state didn’t do what it could then does the state really care? So that package was more about Nevada showing that they cared about Tesla being here than anything else.

IF New Jersey didn't have a system of corporate tax breaks more businesses would leave New Jersey or not locate here in the first place and the Treasury wouldn't have any net gain.

So when a business threatens to leave, the Treasury is screwed either way:


  1. Either the state offers the tax incentive OR
  2. it watches the business leave and take all its taxes and employee spending power with it.


Yes, there are some NJ businesses that are bluffing about relocation/expansion elsewhere and would stay in New Jersey or expand in New Jersey even if they didn't get tax credits, but not all businesses that threaten to leave/expand elsewhere are bluffing.  The expansion of tax incentives in New Jersey since 2013 (when the law was rewritten) was a result of a free-for-all of tax incentives in other states.  (compare how low NJ subsidies were to NY & PA in 2012.)

Even America's Most Profitable Businesses Want Low Taxes

GS has kept expenses low by putting
employees in low cost, low tax locations.
Source:
http://bit.ly/2isMZ3n
The need to be in a low-tax environment is most obvious if a business has a low profit-margin, but even America's most profitable businesses - such as finance giants like JP Morgan and Goldman Sachs - make decisions on taxes.

I bring Goldman Sachs up not to say that Murphy is a hypocrite, but to show that even if Goldman Sachs, whose annual profits are now $7 BILLION, goes where it is offered tax incentives, just imagine the pressure on low-profit and medium-profit businesses are under.

Goldman Sachs is one of the country's most notorious exploiters of tax subsidies and loopholes, taking $593 million from New York and New Jersey alone.

Maybe Phil Murphy, as a Goldman Sachs insider, thinks that even if Goldman Sachs hadn't received at least $164 million in state and local tax subsidies it would have put employees in Jersey City anyway, but I wouldn't be so confident, since Goldman Sachs also has thousands of employees in Salt Lake City, Dallas, Warsaw, and Bangalore, India.  Despite its enormous profitability and need for highly educated workers, even Goldman Sachs makes decisions based partly on taxes and costs.  (even Goldman CEO Lloyd Blankfein brags about it.)

Goldman Sachs Loves Salt Lake City for the Mountains,
Workforce, and Tax Incentives


If Goldman doesn't care about state taxes, why did Goldman Sachs start expanding in Salt Lake City around 2007-2009, at a time when its Jersey City skyscraper was underused?

Certainly the high-quality, multilingual Utah workforce played a part and taxes that are already fairly low, but Goldman didn't move to Utah until it got Tax Incentives.

Goldman Sachs ranks as the second-biggest beneficiary behind Procter & Gamble Co of Utah's tax-break program, having inked a deal in 2009 to receive an estimated $47.3 million worth of rebates over 20 years. In exchange, the bank committed to investing $51 million in Utah, maintaining at least 1,065 employees and paying them at least 50 percent above the average Salt Lake County wage. [ed. GS now has 2,000 employees in SLC] 
The deal built upon a previous $20 million tax break deal Goldman received two years earlier under Herbert's predecessor, Jon Huntsman. 
Goldman agreed to the sweetened package after an entourage of Utah public officials -- including Gov. Herbert, Salt Lake City Mayor Ralph Becker and local business leaders -- came to the bank's headquarters in lower Manhattan to make a personal sales pitch to senior executives.
Goldman Sachs even is expanding in Salt Lake City while it cuts jobs elsewhere.

Goldman Sachs Group Inc has been quietly moving thousands of jobs from pricey places
like New York and London to cheaper cities like Salt Lake City in recent years, and executives said on Thursday those efforts are finally starting to show up in the bank's results.......
The bank added a net of 500 employees to its payroll of 32,900 in 2013, but it added many more than that to lower-cost cities and cut staffing in higher-cost cities, they said. Besides Salt Lake City, Goldman has also built staffing in cities like Dallas and Bangalore, India. 
"I've been covering this company for 10 years, and I can't remember the last time they were cutting compensation at this level," said Tom Jalics, a senior investment analyst at Key Private Bank, whose clients own Goldman shares. "They're really ratcheting them down."..
Ten years ago, Goldman had only a handful of employees in Salt Lake City. Now it has about 1,800 employees, with nine of the bank's 11 divisions represented there, in functions ranging from research and credit analysis to trade settlement and compliance.

HIGH VALUE OR LOW COST?
The migration of jobs to lower-cost centers has created some tension between employees in New York and Salt Lake City, who get paid different amounts for similar jobs and are often culturally at odds. 
New hires in Salt Lake City cost 30 percent less, on average, than employees in the same roles in New York, according to a consultant who has helped grow Goldman's Utah operation but was not authorized to talk to the press. A Goldman employee fresh out of college in Salt Lake City, for example, might earn about $45,754 a year, on average, while those in New York earn about $67,334, according to jobs website Glassdoor.com.

Sure, Utah has the "Mormon Factor," ie, a high-quality, sober, multilingual workforce, but Utah had to offer the tax breaks because Goldman Sachs still threatened to move somewhere else.

The inconvenient truth for progressives is that businesses do respond to tax rates and tax incentives.  If super-profitable Goldman Sachs moves to Utah because of tax subsidies, then lower-profit businesses face an even bigger pressure to relocate to low-tax states.  Democratic governors in the US, like Andrew Cuomo and Dannel Malloy, deploy tax incentives all the time because they know it's necessary to compete with other states.  New York State actually gives out $23.9 billion in tax incentives in 2015 alone.

Philosophically, corporate tax incentives are impossible to defend, but when every state has its own incentive program New Jersey cannot unilaterally stop giving tax incentives out.

So it's a lie of Murphy's that he is going to be able to fund schools with money saved by abandoning tax incentives.  Murphy will not be able to cut tax incentives unless he is willing to accelerate business departure and further inhibit business growth.

I doubt Murphy will make that tradeoff.  Even aside from how dependent Camden, Paterson, Newark etc are on tax incentives, I doubt even the Democrats would let him due to business-exodus and non-expansion fears.

In conclusion, Murphy continues to not show any understanding of how off-formula New Jersey is with state aid, with hundreds of districts overaided or underaided "with no rhyme or reason."  He shows no compassion for towns like Bayonne, Bound Brook, Freehold Boro, and Belleville who face the awful choice between taxing themselves into decline or letting their schools become badly underfunded.

Unlike Jack Ciattarelli and Mike Doherty, he shows no outrage at the fact that the children of investment bankers and lawyers in Jersey City and Hoboken get "free" PreK while the children of cashiers and landscapers in Dover and Bayonne get nothing.

This is a huge contrast to Assemblyman Jack Ciattarelli, who is extremely concerned with NJ's most underaided communities and kicked off his gubernatorial campaign at Manville High School.

Murphy talks about "fully funding" SFRA but presents a funding source that cannot be tapped.  It's like "scientist" claiming to power something with zero-point energy.

Yet again, Phil Murphy spoke on state aid, missed the real victims of the status quo, and said nothing.


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