Rhetoric vs. reality: Business leaders say targeting sale of tax credits is latest way incentives’ critics are showing lack of understanding

By Tom Bergeron
Trenton | Jul 22, 2019 at 1:30 am
Editor’s Desk

The tone and temperature of the reactions varied from annoyed to angry, upset to exasperated.

Tom Bracken, Michele Siekerka and a host of others were dumbfounded.

The 2019 War on Tax Incentives — granted, everyone on every side agrees New Jersey desperately needs to attract companies — had a new victim: companies that purchased the incentive tax credits from the companies where they were awarded.

Anyone spinning the idea that this was another example of those big, bad companies taking advantage of the state’s taxpayers has missed a few basic points:

  • The incentive programs were set up with the express purpose of allowing the credits to be sold;
  • The incentives are of no value — except in resale — to almost every company that applies for them, namely pass-through entities such as LLCs and S-corporations, which do not pay taxes at the corporate level, so there’s no tax against which to apply their credits;
  • This incentive strategy follows the same model as every other incentive program across the country.

Simply put: This is how all the incentive programs in the past have worked — and how the programs Gov. Phil Murphy has proposed would work in the future.

Siekerka, the head of the New Jersey Business & Industry Association, said people need to understand the basics of the programs before they pick on them.

“It makes me furious to hear this is being discussed,” she said. “The whole intention of having these programs benefits small to midsize business is the ability to sell the credits.

“They’re set up exactly for that purpose, because pass-through companies like S-corps and LLCs would never be able to take advantage of these programs but for the ability to sell the tax credits and monetize them in order to create the investment back to their company.”

Bracken, the head of the New Jersey Chamber of Commerce, said it’s just another cheap shot being taken at the business community — which wasn’t part of the deal at the start.

“The selling of tax credits was always known from Day One,” he said. “It was written into the legislation. It’s totally legit. Now, it’s toxic? Now, it’s a bad deal?

“I just read where the constitutionality of all this is now being questioned. Give me a break.”

Those in the incentives game have long known that few truly understand the rules — or the payouts.

Companies that buy credits, for instance, still need the selling company to meet the requirements in their agreement to earn credits. 

That’s the deal with incentives: You have to continually earn them. From Day One.

Reminding people that the state did not give a penny to the owners of the property formally known as Revel — because the former owners of Revel never met their obligation — always results in surprised stares. It’s similar to the look on the face of some politicians in New York when they discovered kicking Amazon out didn’t give them $3 billion for their own projects.

The power play only cost the city much-needed jobs.

New Jersey business leaders fear that this latest misunderstanding of incentives will have the same impact here.

“It’s discussions like this that create the chilling effect that cause companies to back away from even considering getting involved in these programs,” Siekerka said.

And, Bracken said, it will impact the state’s ability to pass new incentive programs.

“Think of the damage that’s being done,” he said. “Just our ability to put together an effective tax credit program now is going to be compromised. It’s going to be so complicated and so scrutinized that I don’t know how we’re going to be able to ever structure a program that’s going to be satisfactory to everybody.”

EDA officials confirm that the governor’s incentive programs do include provisions for the sale of tax credits.

Bracken said they have to.

“Don’t forget, a lot of the governor’s proposed tax incentive plans have been geared to the innovation economy, which are the exact companies you’re talking about —venture companies that don’t make money for years,” he said.

“How are you going to be able to give a tax incentive to a startup? They’re not going to pay taxes for years — because they are startups.”

Here may be the most frustrating part of the discussion.

There’s a need to have a discussion on the sale of tax credits. Just a different one.

The number of C-corps that are able to buy credits — or need to buy credits — is dwindling. And that was before those that did came under siege.  

“What we understand from some of our companies is that the market to buy these credits now is dissipating,” Siekerka said.

“Think about that. You now have companies who are going to get these credits, who the only way they work for them is to sell them. And that market is drying up because of the fear that either those credits won’t be there in the future or companies purchasing those credits are now going to be drawn into this discussion, which is not a fair discussion.”

One insider suggested the state itself should perhaps buy back the credits. That may seem counterintuitive, but considering credits usually are sold at 90-92 cents on the dollar, the state would actually save a sizeable percentage by paying itself for the credits instead of giving full value to a company.

Of course, that would mean someone would have to explain the incentives game to those unfamiliar with the rules.

Good luck with that.