The headlines and talking points were easy: The state spent $11 billion on tax breaks for huge companies — with little to show for it.
To separate fact from fiction, ROI-NJ turned to a powerful voice of the economic development community, the Smart Growth Economic Development Coalition, and a critic of public financial incentives, New Jersey Policy Perspective, to get to the truth about everything you want to know — or need to know — about the recent audit.
Here are their answers, some of which were edited for space:
Gov. Phil Murphy, in his State of the State message, said the state has doled out $11 billion in incentive dollars under the Grow New Jersey program. Is that accurate?
NJPP: No. As of February last year, the EDA (had) approved $10.9 billion in tax subsidies for 1,000 projects. Between 2005-17, just 401 of those projects completed the necessary requirements for creating jobs and/or making capital improvements, which allows those businesses to ‘cash in’ their tax credits totaling $3.4 billion. As of the end of 2017, only $700 million — less than a quarter — has been paid out, but that is expected to balloon very soon. The state budget is facing over a $1 billion loss per year from 2020-23, should all qualifying businesses decide to cash in their full subsidy amount. And the true long-term fiscal impact is yet to come for at least the next 15 years as the backlog of tax credits is paid out.
SGEDC: If ‘doled out’ means actually paid out to companies, then no, the state has actually paid out only $697 million. On the other hand, if ‘doled out’ means the amount of tax credits awarded to companies that can be earned in the future, that amount is $8 billion. There’s another $3 billion that pertains to old programs, which gets to the $11 billion figure cited by Gov. Murphy.
Was the OSC’s recent report based on current programs or older, now-defunct programs?
SGEDC: Older programs. But don’t take our word for it. As Tim Sullivan, the CEO of NJEDA, stated in his reply to the report, 70 percent of the OSC’s criticisms are aimed at programs that are no longer active — namely, BEIP, BRRAG and UTHTC. Moreover, 88 percent of the jobs that OSC found lacking in corroborating documentation pertain to these inactive programs, not Grow NJ. In fact, the statute and regulations underlying Grow NJ corrected the inadequacies of the old programs in terms of oversight, documentation and caps on award amounts.
NJPP: Both. The audit reviewed a sampling of all programs currently being administered by EDA, whether they are accepting new applications or not. That includes the phased-out BEIP, BRRAG and HUB tax subsidies, which represent about $1.7 billion in remaining obligations, as well as the Grow and ERG programs, which were greatly expanded in 2013 and are set to expire June 30 of this year.
It has been alleged that companies have received incentive dollars without upholding their end of the bargain on job creation and retention. Is that true or false?
NJPP: True. Among the sampling of 37 approved projects, the comptroller’s audit found a pattern of faulty data collection so prevalent that 1 out of 5 jobs could not be verified as being created or retained. That kind of sloppy oversight cost taxpayers almost $4 million in overpayment, according to the audit.
But it should also be noted that recent changes made by the EDA to the ‘net benefits test’ do not apply to the $1.5 billion worth of 26 Grow NJ projects already approved in Camden. New Jersey estimates that these projects could create a net benefit of $777 million over a 35-year period. But the state only requires that Camden-based corporations uphold their end of the bargain for 15 years. That means that taxpayers could be on the hook for over $200 million should one of these businesses decide to move, slash its workforce or threaten to move after just a 15-year commitment.
SGEDC: False. It is inconceivable, if not impossible, for that to happen under the mechanics of Grow NJ. First, companies do not receive a single dollar of tax credits under Grow NJ until they have completed their project and opened for business at the facility. Next, companies have to provide proof that at least 75 percent of the promised jobs are in place; that at least 75 percent of the projected capital expenditure has been incurred on the project; that prevailing wages have been paid and affirmative action has been met on all construction work on the project; and that required green building design features have been incorporated into the project.
If either 75 percent hurdle is not met, NJEDA may rerun the project’s ‘net benefit test’ and reduce the amount of the Grow NJ award.
What happens after that initial set of proofs submitted to the EDA if a company fails to meet its employment commitments? Are there safeguards in place?
NJPP: Yes. The EDA now has a claw-back provision in place so it can recoup some of the subsidy it already awarded if a corporation breaks the promise to stay beyond the official commitment period. But this does not apply to Camden projects approved under the 2013 Economic Opportunity Act.
SGEDC: If the actual number of jobs at the project in the first year following project completion are less than 100 percent of the promised number of jobs in the company’s application for a Grow NJ incentive, the award amount for that first year and all nine remaining pay-out years is capped at such lower headcount number; there is no going back up.
Thereafter, if the average monthly number of jobs in any of the nine remaining years decreases even more, the tax credit amount for the year in question is further reduced. In fact, if the number of jobs at the project in any of the nine remaining years decreases by 20 percent or more, that year’s tax credit amount is forfeited by the company and, if that failure continues into additional years, NJEDA can terminate the award entirely.
Moreover, as a condition of receiving a Grow NJ incentive, companies must commit to remaining in New Jersey and maintaining the jobs for an extra five years after the 10-year pay-out period, for a total of 15 years. And, if the number of jobs decreases in any of years 11-15 — in other words, after the tax credits have been paid out — NJEDA can ‘claw back’ an amount from the company pursuant to a strict formula.
Can a company already doing business in New Jersey simply threaten to leave the state, and thereby qualify for a Grow NJ award?
SGEDC: To be eligible for a Grow NJ incentive, a company must demonstrate — by words and numbers — that it is at risk of leaving New Jersey. This process is known as the ‘material factor’ or ‘but for’ test. For starters, the company’s CEO must certify under oath, under penalty of perjury, that the Grow NJ award is a material factor in the company’s site selection process. In addition, any lease or contract for the project must be expressly conditioned on the Grow NJ award; if the company takes any action prior to NJEDA’s grant of a Grow NJ award that would indicate its decision to remain in New Jersey regardless of the outcome, the company is deemed ineligible for the incentive. Further, the Grow NJ application includes a ‘comparative benefit analysis’ — essentially, a side-by-side comparison of the 15-year projected cost of operating the proposed New Jersey facility versus a comparable facility at an out-of-state location that is also under consideration. These costs must be supported ‘to the penny’ by hard evidence of each cost item, such as base rent, property taxes and utilities.
NJPP: Not quite. A company can threaten to leave the state and thereby be encouraged to apply for a Grow NJ award. If it qualifies for an award, then yes. But some positive changes made in 2013’s tax subsidy overhaul make it a little harder for a company like this to be eligible for an award. (See below.)
Is it possible for an existing New Jersey company to add jobs in one place and then eliminate jobs somewhere else in the state, without recourse, as has been alleged by some? If that is the case, can you point to any particular company that has done so?
NJPP: The bigger issue is that New Jersey became deeply invested this decade in retaining ‘at-risk’ jobs by doling out enormous tax breaks to corporations that essentially move down the block. Consider the $210.8 million tax break for Prudential to vacate its office space in Newark’s Gateway Center and build a new tower a few blocks away; the $102.4 million subsidy to Panasonic to move its headquarters one train stop; the $81.9 million award to Goya Foods to move one mile, from Secaucus to Jersey City; or the $40 million grant for Burlington Coat Factory to build a new facility (on land it already owned) less than half a mile away from its current location.
SGEDC: Not under Grow NJ. If a Grow NJ recipient operates more than one facility in New Jersey, it is subject to scrutiny of its statewide headcount in addition to the scrutiny of its headcount at the Grow NJ facility. If a company’s aggregate number of jobs statewide decreases by 20 percent or more in a given year, its Grow NJ tax credit amount will be forfeited for that year, and if the headcount remains low for multiple years, the rest of the award may be terminated by NJEDA.
The OSC report talks of a ‘net benefit test’ conducted by NJEDA to determine whether the state is receiving a return on its Grow NJ investment. Is that an effective process?
SGEDC: Yes. The enabling statute requires NJEDA, before granting a Grow NJ award, to determine that the project will return a ‘positive net benefit’ to the state. NJEDA has adopted a stringent standard — known as the ‘net benefit test’ — to make that determination. In essence, the applicant must project to the satisfaction of NJEDA that, over a 20-year period, the project will yield a 110 percent return on the Grow NJ award amount in terms of new state tax revenue. Not a bad exchange rate — 100 cents out over 10 years and at least 110 cents back to the state treasury over 20 years. And that’s not counting the local taxes generated or the ‘multiplier effect’ of the taxes generated from spending during the work day by the company’s employees, or from the purchase of homes and the rental of apartments by new employees moving to New Jersey.
NJPP: Absolutely. The NJEDA took important steps to reform the rules of the net benefits test back in 2017. Now it’s up to the Legislature and governor to restore some fiscal responsibility and realism of these tax breaks by codifying these rule changes, starting with ensuring that the net benefits test covers only the number of years the corporation is committed by statute to stay in the state.
Does Grow NJ benefit larger companies over small companies?
NJPP: Most of the subsidies have gone to small and midsize companies, but the awards that have gone to large companies have attracted more attention. Regardless, the impact of these subsidies has been overestimated, considering the amount they’ve cost the state and the number of companies that have benefited. Only a tiny sliver of New Jersey’s businesses have been granted tax subsidies through Grow NJ program — just over 300 of New Jersey’s approximately 194,000 businesses since the 2013 reforms. That’s less than two-tenths of 1 percent of New Jersey’s businesses having received tax subsidies, leaving the other 99 percent to make up for the revenue the state must forego in the future.
SGEDC: When the Grow NJ program was revised in 2013, the minimum job eligibility threshold was reduced from 200 jobs to as few as 10 jobs for tech startup and manufacturing companies, 25 jobs for ‘targeted industry’ companies and 35 jobs for all other businesses. Very few of the Grow NJ recipients, contrary to the myths out there, have been Fortune 500 companies.
Some say the city of Camden has received unnecessary, extraordinarily costly special treatment under the Grow NJ program. What do you think?
SGEDC: The sheer reality is that Camden, in the darkest days of the Great Recession of 2008, needed extra help to get the attention of corporate site selectors. A decade and several Grow NJ projects later, a real estate submarket is emerging in Camden where none previously existed, and Corporate America has noticed.
NJPP: According to our analysis, Camden County received about 30 percent of all tax subsidy awards since 2013, to the tune of $1.7 billion. All told, 50 projects helped to create or retain just over 7,500 jobs in the Camden area. In other words, New Jersey taxpayers are on the hook to the tune of about $224,000 per job. For a few projects, the cost was even greater — $658,000 per job for Holtec, $328,000 per job for the Philadelphia 76ers and $196,000 per job for Subaru. For comparison, just 10 years ago, the average cost for each job a subsidy recipient created or retained was $41,600. In the 2000s, the cost was $16,427 per job. Regardless of what one thinks about the efficacy of tax subsidies for economic development, all can agree that per-job subsidies that enter six-figure territory are unnecessarily extravagant and unlikely to ever recapture the value of the state’s investment.
Any closing thoughts?
NJPP: Much of the conversation on the state’s tax subsidy programs has sought to change the debate from the egregious scope of the awards to the need for the existence of the programs. While there is much to debate regarding just how effective subsidy programs actually are — and we would argue that they are not nearly as effective as proponents make them out to be — the core contention that is being made by critics is that the scope of New Jersey’s program is grossly out of balance considering the size of our budget and our GDP.
A 2017 report by McKinsey & Co. shows that the state overspends on tax subsidies, paying more than five times as much as peer states for every dollar it attracts and every job created or retained. The report demonstrates that New Jersey’s average subsidy per newly created job is 2.3 times higher than across the country, and 20.3 times higher than it is in Virginia. The average subsidy per retained job is 3.8 times higher than across the country, and 13.1 times higher than it is in Virginia.
Bottom line: These ineffective tax breaks are making it harder for New Jersey to maintain and improve the kind of assets that are proven drivers of a state economy. The dramatic expansion of these tax break offerings since 2013 has created a damaging cycle of disinvestment and puts New Jersey’s future at risk. Every dollar spent on tax subsidies is a dollar lost in the coming years, making it harder to restore key investments in the kinds of things corporations consider when deciding where to locate or expand: an educated workforce, efficient transportation networks, safe communities and affordable housing, to name a few.
SGEDC: Every New Jersey taxpayer should hope that our state will be fortunate enough to have to pay out the full Grow NJ award amount of $8 billion over the coming years. If you believe in the ‘but for’ or ‘material factor’ test — namely, that the in-state company applying for a Grow NJ incentive is at risk of leaving New Jersey and that the out-of-state company considering New Jersey would not otherwise relocate to our state — then the amount of incentive dollars paid out to these applicants is essentially ‘found money.’ And when one considers that the state of New Jersey is realizing a return on investment of at least 110 percent on every dollar in tax credits paid out, the deal becomes even better for taxpayers. Throw in the program’s limits on amounts awarded for existing jobs and for low-paying jobs, and the Grow NJ program is even more compelling.
The OSC’s criticisms of the Grow NJ program are tame in contrast to its knocks on the older, inactive incentive programs, but that doesn’t mean that the OSC’s suggestions should be disregarded. To the contrary, every recommendation ought to be given serious consideration in the full light of day as a revised Grow NJ or a replacement program is debated in Trenton.