Without caps on tax incentives, N.J. would be outlier

Nearly 13 months ago, Gov. Phil Murphy unveiled his comprehensive economic development plan that laid out a boldly pro-growth progressive vision for economic development. The governor presented a pathway forward that will turn the page on an era of economic stagnation that saw New Jersey significantly lag the region and rest of the country in job creation and wage growth despite unprecedented spending on tax incentive programs.

The good news is that, after months of productive discussions with the state Legislature, many of the most innovative and impactful ideas contained in the governor’s plan — such as the Evergreen Innovation Fund to supercharge New Jersey’s startup culture and a historic preservation tax credit to help revitalize historic properties throughout the state — have gained significant support from legislators, local leaders and the business community. Ideas for important new programs suggested by the Legislature have been incorporated into the governor’s current proposal, such as funding targeted to alleviating food deserts across the state.

File photo
Tim Sullivan, CEO of the New Jersey Economic Development Authority.

But one proposal that I had not expected to be controversial — the idea of setting a budget for the amount of tax incentives the state can offer — has continued to be the subject of robust debate.

Gov. Murphy did not invent the idea of caps on tax credits. In the last two years, the Legislature has passed legislation signed by the governor to create or enhance several capped tax credit programs, such as the Film and Digital Media Tax Credit and the Angel Investment Tax Credit. The longstanding Neighborhood Revitalization Tax Credit and Net Operating Loss monetization tax credit programs both include caps. Indeed, prior to 2013, the now-expired Grow New Jersey and Economic Redevelopment & Growth tax credit programs themselves were capped. Far from being a new idea, capping tax incentives at a sustainable level is the norm.

Numerous other states — including some of our fiercest competitors in the Northeast — maintain caps on their tax incentive programs. New York state’s Excelsior Jobs Program is subject both to a lifetime program cap and an adjustable annual cap of no more than $250 million. Pennsylvania’s New Jobs Tax Credit program is capped at $10.1 million per year. Connecticut’s Manufacturing Assistance Act program is funded by a biannual program authorization enacted in the state’s budget, and the Urban and Industrial Sites tax credit is subject to a $200 million program cap.

The notion that New Jersey can only compete with an unlimited corporate tax incentive program is simply not backed up by the facts. A parade of national thought leaders testified before the Senate Select Committee on Economic Growth Strategies this summer that capping tax incentive programs is the best practice nationwide.

Tax credits are tax expenditures — waiving a dollar of taxes is the same as spending a dollar. All expenditures should have budgets, jointly agreed upon by the Legislature and the governor.

Restoring a capped job creation incentive program in New Jersey would restore the normal balance of responsibilities between the legislative and executive branches — unlike under the prior programs, which lacked sensible limits on the budgetary impact one authority could have.

As a result of those programs, the New Jersey Economic Development Authority is projected to issue more than $1 billion of tax credits every year for the next five years. By comparison, EDA tax credits will offset revenue more than three times the amount of funding available under the Homestead property tax relief program.

Caps on corporate location tax credits are important risk management tools. Companies will always know more about their true intentions than the public sector. Even the best-designed and best-run programs are prone to paying for jobs that would have stayed or come anyway. This is particularly true for projects that incentivize retained jobs.

Caps can also be revisited and adjusted in the future if the circumstances warrant. The recently enacted Film and Digital Media Tax Credit offers an instructive example — with demand outstripping supply, the governor has proposed working with the Legislature to raise the caps that had previously been agreed upon.

There is no reason a cap on corporate tax incentives could not be similarly revisited by agreement between the Legislature and the governor in the future.

The prior generation of tax credit programs expired in June — programs that were by far the most generous and least targeted in the region, and which earned New Jersey 42nd place in the country in job creation.

Clearly, it’s time for a new approach to economic development, where incentives are a tool in service of a broader strategy, not a strategy unto themselves, and where incentives are capped so that taxpayers know exactly how much they are investing in our economic future each year.

Tim Sullivan is the CEO of the New Jersey Economic Development Authority.