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Explainer: Taking Care of Business Within an Urban Enterprise Zone

State pols are trying to extend and reform the program but so far, Gov. Christie isn’t cooperating

Urban Enterprise Zone UEZ

What are UEZs? UEZ stands for “Urban Enterprise Zone,” a state designation that entitles businesses in struggling city downtowns to certain tax incentives. The goal is to entice shoppers to purchase goods in the districts due to a lower sales tax and to encourage new businesses and retailers to open in these areas because of tax incentives.

Companies in UEZs collect just half of the normal 7 percent state sales tax; allow for certain tax-free purchases; avoid energy taxes (for medium- to large-manufacturing firms); receive subsidized unemployment insurance; and choose between a $1,500 maximum tax credit for each new permanent full-time employee or an 8 percent maximum corporate business tax credit on qualified investments. The program, administered by the Department of Community Affairs (DCA), started in 1983 and currently covers approximately 6,800 private companies in 32 zones across 37 municipalities.

Why are they in the news? Gov. Chris Christie vetoed a bill last month that would have allowed municipalities participating in the program to keep 30 percent of the sales taxes collected by their UEZ businesses. Before Christie took office, a portion of the sales tax was sent back to the municipality to use in marketing the districts and making local improvements.

Christie stopped that practice and instead has been diverting the revenues into the state’s general fund, which he’s continued to do every year since. Over the past five years, Christie has diverted about $425 million of those funds back to the state budget.

The proposed bill would have required some of these funds to once again be returned to the municipalities. It called for a 30/70 revenue split between the municipalities and the general fund, returning $82 million to the localities.

"I appreciate the sponsors' desire to modify the UEZ Program," reads Christie's veto statement from February. "However, the changes proposed by this bill, and the impact on state resources, are best evaluated as part of the annual budget process. By considering these changes through the annual budget process, I believe that important new policies concerning the UEZ program can be thoughtfully constructed."

Assembly Speaker Vincent Prieto (D-Secaucus) vowed in a statement issued February 5 to “review all options as we consider this veto and where we can go from here to ensure this important policy initiative becomes reality." But according to a Democratic spokesman, nothing has happened yet.

What other legislative activity is happening? On the day that Christie vetoed the 30/70 bill, the Assembly Commerce and Economic Development Committee passed a bill that would make all of Atlantic City a UEZ for 10 years. Under the bill, which was approved 6-3, the city would keep 30 percent of sales tax revenue for property tax relief, with the rest going to the state. Casinos would be barred from participating, though independently owned entities located in casinos would qualify. Last year, lawmakers in both houses introduced bills to create UEZs in towns like Seaside Heights, Garfield, Harrison, and Keansburg, but those either stalled in committee or were voted down.

That same day, Assembly Deputy Majority Leader Reed Gusciora (D-Trenton) and Sen. Shirley Turner (D-Ewing Township.) introduced legislation to extend the program for 10 years to six districts whose designations will expire over the next five years. According to the law that created them, UEZs expire 20 years after their approval and qualify for one 16-year extension. This bill would add 10 years to the program in Bridgeton, Camden, Newark, Plainfield, Trenton, and the joint UEZ in Millville and Vineland. Under the bill, 10 percent of the reduced-rate sales tax revenue would go toward the New Jersey Urban Enterprise Zone Authority, the state body that administers the UEZ program, with the remaining revenue appropriated as follows:

  • During the first three-year extension, all of the remaining revenue collected would be appropriated for use by these cities’ UEZs.

  • During the second three-year extension, two-thirds of the remaining revenue collected would be appropriated for use by the UEZs and the final third would be deposited in the general fund.

  • During the third three-year extension, one-third of the remaining revenue collected would be appropriated for use by the UEZs and the remaining two-thirds would be deposited in the state’s general fund.

  • In the final year, all remaining revenue would be appropriated to the state’s general fund. The Assembly and Senate versions await action in committee.

Additionally, late last year, Republicans in both houses introduced a bill that would dedicate half a penny on the dollar from the sales tax to the UEZ that collected it but would gradually eliminate that tax reduction over seven years. Neither bill has received a hearing in its respective Democratic-controlled committee to which it was referred.

Do UEZs enjoy bipartisan support? Yes and no. As noted above, Democrats have taken no action on a Republican proposal to dedicate sales-tax revenue to UEZs while removing a key component of the program. But Democratic leaders also took no action on bills introduced by members of their own party, likely in an effort to amass support for the 30/70 bill without distraction. However, Republican senate committee members unanimously voted against the Democratic-approved 30/70 bill because, according to Jeremy Rosen, director of communications for the Senate Republican Office, “It punched a huge hole in the budget outside of the budget process. It’s not fair or accurate to say that Senate Republicans are not generally in favor of UEZs. The UEZ program has its flaws, but Senate Republicans maintain that lower taxes in this extremely high-tax state are necessary to grow the economy.”

To his point, Republicans opposed a provision in Christie’s proposed fiscal year 2015 budget that would have increased the sales tax on business-to-business UEZ purchases from zero to 3.5 percent. That provision was removed.

How well do UEZs work? In 2011, the state treasurer’s office released a report that recommended the program be dismantled. The report concluded that between 2002 and 2008, the program “Delivered a limited economic impact on the zone economies, and produced a negative return on State investment,” as summarized by a DCA memo. More specifically, the report said the program cost the state $2.17 billion through direct expenditures running the program plus a loss of revenues due to reduced tax rates.

Yet, according to the report, only $.08 in new state and local revenue was generated for each dollar of investment, plus $.83 in “ripple effect” economic activity. Also, “While other states have streamlined their programs, our program is bureaucratically cumbersome, costly to operate, and involved over 135 state and local employees. Further, the consultants found that a lack of consistent measurable documentation of private investment in either the grants or tax incentive program was accompanied by a lack of documentation of private investment by UEZ businesses in the zones.”

Anticipating that the tax incentives would create a snowball effect to attract further business investment, the DCA commissioner at the time asked the treasurer to recommend preserving the program overall while eliminating the zone assistance fund program (ZAFP) that held funds earmarked for UEZ municipalities to make physical improvements to the districts.

While the ZAFP itself wasn’t eliminated, the funds were redirected to the general fund beginning in fiscal year 2011. A bill has been introduced in both chambers to require municipalities housing UEZs to submit growth plans in order to continue participating in the program.

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