Tax Credits: Too High a Price to Attract Companies, Keep Them in New Jersey?

Companies and critics explore pros and cons -- and costs -- of incentives used to convince corporations not to move out of state

Credit: Amanda Brown
Michele Siekerka, president of the New Jersey Business and Industry Association
When Panasonic was seeking a new location for its corporate headquarters after four decades in Secaucus, moving to downtown Newark was not the original plan, according to chief executive officer Joe Taylor.

Offices in San Diego, Chicago, and Atlanta were all under consideration, but after intense lobbying from politicians here — and the enticement of an $80 million state economic-development tax incentive — Taylor decided to keep the company and its 1,000 employees in New Jersey, choosing to relocate in downtown Newark.

Now, Taylor said 60 percent of the company’s employees are taking the train to work, meaning their cars are off New Jersey’s already choked and potholed highways. Panasonic also has an agreement with city government to give local residents a first crack at job openings.

“I’m a huge proponent of economic development,” Taylor said while participating in a panel discussion during NJ Spotlight on Cities, a daylong conference held earlier this month at the New Jersey Performing Arts Center in Newark that focused on the state of New Jersey’s cities.

“I think tax credits are critically important,” he said. “I think other kinds of credits are critically important.”

Credit: Amanda Brown
From left: Joe Taylor, CEO of Panasonic; Tom Moran from the Star-Ledger, serving as moderator; and Ralph Izzo, chairman, president, and CEO of Public Service Enterprise Group.
Despite Panasonic’s seeming success story, however, New Jersey’s economic-development tax credits have become a big source of controversy in a state that is still struggling to recover jobs and tax revenue lost to the past recession.

The issue also continues to divide Trenton, with some Democratic lawmakers working with Gov. Chris Christie and other Republicans to ramp up the incentive programs in 2013. Others are backing legislation to rein in the incentives or at least make them more transparent.

The tax incentives were a key topic that dominated both Taylor’s panel discussion and another held during Spotlight on Cities.

The incentive programs are designed to keep companies like Panasonic from leaving the state, or to entice others to relocate here, with more lucrative tax breaks offered to those moving to cities like Camden that need an extra boost. The incentives are not direct grants as they are sometimes portrayed, but credits on future tax liabilities that have to be earned by companies by meeting certain employment and investment benchmarks.

But after the incentive programs were significantly revamped in 2013, more than $2 billion in potential revenue for an already stressed state budget has been pledged to companies, even as the state’s unemployment rate remains higher than the federal jobless rate. In all, the state has promised roughly $6 billion in tax breaks since Christie took office in early 2010.

Gordon MacInnes, president of New Jersey Policy Perspective, a liberal think tank based in Trenton, said the problem isn’t necessarily the tax incentives, but how the current programs are structured and administered.

“One of the problems is there is no cap on the number of dollars that can be handed out,” he said. And those incentives have been awarded to corporations like Panasonic even as the state’s $33.8 billion budget has underfunded New Jersey’s school-aid law, the pubic-employee pension system, and as the state Transportation Trust Fund is running out of money.

“What this does is ensure that situation will grow worse as we go forward,” MacInnes said.

[related]Also, some of the credits can be earned in a decade by companies that have been awarded their tax breaks based on 30-year projections — even when they’ve committed to stay for just 15 years, he said.

Still, New Jersey is not the only state offering companies tax incentives to relocate, said Michele Siekerka, president of the New Jersey Business and Industry Association. Providing incentives is something that’s necessary for New Jersey to remain competitive in a global marketplace, she said.

“Especially in our cities, these incentives allow New Jersey to be competitive with these other states that are trying to eat our lunch on jobs,” she said.

And despite headlines pointing to billions in promised tax breaks, Siekerka said only $74 million has been paid out in credits to date. Meanwhile, the incentives have generated $809 million in investment and more than 5,000 new jobs when construction work is factored in, she said.
“That is stimulating the economy,” she said.

Ralph Izzo, chief executive officer of Public Service Enterprise Group, the parent company of PSE&G, said he also opposes the incentive programs, calling them “a zero-sum game among states.”

“They are a second-best mechanism to do what really needs to be done, which is to eliminate all the dislocations embedded in the various loopholes in the tax code and to lower overall tax rates,” Izzo said.

And while Taylor’s company just moved to Newark, Izzo’s has been in the city for more than a century. He cited a number of factors that explain why PSEG has stayed for so long, including proximity to major transportation logistics like rail and a major airport, as well as to Manhattan, where he frequently has meetings with investors.

“Newark is a great place for access to academia, Rutgers and NJIT, a community college system, access to airports, access to financial markets,” Izzo said.

But MacInnes said he fears New Jersey’s economic-development strategy is focused only on the tax incentives at the expense of investment in other key areas, such as the transportation infrastructure Izzo and Taylor highlighted during their panel discussion.

Due to significant debt, the Transportation Trust Fund, which pays for road, bridge and rail improvements throughout the state, will no longer have enough money coming in for new projects by June 30, 2016, unless taxes are increased or another new source of revenue is identified. But Christie, who is seeking the GOP’s 2016 presidential nomination, has yet to say what his plan is to renew the fund.

New Jersey Transit was also just forced to increase its fares after the state couldn’t come up with the money needed to help the agency close a significant budget deficit. And despite some recent positive developments, a new commuter rail tunnel to replace the 105-year-old tubes currently linking New Jersey with Manhattan remains at least more than a decade away.

“We have neglected the assets that really build an economy, that drive a decision to locate a new business or expand a business that’s already here,” MacInnes said. “That’s what keeps people in New Jersey and attracts them to New Jersey.”