Christie’s Conditional Veto Could End Tax Break for Urban Enterprise Zones

John Reitmeyer | September 6, 2016 | Budget
Critics claim that requiring enterprise zones to charge full sales tax will cost them customers, could lead to layoffs and shutdowns

Credit: Governor's Office/Tim Larsen
For the past three decades New Jersey has allowed stores in dozens of downtown shopping districts to charge only half the state sales tax, helping them compete with suburban malls and, more recently, online retailers. But now that tax break, long praised by urban leaders, is on the brink of extinction thanks to Gov. Chris Christie.

The state’s special Urban Enterprise Zones were never meant to be permanent, Christie argued last week in a conditional veto of legislation seeking to extend the tax break. He also suggested the state will need the lost sales-tax revenue to balance the budget over the next decade.

But Democratic lawmakers who represent the communities that have long benefited from the sales-tax break and other perks of the UEZ program are now promising to make sure the Republican governor doesn’t have the last word on the issue, especially as some of the state’s highest-profile UEZ communities are now in danger of losing the special designation at the beginning of 2017.

The lawmakers say they’ve launched an effort to get enough votes from their colleagues to override the governor’s action to prevent the UEZ program from being phased out. And they’re also questioning Christie’s motives, since the governor’s concerns about a loss of sales-tax revenue seem to be directly at odds with the substantial sales-tax cut that he’s been championing amid ongoing talks to renew the state Transportation Trust Fund.

First created by lawmakers in 1983, the UEZ program was launched three years later with businesses in Bridgeton, Camden, Newark, Plainfield, and Trenton all being permitted to levy only half of the state’s sales tax, currently 7 percent.

Administered by the state Department of Community Affairs, the program also provides other incentives, including a break on energy taxes, business-to-business tax exemption, subsidy for unemployment insurance, and corporate-tax credits for hiring and investing. After a series of expansions, the program has grown to 32 designated enterprise zones in 37 municipalities, with approximately 6,800 private companies benefiting from the incentives.

But under the original terms of the UEZ program, the special designation was to sunset after an initial 20-year term. Lawmakers, however, voted in 2001 to allow a onetime extension of the program for another 16 years.

With the expiration date again looming at the end of 2016 for the first five UEZ communities, lawmakers earlier this year drafted legislation seeking to extend the program for another 10 years. Urban leaders also called for the renewal, arguing that their cities and towns can least afford to lose a tax break since many are still struggling to recover from the Great Recession and other economic struggles.

The bill seeking to establish the 10-year extension eventually cleared both houses of the Democrat-controlled Legislature in late June.

But Christie issued a conditional veto last week, citing in his veto message a 2011 consultant’s report commissioned by his own administration that questioned the efficacy of the tax break. He also said the state would generate an estimated $2.33 billion in additional sales tax revenue over the next decade as all of the UEZ businesses begin levying the full 7 percent sales tax.

“State resources to help financially distressed municipalities should be temporary in nature and designed to provide these municipalities with tools to ultimately succeed on their own,” Christie wrote in the veto message. “The UEZ program was initially intended to function in this way but has morphed into a permanent subsidy from all state taxpayers.”

The conditional veto would also require Christie’s administration to assess whether a new alternative program should be created to help communities facing the steepest financial problems.

“I am concerned that this bill simply continues a failed 30-year experiment with UEZs at significant costs for the state,” the veto message said.

That drew a sharp response from the bill’s sponsors — and a promise to seek an override of the governor’s veto.

“Ending the UEZ program is going to force hundreds of establishments to close up or move and will cost thousands their jobs and livelihood,” said Assemblyman Reed Gusciora (D-Mercer).

“It spells utter chaos for our revitalizing urban areas, which will see the precious progress they’ve made in the past thirty years reversed,” said Gusciora, whose legislative district includes Trenton. “It is a bona fide step in the wrong direction.”

Sen. Shirley Turner (D-Mercer) also questioned why Christie is concerned about losing an estimated $2.3 billion in state sales-tax revenue by extending the UEZ program for another 10 years when his proposed solution to extend the TTF involves cutting the sales tax to 6 percent statewide. The nonpartisan Office of Legislative Services has estimated the impact of the sales-tax cut Christie is pressing lawmakers to approve would be far more significant, costing more than $3 billion in the first three years.

So far, Christie’s TTF proposal has stalled in the Senate, where leaders prefer a less costly $900 million package of proposed tax cuts that includes a phasing out of the New Jersey estate tax. That’s led to a prolonged impasse and the ongoing shutdown of state-funded road, bridge, and rail projects.

Turner, who represents the same district as Gusciora, said the nonpartisan analysts also determined that extending the UEZ program would provide the struggling municipalities with an estimated $820 million in much-needed revenue. And she pledged to work hard to convince her colleagues to override the governor — something that has never happened since Christie took office in early 2010 — before Trenton and the other communities lose the tax incentive.

“I remain committed to ensuring that our cities receive the support they need, and I will fight for an override,” Turner said.