Task Force Finds Potential Crimes in NJ’s Tax-Incentive Programs

John Reitmeyer | April 15, 2019 | Budget
Panel set up to examine the state’s controversial economic-development tax breaks announces evidence of ‘potential criminal violations’ but gives no details

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Task force on tax breaks
A task force investigating possible fraud in New Jersey’s lucrative economic-development tax-incentive programs has uncovered its first potential criminal actions, upping the stakes in an ongoing debate about the future of the programs.

The special counsel for the task force impaneled by Gov. Phil Murphy announced on Friday that it has sent a formal “referral letter” to law enforcement outlining “potential criminal violations” that have been uncovered in its ongoing probe.

“As we have said, we are going to follow the facts in a search for the truth. Whether that means recertifying companies, seeking voluntary payments and terminations, or making referrals, we plan to be thorough, objective and efficient,” Ronald Chen, a Rutgers Law School professor who is a chairing the task force, said on Friday.

Credit: law.rutgers.edu
Ronald Chen
The referral letter outlined “evidence of unregistered lobbying on behalf of special interests,” according to the special counsel’s announcement, which offered little additional detail and did not identify any specific individual or company as having been involved in the potential wrongdoing. Still, it marks the most serious development to date involving the oft-criticized incentive programs, which were also the subject of a recent audit by the Office of the State Comptroller.

The governor’s task force had previously announced that, as a result of its probe, a company had voluntarily agreed to repay the state a grant and terminate future payments, saving taxpayers an estimated $1.5 million. The company was not identified. And last month, a whistleblower testified during the task force’s first public meeting that top executives at her former company lied on a 2015 application for a state tax break that landed the company — which was not identified during the meeting — an economic-development incentive worth nearly $2.7 million.

A critical time

The latest news of the potential criminal activity comes at a critical time as the tax-incentive programs are set to expire in less than three months. Murphy and lawmakers have yet to agree on whether they should be renewed or significantly overhauled.

Murphy formed the investigative panel through an executive order signed in January, granting it subpoena power and assigning New York-based law firm Walden Macht & Haran as special counsel. Those actions came in the wake of a troubling audit released by the comptroller’s office in January that raised serious concerns about the state’s tax-incentive law and the oversight policies of the state Economic Development Authority.

The Trenton-based EDA has administered tax incentives for well over a decade, but the programs were significantly overhauled under a 2013 law enacted by then-Gov. Chris Christie. Under agreements negotiated with Democrats who control the Legislature, including Senate President Steve Sweeney (D-Gloucester), the 2013 law sought to jumpstart job growth in the wake of the Great Recession by allowing companies and developers to get more generous tax breaks, while also reducing requirements for investment and job creation. This was especially true for Camden, which is a major part of Sweeney’s power base in South Jersey.

The pace of the incentive awards was also ramped up, helping to fuel criticism that the programs had become too generous and too difficult to monitor. More than $8 billion in tax breaks were awarded during Christie’s tenure, and a total of $11 billion since 2005.

To receive tax breaks, companies are supposed to generate a “net benefit” for the state through job creation and investment. Firms aren’t supposed to be able to claim their tax incentives until those standards are met. But the comptroller’s audit found in a sample group of a few dozen companies that there wasn’t enough documentation to prove all the promised jobs had been created, even though the companies had been allowed to redeem their tax breaks. In all, the audit brought into question roughly 3,000 jobs, but it did not name any of the companies involved in the questionable transactions nor make any criminal referrals.

Hints about questionable transactions

Friday’s announcement from the task force’s special counsel provided only a brief description of the potential criminal wrongdoing, but it hinted at connections to the period when the 2013 law was being drafted.

“To date, the investigation has uncovered evidence of unregistered lobbying on behalf of special interests, which materially affected the legislation and regulations governing New Jersey’s tax incentives granted to businesses,” the announcement said.

The special counsel did not disclose which agency the referral letter was sent to. (The task force is scheduled to hold its next public meeting early next month in Newark.)

Murphy has already proposed major changes for the incentive programs in advance of their June 30 expiration. They include targeting the programs more toward specific policy goals, such as historic-site preservation and brownfield redevelopment. The governor is also insisting that lawmakers place caps on the size of the incentives to lessen their impact on the already-strained state budget.

But some lawmakers have come to the defense of the existing programs, arguing they played an important role in the state’s recovery from the recession. It’s unclear whether Murphy will be able to strike a deal with lawmakers to remake the programs before June 30.

In a statement issued Friday, Sweeney called for the task force to be more transparent. He also said lawmakers need “an accurate accounting of the successes, weaknesses and failings of the current programs so that the Legislature can make informed decisions about their renewal and any needed reforms.”

“The integrity of the incentive programs is critical for their effectiveness and so is the public’s trust in any investigations,” Sweeney said.

A spokesman for the governor declined comment on Friday.