Gov. Phil Murphy’s administration has created a new tracking system to police the sale of corporate tax breaks, a controversial practice the governor is still seeking to reform as part of a broader overhaul of New Jersey’s economic-development incentive programs.
The electronic-tracking system was set up earlier this month by the Department of Treasury to give officials the ability to monitor all corporate tax-credit sales in real time instead of waiting for paper certificates to be redeemed.
The sale of these tax credits from one company to another is allowed under state law, but the practice has come under fire amid a broader scandal that has engulfed the state Economic Development Authority. In its wake, Murphy and lawmakers have allowed the state’s main tax-incentive programs to expire, which means no new applications for tax breaks are being accepted. But previously awarded tax credits are still eligible to be sold by companies that receive them.
On the track of better budget forecasting
The tracking system should lead to better budget forecasting; Treasury officials will now know each time a tax credit is transferred between companies. But the electronic portal will not be available online or used to enhance transparency due to confidentiality laws, the officials said.
New Jersey companies are allowed to sell the tax credits that can be awarded by the EDA for meeting specific hiring or investment goals, and these sales often help companies generate capital or derive value from a tax break when they have yet to turn a profit or establish any corporate-tax liability. The credits are often sold to another company at a discount, with the only requirement being that none can be transferred for less than 75 percent of its value.
But such sales haven’t been tracked closely by prior administrations, at least not beyond the initial transaction, even though they can prevent hundreds of millions in tax dollars from going into the budget in a given year, according to state tax-expenditure reports. That makes it hard for Treasury officials to predict when a company will come forward with a paper certificate indicating a tax break was being redeemed. New tax-incentive rules that were enacted by former Gov. Chris Christie in 2013, following the Great Recession, also upped the stakes, as the pace of both the incentive awards and the sale of credits increased.
The new tracking system was established after a close examination of the earlier monitoring process that began last year, according to Treasurer Elizabeth Maher Muoio.
Who’s minding the store?
“We were surprised and a bit alarmed to find out that previous administrations had very little oversight in place, particularly when it comes to tracking the transfer of tax credits,” Muoio said. “With more than 70 percent of tax credits transferred to date, the need for additional oversight and monitoring is critical.”
Murphy, a first-term Democrat, has proposed a series of tax-incentive reforms in draft legislation that was provided to lawmakers last month. They include capping the incentives that can be awarded on an annual basis and establishing new policy goals, such as historic-site preservation and brownfields redevelopment.
The sale of tax breaks would still be allowed under Murphy’s reform proposal, including to raise money for a public-private venture-capital fund that he is seeking to establish. But sales would be limited to just one per credit, and the minimum value would be increased from 75 percent to 85 percent.
Although the governor first proposed his economic-development strategy last year, the effort drew new attention earlier this year following the release of an audit that raised troubling questions about the EDA’s ability to administer the tax-incentive programs, which are supposed to create a net benefit for the state. Also playing a role is a special investigative task force that Murphy impaneled earlier this year to scrutinize the EDA’s actions. The task force has taken testimony from whistleblowers, industry experts, and the public, and has also made at least one criminal referral to law enforcement.
Murphy reform stalled
So far, lawmakers have yet to advance Murphy’s proposed reforms. Instead, they favor reinstating the programs that were recently allowed to expire. In fact, lawmakers sent Murphy a bill last month that extends the existing programs until early next year to give the Legislature more time to evaluate whether any changes should be made in response to the audit, which was released by the Office of the State Comptroller.
But Murphy has vowed to veto that measure, setting up an ongoing stalemate with the Legislature.
Tim Sullivan, who was handpicked by Murphy to lead the EDA last year, called the state’s new tracking system for tax-credit sales “one of many steps we are taking in partnership with the Department of the Treasury to support transparency and accountability at all stages of the tax-credit process.”
“The NJ EDA’s highest obligation is to be a careful steward of taxpayer dollars and to ensure that our programs most effectively support Gov. Murphy’s goals of building a stronger, fairer economy that works for everyone in New Jersey,” Sullivan said.