Experts: NJ’s Tax Incentives Are Not The Only Way To Grow An Economy

John Reitmeyer | September 6, 2019 | Budget
At hearing, lawmakers are told that providing tax relief for companies looking for a place to set up shop has limited value, at best

Credit: NJTV News
A hearing on New Jersey's controversial tax incentives took place in Trenton yesterday.
New Jersey has committed billions of dollars to corporate tax-incentive programs, now widely questioned, as part of an effort to grow the state economy. But lawmakers heard Thursday about ways other states have generated economic development — and without the hefty price tag.

Targeting tax incentives to specific policy goals and capping their annual cost were among the best practices highlighted during a lengthy hearing in Trenton as several top policy experts provided testimony.

And rather than offering tax breaks to companies, focusing instead on worker-training programs and other efforts that can boost the economy was also held up as an example of good economic-development strategy.

“It’s easier to hand out cash than to run a high-quality program,” said Timothy Bartik, a national expert from the Michigan-based Upjohn Institute for Employment Research. “But a wise investment in either infrastructure, or small-business development, or skills development can pay off much more than simply providing cash.”

The hearing of the Senate Select Committee on Economic Growth Strategies came as lawmakers and Gov. Phil Murphy have been locked in a bitter dispute over how much the state needs to reform its tax-incentive offerings. Lawmakers have been seeking an extension of much-criticized programs that were allowed to expire earlier this summer even as they’ve also held hearings to look at possible changes.

Governor promised reforms

But Murphy has refused to play along, and is instead calling for a significant overhaul that echoes many of the best practices highlighted yesterday. He also sent lawmakers a conditional veto late last month that replaced their proposed extension with his own reform initiatives, which has continued the stalemate.

“I ran for Governor and was elected on the promise to transform the State’s incentive programs so that the programs work for all New Jerseyans and not just connected political interests,” Murphy wrote in the veto.

While tax-incentive programs have long been a subject of debate in New Jersey, the discussions intensified after the Office of the State Comptroller issued an audit earlier this year that raised serious questions about whether companies had gamed programs that were in place at the time, or earlier incarnations, to meet hiring and investment goals set in state law.

Murphy, a first-term Democrat, also convened a task force to scrutinize the programs he inherited from former Gov. Chris Christie amid allegations that some companies have been able to redeem tax breaks without meeting all of their pledged obligations. So far, the task force has made at least one criminal referral.

At the same time, Murphy has proposed a series of sweeping policy reforms, including targeting tax incentives to specific goals like brownfields redevelopment and historic preservation. He’s also seeking to cap the amount of revenue that can be sacrificed each year to cushion the blow of tax incentives on the state budget.

Setting limits on total incentives

The use of caps by other states was one of the key issues that came up during yesterday’s hearing.

“Caps allow lawmakers to determine how much money is available for incentives in the same way that they can adjust spending levels in other policy areas, such as education and transportation,” said Josh Goodman, a senior officer with The Pew Charitable Trusts.

Credit: NJTV News
Josh Goodman of The Pew Charitable Trusts
He suggested the caps can also be made “flexible” to ensure states don’t have to pass up a potentially beneficial economic-development opportunity simply because a spending cap has already been met. A program in place in Nebraska is a good example of that approach, Goodman said.

“The good news is that some states have designed flexible caps that have helped alleviate those concerns,” he said.

Meanwhile, other witnesses shifted the conversation away from tax breaks. They noted that businesses often place a heavy emphasis during relocation searches on whether there is a skilled workforce that can meet their needs.

In fact, Joseph Parilla, a fellow with the Washington, D.C.-based Brookings Institute, said studies show more than 90 percent of executives rate the availability of skilled labor as an important factor in their relocation decisions.

Yet much of the focus of incentive programs, including New Jersey’s, is put on tax relief, and a much smaller percentage is devoted to boosting worker-training programs.

“Given the importance of talent to business decisions, this seems misaligned,” Parilla said.

‘Competitive necessity or political optics’

Later on, the idea of whether states should provide incentives at all came up, as Jackson Brainerd, a fiscal policy expert with the National Conference of State Legislatures, testified it was important to keep close tabs to ensure programs are delivering results.

“The discussion around improving tax-incentive evaluations, while undoubtedly useful, is often premised on the assumption that incentives are tools that states must use, whether due to competitive necessity or political optics,” Brainerd said. “But there is no evidence that the number of economic-development tax incentives offered bears any relation to the broader performance of a state’s economy.”

The question of whether New Jersey’s programs have been worth their cost has figured prominently in the ongoing debate in the state.

“There’s quite a bit of evidence that tax incentives often fail to achieve their stated goals and can have a negative impact on state fiscal health,” Brainerd went on to day. “Even programs that do show success cannot guarantee that they didn’t subsidize behavior that would have occurred anyway.”

That testimony drew a quick response from Sen. Bob Smith, who has been leading the series of hearings on the tax-incentive issue.

“You just provided the headline for the story on today’s meeting,” the Middlesex County Democrat said. “Thank you for blowing up the hearing.”

Afterward, Smith was more circumspect, saying the hearing highlighted “a couple of big ideas” that will be part of the tax-incentive discussions going forward. They include improving transparency and possibly readjusting a cost-benefit ratio that had been used to evaluate the tax incentives to be more in the state’s favor.

“I think one purpose of these hearings is to see not only what we have done in the past, but how we can make it better,” Smith said. “I think there are ways to make it better.”