Fine Print: What NJ’s Annual Tax Expenditure Report Says About Where Your Money Goes

John Reitmeyer | February 5, 2020 | Budget
New Jersey has a wealth of tax-break programs. Over time, they can wind up costing taxpayers a small fortune
Credit: Stockton University
Tax Expenditures in New Jersey

What it is: Every year, the state Department of Treasury publishes what’s called the Tax Expenditure Report, which is a catalog of every tax-break program that is currently on the books in New Jersey. In addition to listing and describing each program, the lengthy report also provides estimates of how much the tax breaks cost the state’s annual budget in uncollected revenue.

Why the report is published: About a decade ago, as the total amount of money that was devoted to paying out the tax breaks began to add up, state lawmakers decided to pass a law to require Treasury to compile and publish a full accounting of the tax breaks and their annual costs. That law was enacted in early 2010 by then-Gov. Jon Corzine, and a report has been published every year since.

Why the report is important: Tax expenditures are often drafted with good intentions, such as to promote the research and development of medications or provide a break to overburdened homeowners or low-wage workers. But it’s easy to overlook the collective impact that such tax breaks have on the state’s annual revenue stream, especially during times when the economy is expanding, such as during the ongoing recovery from the Great Recession. A comprehensive report on state tax expenditures published in 2017 by Stockton University’s William J. Hughes Center for Public Policy determined more than $20 billion in annual revenue went uncollected due to the tax expenditures, a huge sum for a state with an annual budget of nearly $40 billion.

What counts as a tax expenditure: When the state spends money after it has been collected, that’s known as a “direct expenditure.” But when revenue that is collected is reduced in some fashion by state law, that is known as a “tax expenditure.” There are many ways the state provides such expenditures, according to Treasury’s latest report, including credits, exclusions, exemptions, deductions, deferrals and preferential tax rates.

Some examples of tax expenditures: Perhaps the most notorious of the state’s tax expenditures are economic-development tax incentives. These are provided to businesses under two programs that have traditionally been administered by the Trenton-based Economic Development Authority. The programs, which are generally intended to reward businesses for meeting certain hiring or investment goals, or to encourage relocation to New Jersey, have been the subject of an ongoing disagreement involving Gov. Phil Murphy, a Democrat, and legislative leaders from his own party who control both the Assembly and Senate.

While the awarding of any new corporate tax breaks has stalled since lawmakers are refusing to approve sweeping reforms proposed by the governor, the state is still obligated to fund tax incentives that have already been approved by the EDA. The estimated cost of funding those breaks in fiscal year 2020 was $502 million, according to Treasury’s latest Tax Expenditure Report.

But it’s not just tax breaks for corporations that are provided by the state and tallied up in the report. For example, New Jersey also provides homeowners with a state income-tax deduction for property taxes, a deduction that can be worth up to $15,000 annually, depending on how much property tax are paid in a given year. Treasury estimated the cost of the state property-tax deduction to be $737.7 million in the most recent Tax Expenditure Report.

Another widely used tax-expenditure program is the state Earned Income Tax Credit, which provides a refundable tax credit worth as much as $1,000 or more to many low-wage workers in New Jersey. In fact, this is one area where the governor and lawmakers have reached agreement in recent years as a phased-in increase of the EITC is underway. The cost of providing the state EITC — there is also a federal version of the same tax-credit program — was estimated to be $602.7 million in the most recent Tax Expenditure Report.

What’s the latest: For better or worse, New Jersey continues to expand the size of its tax expenditures, or add new ones to Treasury’s list. For example, last year voters agreed to broaden a tax-break program that provides a property-tax deduction worth $250 to war veterans or their surviving spouses. That policy change ensured those in continuing-care retirement communities receive the deduction. Estimates compiled by the nonpartisan Office of Legislative Services projected the expansion would cost up to $550,000 annually. And this year, lawmakers have already approved putting another question on the November ballot that will ask voters to waive the requirement that veterans must have served during wartime to qualify for the same deduction. The OLS estimate for the annual cost of that proposed policy change is about $13 million.

In addition, Murphy last month enacted a new law that expanded a state tax-break program for the entertainment industry that seeks to encourage movies and TV shows be filmed on location in New Jersey. Under the new law, the state’s total allowance for funding entertainment tax credits was increased from $75 million to $100 million annually. The same law also extends the life of the tax-break program by five years, ensuring it will be around at least until mid-2028.

Also, Assemblyman Brian Bergen (R-Morris) introduced legislation earlier this week that seeks to establish a new tax credit for New Jersey small businesses to reward their regular collection of state sales-tax revenue. It remains to be seen whether that proposal will make it through the Legislature and win support from Murphy.