Standoff on Caps for Corporate Tax Incentives Pits Murphy vs. Sweeney — Again

Governor wants an annual upper limit on what New Jersey can spend on tax breaks, while senate president says individual subsidies should be capped
Credit: NJTV News
Gov. Phil Murphy, left, and Senate President Steve Sweeney

New Jersey appears no closer to restoring corporate tax-break programs that have helped bring new jobs here but have also been widely criticized as too lavish. That criticism remains, even after a group of lawmakers proposed dozens of ways to improve on prior efforts.

That bipartisan panel of state senators who spent months holding hearings on the contentious issue of tax incentives put forward more than 20 different reforms in a report issued last week.

But left off their list was a call for a hard cap on the maximum amount that can be allocated in any given year to corporate tax breaks, a major policy goal for Gov. Phil Murphy and something many states already do.

Instead, the senators are calling for caps on the individual tax breaks that can be given to companies if they meet certain goals, such as for new hiring. They also called for a strengthening of a net-benefit test that is supposed to ensure the incentives ultimately pay off for taxpayers who foot the final bill.

Corporate tax-break police

The senators’ work drew support from Senate President Steve Sweeney, who has long opposed Murphy’s call for an annual spending cap. Instead, Sweeney (D-Gloucester) argues the Murphy administration should be able to police each tax break to ensure they result in a net benefit for taxpayers.

“I don’t know how many more times we can say it, or how much more clearly we can say it,” Sweeney said while discussing the issue with reporters earlier this week. “I’m not supporting a bill that has an overall cap.”

Asked for a response, Murphy spokesman Darryl Isherwood indicated his boss is also not budging, saying, “The governor continues to support program caps.”

“Program caps are accepted best practice and every one of our competitor states employs some sort of cap on their incentive programs,” Isherwood said on Wednesday.

New Jersey has been offering companies some form of tax breaks to help offset the state’s high cost of doing business for over two decades. But the programs were significantly overhauled in 2013 during the tenure of then-Gov. Chris Christie, when the state economy was still struggling to recover from the Great Recession.

Among other changes, the tax-break programs were made more generous and annual caps were stripped away. While proponents point to the economic growth that followed, others have said they were too skewed in favor of large corporations at the expense of New Jersey communities and small businesses, and they were allowed to expire last summer after Murphy and lawmakers couldn’t strike a deal to renew them.

NJ’s $9B tax-break tally

An audit conducted by the office of the state comptroller released last year also raised serious questions about the state’s oversight abilities, even as the Department of Treasury estimates New Jersey is on the hook for an estimated $9 billion in tax breaks that have been pledged to companies going back well over a decade. The audit helped spur separate reviews conducted by both a task force assembled by Murphy, a first-term Democrat, and the committee of senators, which was impaneled by Sweeney.

Murphy’s task force has issued two reports that have questioned some of the individual awards granted to companies, including those with ties to South Jersey Democratic powerbroker George Norcross. It has also faulted the oversight practices followed by the Trenton-based Economic Development Authority. The governor has also separately proposed his own package of tax-incentive reforms, which include calls for more targeted tax breaks, annual program cap and establishment of a public-private venture-capital fund, among other changes.

Meanwhile, the Senate panel also issued its own report late last week, calling for 25 different policy revisions.

Yet even while recommending things like an enhanced focus on community benefits and the establishment of an inspector general within the EDA to monitor future tax breaks, the senators opted against calling for the annual spending cap sought by Murphy. That comes after even some of the witnesses who testified before the committee last year praised such caps for ensuring tax breaks don’t take away too many resources from other priorities, such as education and transportation.

But Sweeney cited the Legislature’s recent experience dealing with Murphy on a different tax-break program, one that benefits entertainment companies when they film on location in New Jersey, as a reason to resist the governor’s call for an annual cap. In that case, the governor and lawmakers had to pass a new law earlier this year to increase an annual cap that had been placed on film-tax credits because of the growing popularity of the program.

Sweeney pledges not to repeat mistake

“I’m not going to make the same mistake we made with the film-tax credit when this administration made us put a cap on it just to come back and say ‘pass another bill because (we) need more,’” Sweeney said.

While New Jersey would be an outlier among regional peers for maintaining uncapped programs, Sweeney’s firm stance against an annual cap does have full support from the state’s top business-lobbying groups, including the New Jersey Business & Industry Association.

Christopher Emigholz, the group’s vice president of government affairs, pointed to the net-benefit test that the state has traditionally used to analyze whether a tax break will create more economic activity than the value of what the state is giving back in a tax incentive. Right now, the test calls for a 10% net benefit for taxpayers, but the Senate committee said that standard should be “considerably higher” in most cases.

“If a net-benefit test shows that the state is benefitting, then why would we want to cap success,” asked Emigholz.

He also suggested the stalemate over tax incentives has put New Jersey at a competitive disadvantage, since neighboring states have still been providing companies with tax breaks even as New Jersey stopped doing so last summer.

“New Jersey remains without the much-needed mechanism to level the playing field against our regional competitors who have a less challenging business climate,” Emigholz said.

Good numbers, even without tax breaks

Yet even as those types of complaints have been aired by business-lobbying groups, others have noted that the state economy doesn’t seem to have taken a hit from New Jersey’s getting out of the tax-incentive game. In fact, the state unemployment rate has steadily held at or near historic lows throughout the period when new tax-incentive deals have been put on hold. Growth in the state’s gross-domestic product has also picked up despite the tax-break blackout.

Sheila Reynertson, senior policy analyst at New Jersey Policy Perspective, a left-leaning think tank based in Trenton, also pointed to the state’s perennial fiscal challenges in making the case against agreeing to a deal unless it includes the annual cap sought by the governor. The projected impact of the tax breaks on the state budget range from around $500 million this fiscal year to over $1 billion in upcoming years.

“The fact remains that New Jersey is not in the financial position to give out limitless corporate tax breaks, and hard caps should be a nonnegotiable component as lawmakers consider tax-subsidy reform,” Reynertson said.

Such caps are also “the state’s best defense against the future waste and abuse of corporate tax-subsidy programs,” Reynertson said.

Isherwood, the governor’s spokesman, highlighted the work of Murphy’s task force, which has reportedly found problems with more than $500 million in previous incentives that may have gone undetected without such close scrutiny.

“The task force findings have shown convincingly why an unlimited pool of money is a bad idea. The state cannot afford to hold up an important program based on this,” Isherwood said.

What happens next remains to be seen, but the tax-incentive issue is not the only one where Murphy and Sweeney — the two most powerful Democrats in the State House — have openly clashed over the past two years. They include disagreements over tax policy, the budget and public-worker benefits. But compromises have also been reached, including on the minimum wage.

Also playing a role in any tax-incentive discussions is Assembly Speaker Craig Coughlin (D-Middlesex). He’s previously hinted that some common ground has already been found, even if a complete deal has yet to be reached.  Asked about the tax-incentive issue on Wednesday, Coughlin spokesman Kevin McArdle said “both houses and the governor’s office are still actively crafting the legislation.”

“We are optimistic we can reach an agreement that is fair and responsible in the very near future” McArdle said.