Legal Team Chosen by Murphy Says Cap Annual Spending on Tax-Incentive Programs

John Reitmeyer | July 10, 2020 | Business, Budget
In final report, team also addresses enhancing administrative oversight and transparency, refers more than $500 million in tax breaks to EDA for review
Credit: (Michael Mancuso, NJ.com)
Gov. Phil Murphy

A new report from a group of lawyers Gov. Phil Murphy impaneled to scrutinize controversial economic-development tax incentives has called for the state to cap how much it dedicates to these programs.

The group’s proposal to put fiscal limits on future tax-break programs was one of several policy recommendations included in a 100-page document the lawyers made public Thursday, saying it would be their final report on the subject.

Other recommendations highlighted ways to upgrade administrative oversight and transparency and to tighten rules for outside consultants, who in past years played a significant role in shepherding applications for tax breaks through the state Economic Development Authority.

But it is the recommendation to implement a cap on state spending on tax breaks that directly conflicts with lawmakers who’ve favored limiting individual awards as a way to rein in costs while not trimming the programs themselves.

It remains to be seen whether the release of the new report will move the needle at all inside the State House, where lawmakers have been contending with the impact of the novel coronavirus pandemic.

Lawyers helping state save money

In addition to Thursday’s release of new policy recommendations and other findings, the lawyers hired by Murphy also reported they’ve secured the “voluntary termination” of incentive awards worth up to $11.5 million that they flagged. They said up to another $578 million in potential tax breaks has been referred back to the EDA for additional review, and in some cases, referrals to law enforcement have also been made.

Murphy, a first-term Democrat, praised the lawyers’ latest efforts in a statement Thursday, saying their work will ensure “we can move forward with a new incentives program and ensure it is run effectively and efficiently with the proper safeguards in place.”

A spokeswoman for Assembly Speaker Craig Coughlin (D-Middlesex) said he did not have an opportunity to review the report on Thursday. A spokesman for Senate President Steve Sweeney (D-Gloucester) declined comment on Thursday.

Murphy has urged lawmakers to cap spending on tax incentives on an annual basis in response to serious issues raised in a 2019 audit of the tax-incentive programs that was compiled by the Office of the State Comptroller. He’s also proposed other reforms that are intended to make the state’s economic-development strategies more targeted to specific goals.

Lawmakers draft their own reforms

For their part, lawmakers have drafted their own set of proposed reforms also in the wake of the 2019 audit, with some overlap with the goals laid out by the governor.

But the ongoing disagreement over enacting program caps has helped stall the renewal of several tax-incentive programs to spur economic development that expired a little over a year ago even as business groups lobbied  hard for their replacement.

The tax-break programs are supposed to encourage companies to invest and create jobs in New Jersey, and some protections were written into a 2013 law to ensure that certain hiring and investment goals must be met before any tax breaks can be distributed by the state.

The 2019 audit raised serious concerns about the state’s oversight abilities. And the Department of Treasury estimates New Jersey is now on the hook for an estimated $9 billion in tax breaks that have been pledged to companies going back well over a decade.

The ongoing pandemic has also brought a new wrinkle to the debate as the state has had to manage serious revenue shortfalls in recent months in response to stay-at-home orders that have been issued by Murphy to help slow the rate of new infections. Claims for unemployment benefits have also increased as the virus and the governor’s orders have slowed economic activity across the state.

State must ‘make tough choices’

The new report from the lawyers appointed by Murphy makes the case that program caps would force the state to “make tough choices as to how to allocate scarce resources.” It also argues that caps would help address concerns raised as part of its investigation about companies largely feigning overtures to locate elsewhere in order to meet job-creation or retention standards that existed in state law.

“This, we believe, would increase the likelihood of tax credits effectively serving their intended purpose of incentivizing companies faced with true location choices to choose New Jersey,” the report said.

And while the recommendation to implement a spending cap focused on only one of the tax-incentive programs that was administered by the EDA, the lawyers made it clear during a videoconference news briefing held on Thursday that they favor caps on any future programs, including those aimed at spurring redevelopment projects.

“There always has to be a bottom line,” said Ronald Chen, a Rutgers Law professor who led the lawyers’ 18-month investigation.

“From my point of view, there should always be an upper limit,” Chen said.

The group’s work has involved convening several public hearings and drafting two prior reports. It also directly scrutinized concerns that were raised in media reports about tax breaks awarded to several companies with ties to influential South Jersey Democrat George Norcross. Norcross and officials from those companies have vehemently denied any wrongdoing.

After the release of the final report, Sue Altman, president of the New Jersey Working Families organization, praised the lawyers’ efforts, calling their findings “a searing indictment of a broken political culture intent on enriching powerful special interests at the expense of taxpayers.”

“With New Jersey facing an unprecedented fiscal crisis caused by the pandemic, it has never been more important that law enforcement act swiftly and take appropriate action against companies that have defrauded taxpayers,” Altman said.

But Michele Siekerka, president and chief executive of the New Jersey Business & Industry Association, suggested the state has suffered by not having any tax-incentive programs in place as the governor and lawmakers have remained gridlocked on what to do next.

“As we have said since last year, oversight and reviews of the incentive programs to ensure their integrity and effectiveness are wholly appropriate,” Siekerka said.

“However, for New Jersey not to have this tool at its disposal for such a long period of time has made our state even less competitive — as we already lagged behind the region and the nation in economic growth in our pre-COVID-19 existence,” she went on to say.