On Monday Chris Christie announced that Holtec International will be building a 600,000 square foot manufacturing facility on the shores of Camden, New Jersey. Last week the project was spurred along by a $260 million tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. . Holtec’s announcement marks the third largest taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credit ever issued by the New Jersey Economic Development Authority. In 2011 Revel Casino received a similar tax credit –to the tune of $261.4 million, and has filed for bankruptcy two times since 2012. The company’s recent failure illustrates the shortcomings of credits that lure targeted business activity but do not create an environment for long-term economic growth.
At first glance tax credits seem like a win-win for New Jersey. A business has to generate a profit to be taxed and it has to be taxed to be eligible for its tax credit. This seems like a great deal for the state because tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. s are closely tied to business results. For example, if a business succeeds the government gains from the indirect benefits associated with job growth outweigh tax expenditures, and if a business fails the government is off the hook because it doesn’t owe any tax expenditures. However, while these tax incentive programs may incentivize economic development in the short term by creating lots of construction jobs, they often do not guarantee success of a given enterprise. In the event of a business failure, even if the state does not owe tax expenditures, it still bears the larger economic costs caused by market distortion.
Instead of driving economic growth, some have speculated that Christie is using economic development tax credits to win the support of New Jersey trade unions—driving a wedge between public and private unions. In Chris Christie: The Inside Story of His Rise to Power, Bob Ingle and Michael G. Symons assert that the $261.4 million in tax credits issued to build Revel Casino were a “gift” to trade unions. They purport that Tishman Construction and the South Jersey Building and Construction Trades Council, who contracted with Revel in 2011, directly benefited from the tax credit windfall. Further, Chris Malanga described the relationship between tax credits and trade union support in the article “How Chris Christie Split the Labor Movement in New Jersey.” He asserted that in spite of a poor reputation with public labor unions, the governor has earned the support of trade unions by carving out special tax incentives.
Christie stated that dividing labor’s support was one of his administration’s greatest achievements in 2013. He stated, “We have the endorsement of 24 building-trade unions,” he said. “We have an opportunity as a political party to drive a wedge in the union movement, and the laboratory where that’s happening right now is in my state.”
The recent $261 million tax credit for Hotlec International and the $390 million tax credit for the American Dream Meadowlands project in 2013 indicate Revel Casino’s failure has not stalled New Jersey’s tax credit economic development policy. The state should learn from this failure though. Instead of carving up the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. by choosing winners and losers for political expediency, New Jersey should implement broad based reforms to its tax code to create a neutral environment for business development.
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