This week, the Wall Street Journal provided some alarming calculations on one of New Jersey’s biggest 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. incentives programs. The state’s Urban Transit Hub Tax Credit is aimed at attracting and developing large-scale commercial and residential investment in a pre-defined urban transit corridor. Qualified commercial investments of $50 million or more locating in the transit hubs are eligible for a credit of up to 100 percent of their qualified capital costs. The credit is dispersed in increments over ten years. Total lifetime funding for the credit is capped at $1.5 billion—with $250 million of that reserved for residential projects. In an effort to create and retain in-state jobs, the program also requires that those receiving the credit create or save at least 250 full-time jobs. According to New Jersey Future, a nonprofit organization devoted to land-use issues:
“The program distinguishes itself among the state’s economic incentive programs with its highly targeted, strategic focus primarily on weaker development markets with strong transit infrastructure…the intent of the tax credit has been to attract investment that builds 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. s and sparks wider revitalization in these locations.”
Recent legislation passed by the legislature—but yet to be acted on by Governor Chris Christie—would increase the total funding cap by $250 million and increase the filing deadline through mid-2014.
As of July, $977.1 million had been awarded to eighteen residential and commercial projects—leaving almost $523 million for remaining projects if the legislation is not passed. That $977.1 million means the average cost per project is $54.3 million. Or, alternatively, an average of $35.5 million for each of the seven residential projects and $66.2 million for each of the eleven commercial projects.
New Jersey’s Senate Finance Committee noted that the program will result in a maximum of $250 million of lost revenue through 2027. In their reported fiscal impact, the committee stated that
“additional 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. s that are essential to the realization of capital projects in designated areas will generate indirect fiscal benefits to the State and local governments that may, or may not, exceed the cost and opportunity cost of providing financial assistance.”
It seems that even the government is unsure as to whether the program will garner a net positive return. Further, research shows us that indirect benefits and impact multipliers are difficult to calculate accurately and riddled with uncertainty.
Of the eleven total commercial projects that have been approved, the two most expensive (in terms of credits awarded per job created or retained) are those sponsored by Campbell’s Soup and Prudential Financial. Campbell’s only creates 50 new jobs and retains none—and the jobs cost the state $683,836 each in foregone revenue. The Prudential project, creating 400 jobs, comes in at $527,071 per job. Even the cheapest commercial project still costs $51,728 per job in lost revenue. According to the Wall Street Journal, the Christie administration argued that the credit has strayed from its original focus because it “wasn’t intended to create jobs…but to spark development.” Further, the Journal notes the credit’s much smaller scope in early days. The program seems to be anything but small now—Prudential alone will receive nearly $211 billion in tax credits in return for their capital investment.
It’s clear that New Jersey is running an expensive shop—how can the state be sure this large scale subsidization will pay off? The New Jersey Economy Development Association (EDA) attempts to guarantee this by calculating “net benefits” for each project, which “estimates the public revenue that will come from the jobs and capital investment tied to a project, including income and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es.” He noted that “the results are not exact, but the EDA errs on the conservative side.”
Critics argue that these cost-benefit calculations result in overly-optimistic and downright unrealistic benefit estimates. We ran some simple calculations of our own to see if this was the case. When the return-on-investment (ROI) is calculated from total benefits calculated by the EDA (derived from their reported net benefits), all of the eleven commercial projects generate a positive return on investment. But when only the company’s reported capital investment is used as the project benefit, only four of the projects generate a positive ROI.
Whether these subsidized investments will pay off for the Garden State remains to be seen, but it’s obvious that the program is far from affordable. NJ Spotlight reported that the New Jersey Policy Perspective worried that “none of it is part of a coherent strategy…All it is is spaghetti thrown at the walls to see what sticks.”
More on New Jersey here.
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