How costly is too costly?
That’s the current debate over business-retention incentives, and a recent situation illustrates this well.
In February, the state Economic Development Authority approved $5.4 million of tax credits to keep 32 jobs in New Jersey, while creating eight new jobs at Camden Yards Steel. Camden Mayor Frank Moran applauded the EDA incentives, awarded under the state’s Grow NJ program, but an EDA analysis shows the state will derive just $124,564 in economic benefits from the incentives during the next 35 years.
Small wonder then that Gov. Phil Murphy recently signed an executive order directing the State Comptroller’s Office to complete a performance audit of the EDA’s tax incentive programs.
The EDA spent $8 billion in tax incentives since 2010, “a figure that has ballooned from the $1.2 billion spent between 2000 and 2010,” according to Murphy.
The governor said New Jersey spends $162,000 in economic incentives for each job, while Massachusetts, for example, spends only $22,000.
James Hughes, a professor and former dean at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy, conducted a study of incentives several years ago.
“New Jersey cannot unilaterally remove itself from having and using these incentives in the ever more intense economic competition among states and nations,” he wrote in 2004. “It would be both political and economic suicide for either political party to propose an abolition of incentives.”
And that’s still true, Hughes said.
“Technically, economic incentives are an inefficient use of resources,” he said. “But many states use them, so you can’t unilaterally disarm.”
Southern states began the practice decades ago “as an engine of economic growth,” he noted.
Added Hughes: “New Jersey actually came to the game late, initially in the 1970s when the state was losing manufacturing jobs. In the 1980s, the office building boom erupted — 80 percent of all office space ever built in New Jersey went up in the 1980s — and we really didn’t need incentives. But in the 1990s, growth here slowed and the state got serious with economic and tax incentive programs.”
He noted that the state’s taxes and costs of living are relatively high.
“It would be ideal to reduce the costs of doing business in New Jersey, but that would require dramatic changes with a lot of short-term revenue loss to the state,” Hughes warned. “Added to that is the possibility of a double whammy if the decade-plus national economic expansion starts to lose steam.”
Elsewhere, there’s no shortage of proponents of business-retention incentives.
Attorney Ted Zangari, a member and co-chair of the Real Estate Department at Sills Cummis & Gross in Newark, called tax-credit programs “not only useful, they are essential.”
Zangari represents the Smart Growth Economic Development Coalition, an advocacy group that includes major real estate, business and labor organizations, and more than a dozen other trade associations.
But he added, “Gov. Murphy is absolutely correct that financial incentives are not the only factor that should be considered” and said the Coalition wants some changes to incentive programs.
The challenge for New Jersey is that “most of our competitor-states are roughly equal or better” when it comes to transportation, skilled labor workforce and quality of life, he said.
“That’s where financial incentives enter the equation,” Zangari said. “Grow NJ — unlike the [Business Employment Incentive Program] and [Business Retention and Relocation Assistance Grant] programs of the 1990s and early 2000s — has been tremendously successful in sufficiently narrowing and even closing that cost-gap over a 10- or 15-year time horizon.”
The Cato Institute, a free-market think tank, disagrees with the whole concept of taxpayer-funded incentives.
“Economists generally oppose the use of state-sponsored business incentives, at least to the extent the state selectively favors particular firms and industries with targeted tax relief, cash subsidies, regulatory exemptions, preferences on land use and other valuable goods and services,” said Cato’s Ryan Bourne. “So on net, economists would expect state-sponsored business incentives to worsen the economy as a whole.”
Bourne said New Jersey “should try to move as far as possible away from targeted incentives towards broad-based attempts to improve the business environment of the state by enhancing economic freedom.”
But that’s easier said than done, he added, “given politicians’ preference for observable wins, and the prestige and credit that comes from being seen to create new jobs.”