Strings attached

A single paragraph tucked into the 600-page American Rescue Plan could complicate New Jersey’s economic recovery ambitions coming out of the COVID-19 recession.

The package includes $350 billion in state and local aid, of which New Jersey is getting more than $6 billion to cover expenses related to the pandemic and make up for revenue losses. But a provision in the law limits how states can use corporate tax breaks to attract businesses, prohibiting states from using federal aid to provide tax cuts.

Under the ARP, states “shall not use funds … to either directly or indirectly offset a reduction in the net tax revenue … resulting from a change in law, regulation or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit, or otherwise) or delays the imposition of any tax or tax increase.”

The U.S. Treasury Department must still promulgate regulations to implement the law, a process that could take months. But the rule and any potential restrictions on state tax breaks will be in effect until 2024, according to the bill.

State officials and some economists contend that because the New Jersey tax break package was enacted in January, before President Joe Biden signed the $1.9 trillion relief package, the state tax incentive program should be largely exempt.

That package, the New Jersey Economic Recovery Act of 2020, includes $14.5 billion in economic incentives to be doled out over the next decade. It features corporate tax breaks, financing for real estate, aid for startups, a state-run venture capital fund, and money for anchor institutions, food desert alleviation, five so-called “mega-projects” and work on historic buildings and polluted properties.

“I don’t anticipate any impairment of our ability to execute on the Economic Recovery Act or the incentives package that I signed in January relative to the federal funds,” Gov. Phil Murphy said at a March 17 news conference. Officials at the New Jersey Economic Development Authority, which will run most of these programs, did not provide comment for this story.

Business groups like the New Jersey Chamber of Commerce and the New Jersey Business and Industry Association support the federal relief package and the tax incentive program. And they contend the former will not interfere with the latter.

“If you don’t have a tax incentive like we didn’t for almost two years, we were out of the game,” said New Jersey Chamber of Commerce President and Chief Executive Officer Tom Bracken. “Site relocators would tell you that we we-ren’t on the page when people were talking about relocating.”

The Treasury Department’s interpretation of the language will be crucial. “If the intent is to keep the federal government from funding all sides in the state’s race to the bottom of the economic development subsidies, then that seems to be what it is,” said John Mozena, who heads the progressive think tank the Center for Economic Accountability.

“The next question is does that apply to just new tax credit programs after the law goes into effect, or does it apply to new individual abatement for any one business … after the law goes into effect?”

Murphy warned throughout 2020 that without federal aid, the state would face dire financial straits. “For us at state government, the anticipation of more than $6 billion in federal support will give us additional degrees of freedom in meeting the many needs of our residents within the new budget I proposed” the governor said at a March 6 public event.

“Most states have very depleted rainy-day funds right now. Most states have stressed unemployment insurance reserves. Most states have a big catch-up,” said Greg LeRoy, who heads the progressive think tank Good Jobs First in Washington D.C. And expenses for services during the pandemic – public safety, transit and schools – have soared, he continued.

But New Jersey was able to avoid the dire scenarios Murphy projected last spring and summer, thanks to more than $3 billion of borrowing through the Federal Reserve and the public market. In addition, sales, corporate business and gross income tax collections have been strong, alleviating the worst fears of lawmakers and public officials.

The main question now is how many degrees of separation are acceptable between federal relief and the money going toward state tax breaks. “The vagueness of ‘indirect’ potentially ties state’s hands for three years on setting their own policy,” said Jared Walcak, a state analyst with the Tax Foundation, a Washington D.C. think tank.

“[W]hat if states take advantage of that relief and then cut taxes,” he added in a March 10 blog post. “If this facilitates the tax cut, it is likely prohibited.”

A one-time $100 million tax cut made possible through $100 million in federal aid would be prohibited, he suggested. But a tax cut for that same amount made possible through outside factors – booming businesses or sound budget practices – would likely be allowed under the law.

“It matters what you’re spending on,” he continued in a phone interview. ”You can’t directly spend it on the tax break, you’re putting something toward general government and that potentially creates some fiscal capacity.”

In any event, the loss of tax breaks as a bargaining chip for states could be a positive development in the long run, some groups suggest.

“At the very least, it’s a strike against states engaging in disproven economic recovery strategies, including poorly targeted tax cuts and corporate tax subsidies,” said Brandon McKoy, who heads the progressive think tank New Jersey Policy Perspective.

“Putting a pause on such tax breaks would be a wise policy choice because states should be using all of their available resources to aid families and small businesses — not engage in trickle-down economic development policies.”

“Putting a pause on such tax breaks would be a wise policy choice because states should be using all of their available resources to aid families and small businesses — not engage in trickle-down economic development policies.”
– Brandon McKoy