Photo credit: Amanda BrownRichard F. Keevey
States often try to improve their ability to attract or retain companies that create jobs and invest in the state through what are known as corporate incentives. These incentives can take the form of targeted spending programs (e.g. tailored training or infrastructure improvements for a specific company). Most of the time, however, these are tax incentives where companies pay less tax if they agree to create jobs and / or make other investments.
New Jersey recently approved corporate tax incentives of $ 14.4 billion. The law also provided for a direct allocation of US $ 55.5 million to support certain programs primarily aimed at small businesses and administrative businesses.
There is an ongoing debate about the effectiveness of these business incentive programs. In the past few weeks I’ve been asked many times, “How can the state afford to lose $ 15 billion in its budget?”
My friends found that New Jersey has many fiscal challenges: a large, unfunded pension system, rising debt, and poor credit. In addition, the state just approved $ 4.5 billion in bonds to offset the current budget as the coronavirus pandemic dragged on revenue. How can it afford a $ 15 billion tax revenue?
Likewise, several left-wing organizations argued that the governor and lawmaker ignored the good management of limited government funds and that maintaining the programs was a terrible way to spend money. The state is foregoing billions of dollars at a time when it desperately needs that money for education, transportation, and other vital services.
The counter-arguments from business, governor and lawmakers are that in the current competitive climate between states and countries, these incentives are necessary to keep and / or attract companies and to increase economic activity.
Additionally, proponents say these incentives will prove to be a smart investment over time. The jobs and other investments created by these business incentives will contribute to greater economic growth and, as a result, higher future tax revenues. As such, they represent a type of investment that will produce returns over many years. Otherwise, businesses will not see New Jersey as an attractive place to do business, and both future economic growth and critical public investment will be sacrificed.
However, some critics also note that about a year ago the governor railed against similar programs run by the previous administration. He claimed that the programs were poorly managed and that they were a political boon to certain preferred companies.
This new program, the governor argues, is much more focused and offers many safeguards, such as: B. a limit on lost tax revenues, and that these investments are necessary to rebuild our troubled economy.
First, I had to reassure my friends that this program will not result in a loss of $ 14.4 billion in sales in the upcoming budget – a fact that many people are losing.
The ultimate impact on future budgets is much more confusing, however, as the incentives are not limited to one program or just a year. Rather, there are countless programs (eight new initiatives and two retained from the previous program), each with different admission criteria and purposes. The waiver of income will not occur in a year, but over many years.
It is not clear what the real real costs will be, as many of the projects created by the incentives are likely to bring new businesses, investments and jobs to New Jersey that would otherwise not have been created. This “multiplier effect” brings the state tax revenue – e.g. B. Sales, income and gasoline taxes. In addition, local governments are likely to generate revenue as new projects can result in new or improved property values that add appraised value in a community and likely increase overall property taxes.
Conceptually, at least, the net tax impact (the cost of tax incentives in relation to the newly generated tax revenue) could be positive. For example, requirements could be put in place to ensure that government incentives only for capital projects that are estimated to generate revenues of a few percent / multiple of the direct loss of government tax revenue. However, some programs may not require offsetting tax revenues to be generated as not all programs are subject to this traditional calculation of net benefit.
At present, incomplete information on the number and type of projects receiving government business incentives does not allow a reasonable tax estimate of the ultimate impact of this investment.
Another factor to consider is the opportunity cost to the state budget. Opportunity cost is the next best use for scarce government funds when the tax incentives have not been provided. The decision to pursue new business incentive programs (as well as improving some existing programs) could divert resources away from policy alternatives to which they would have been applied without the incentives, including possibly both spending priorities and individual tax cuts.
A complex story
Tax incentives are designed to stimulate economic growth that would otherwise not occur. Incentives are offered to persuade companies to move / stay, hire and / or invest within a state. New Jersey has just overhauled its entire tax incentive program because the previous program was deemed ineffective.
New Jersey is not unique in having implemented tax break programs that have not been successful. The literature on tax incentive programs contains numerous examples of costly incentives with dubious results or utter errors. One observation from the research literature is that states, in their ability to influence business behavior – e.g. B. where they set up or expand their business activities and thereby create jobs and other investments – are significantly restricted by tax incentives.
Here are some of the conclusions from previous efforts:
- Tax incentives are seldom the determining factor for a company to invest in any particular state.
- Incentive advantages leak outside the state border. Imagine a worker who gets a job in New Jersey but lives and pays taxes in Pennsylvania.
- The company would have come or stayed without the incentive;
- The profit of one company is often the loss of another company.
- And business incentives could reduce spending on key government programs.
So does this mean that New Jersey’s new tax incentive program is doomed to fail? Not necessarily – and I hope not. But it will take a lot of hard work and smart and thoughtful decisions to make the program more likely to succeed.
On the positive side, the state has assessed the previous program comprehensively and has probably learned from its mistakes and shortcomings. The new program design is better with additional guidelines, oversight, and caps.
In addition, jobs created should be required to be linked to a living wage and other benefits such as health care. Incentives should also be directed to places and regions most in need of economic recovery.
You may need to include clawback provisions that allow the state of New Jersey to get back the incentive payment (ie, waiver of tax payments) if the company fails to deliver on its investment and / or employment promises.
Even the best-designed programs face pitfalls that can lead to errors or disappointing results. Therefore, continuous monitoring is vital, including reporting to lawmakers and the public on outcomes such as additional jobs, other revenue generated and related outcomes.
Finally, the management of the program is vital. The staff of the Business Development Agency, the authority responsible for the program, have an excellent reputation in managing such business incentive programs and must perform these tasks at the highest level.
It simply takes too much money to forego intensive surveillance and surveillance. In a market-driven economy, private investment and job creation are vital, and New Jersey must take all reasonable steps to remain competitive with other states and regions.
Corporate incentives, if carefully designed, managed, and monitored, can be an important tool in the state’s arsenal. Let’s hope New Jersey’s newest program proves the doubters otherwise.