TRENTON-New Jersey's recent decision to give Verizon nearly $80 million in tax breaks raises questions about how best to use state resources and highlights the need for major reforms in how such breaks are handed out.

Those are the main findings of a new report from New Jersey Policy Perspective in the think tank's Economic Development Accountability Project. The report, Telecom Giant Dials "M" for Money and New Jersey Picks Up the Charges, raises questions about why Verizon is receiving such large tax breaks, suggests alternative uses for the money and calls for significant reforms in the state's process for awarding favorable tax treatment to corporations. "There is no reason to expect that companies will stop playing states off against each other for incentive payments or that they will decline what is offered to them," the report says, "so reform will have to come from the states themselves." The report makes four recommendations for opening the process to more public scrutiny and debate:

• New Jersey should not be allowed to borrow money again to pay business incentives. These expenditures should come from general appropriations as part of the regular budget process, subject to the same competition for funding as other state programs.
• Any individual incentive agreement that costs the state more than $5 million should require a public hearing by the Legislature and passage of a resolution in favor of the specific project. Such a process would alert the Legislature to businesses' needs and future demands on state resources.
• The state should report each year showing the total amount of tax revenue lost because of exemptions from the sales tax given to businesses as part of incentive packages. The report should include the name of the business, the project for which the sales tax exemptions were granted and the amount of revenue lost.
• Each year the state budget should include a line item for each company for every grant payout greater than $25,000 that would take place during the fiscal year under the various state business incentive programs; smaller grants could be combined in one line item.

"If tax breaks are as effective in building the economy as supporters say, these reforms should pose no threat," said NJPP President Jon Shure. "Corporate executives should be just as willing to make their case in public as over dinner with politicians."

Public officials frequently say that awarding tax breaks sends a signal that the state is hospitable to businesses. Unfortunately it also sends a disturbing signal that the residents of New Jersey are second-class citizens. They must face higher property taxes and college tuitions, decreased access to health care and housing opportunities and any number of other difficulties because there is too little money in the state treasury. Meanwhile, businesses are assured that they will get their money no matter what, because the state is willing to incur debt to make sure.

Every year at the beginning of the legislative budget process, individuals from various advocacy groups come before the Legislature to prove their worthiness for a budget appropriation to help them serve their clients. Companies would face a similar situation if a legislative vote were required on the biggest tax break agreements. Those with alternate ideas for how to spend the money would have a chance to come forward. And elected officials would have to go on record as to their spending priorities.

More disclosure of who gets what, and how much it costs the state each year, would provide greater opportunity for the public, watchdog groups and the press to keep track and assess the impact of business incentives. From this knowledge, informed debate can emerge. If business incentives are as crucial to building the state's economy as supporters say, shining a brighter light on the process should pose no threat.

In apparent competition with Virginia-whose offer to Verizon has not been made public-New Jersey agreed to give the company close to $80 million in tax breaks over 10 years: nearly $64 million from the Business Employment Incentive Program, which gives companies a portion of the state income tax they withhold from employees and that otherwise would go into the state treasury; tax credits of nearly $3 million under the Business Retention and Relocation Assistance Grant program; an exemption, also under BRRAG, from paying sales tax on equipment, furniture and building materials Verizon buys for its move to the facility Verizon purchased in Basking Ridge. Based on published reports on how much the firm plans to spend on renovations, the sales tax break would be $11-15 million and $15 million.

In return, Verizon announced it will buy the former AT&T corporate campus in Basking Ridge and move an operations center and jobs there from other places in New Jersey and other states. The report questions whether such incentives are needed by a firm that had net income of nearly $8 billion last year, pays its CEO over $11 million a year and recently bid $8.5 billion to purchase MCI: "Verizon is no struggling start-up business that can claim it needs a little help from government to make it over the top." The report also notes that the number of jobs Verizon will retain in New Jersey and bring to the state in return for the tax breaks would still put the firm's total employment in the state below the level of 2001. "In essence," says the report, "the state is paying a company for having downsized."

The report details alternate uses for nearly $80 billion over 10 years that would help make college tuition, housing and health care more affordable to thousands of New Jersey residents: "But the money will not be used for any of those purposes. It will be gambled by a state that has decided to use tax dollars to back one particular player in one of the global economy's most volatile sectors."

Under changes made two years ago, the state borrows the money to pay tax breaks granted by BEIP, instead of appropriating it from the treasury. This makes it so that such programs are less likely to be cut in difficult economic times and that future tax receipts will go toward repaying bondholders, plus interest.

TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective