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Sunday, September 8, 2013

New Jersey Subsidies More Out of Control than Ever Under Christie

I have written before how state and local subsidies are more out of control than ever, and more recently how the number and size of megadeals has increased substantially since the Great Recession.

Now a new study from Governing magazine (h/t to Al at LinkedIn group Economic Development 2.0) exhaustively analyzes New Jersey's five largest incentive programs and their growth since 2011. Governor Chris Christie has made aggressive use of incentives a centerpiece of his economic development strategy, but the magazine's comparison of New Jersey's job performance with than of surrounding states shows that it simply isn't working. Not only that, according to the report, "at least 20 companies receiving incentives filed layoff notices" before fulfilling their job requirements.

But it is the sheer dollar value of incentives that makes the head spin. According to the magazine's estimates, the state awarded $904 million in 2011 and $872 million in 2012. Adding in this year's awards brings the total to $1,950 million which is, Governing notes, "more than the previous 15 years combined." (Note: 15 years is the entire life of these programs.)

Moreover, some of the biggest incentive awards have been some of the most outrageous. The Urban Transit Hub Tax Credit awarded Panasonic $102.4 million to move nine miles, within the state, from Secaucus to Newark. As I have reported before, giving subsidies to move existing facilities is the most obviously wrong form of incentive use, because no new jobs are being created, but tax revenue is cut. Interstate job piracy is bad, but for the state to fund intra-state piracy is lunacy.

Meanwhile, New Jersey's July unemployment rate came in at 8.6%, #43 of the 50 states.

Kudos to Governing and reporter Mike Maciag for a great piece of reporting, providing a well-documented case study of what out-of-control subsidies look like as the country tries to recover from its ongoing jobs depression.

Cross-posted at Angry Bear.


  1. While I am not here to defend economic incentives, either in general or in the particular, I do want to make clear that the purpose of one of the incentives you mention -- the Urban Transit Hub Tax Credit -- was NOT job creation, and should not be criticized on that basis. (The Governing article hinted at this but did not make it clear.)

    The stated purpose of the UTHTC was to spark capital investment in distressed urban areas that have good transit infrastructure -- something New Jersey has a lot of. Judged on that basis, the incentive has been successful: more private, unsubsidized capital investment has flowed to those areas following the awarding of these tax credits, adding to the ratable base in these urban areas and allowing them to invest in further revitalization. We can debate whether that is a good use of subsidies, but we shouldn't be criticizing a subsidy for not doing something it was never intended to do.

    Also, all of the economic incentives in New Jersey have net-benefits requirements, something else you failed to mention in this post. (FYI, all UTHTC recipients included net job growth in their net-benefits documentation; more detail is here: Panasonic projected 250 new jobs, just FYI.)

    And finally, a question: Did the companies that filed layoff notices after receiving subsidies receive those subsidies during Christie's administration? That would be an important detail. (Again FYI, to date only one UTHTC awardee has actually been issued a tax certificate.)

    So, as I said, I'm not here to defend tax subsidies, but I think the discussion about them is a lot more nuanced that this post allows.

    1. Thanks for the comments, which I will take in a slightly different order. First of all, all 20 of the firms filing layoff notices received their incentives "since 2010," according to the Governing article, which I take it is their shorthand for during the Christie administration.

      Next, if I read the table at your link correctly, total capital investment for the project was $125.8 million, of which $102.4 million is being paid by the state and $23.4 million by Panasonic. In my book, that's really excessive. In the EU, a subsidy equal to 80% of the investment is not ever allowed. In fact, I would estimate the maximum it could get, only in the poorest regions of the EU that have a 50% maximum "aid intensity" limit, would be a little under 40% of the investment, since the investment is greater than 50 million euros (about $65 million), a threshold that triggers lower aid maxima (half of a region's normal aid maximum). Again, that's in the very poorest regions of the EU.

      To get to your main argument, the idea of encouraging the use of underused transit infrastructure is a good one. Leaving aside the fact that the subsidy was too large relative to the investment, the same effect could have been gotten by giving a $102.4 million subsidy to a company creating all new jobs, rather than one leaving behind a 1,000 job hole (and associated lost tax revenue) and empty office building in another city in New Jersey. That was my major point with regard to Panasonic. As Good Jobs First showed in its report, The Job Creation Shell Game, many states have shown that they know how to write anti-piracy rules into their subsidies. New Jersey should have done that with UTHTC.

    2. Ah, we're basing this on the Good Jobs First report. OK.

      I'm not in a position to offer a judgement on what is an "excessive" subsidy, except to note, again, that each recipient of the UTHTC was required to demonstrate net benefits. So, if the numbers are to be believed, New Jersey will be better off as a result of these incentives than without them.

      The issue of "moving" jobs is also a nuanced one. Do we really want a bunch of office jobs in Secaucus, which is almost entirely auto-dependent, plagued with traffic and not near much housing at all? Secaucus is full of warehouses and is a huge logistics center (and, to offer a value judgement, doesn't really need the tax base since it has very few residents), but the kinds of jobs Panasonic had there are much better suited for a higher-density, transit-rich environment. (This is what we have come to call undoing dumb growth.) But again, the UTHTC wasn't about jobs, it was about raising the tax base.

      Perhaps you could say more about how job creation by itself will raise a city's tax base and increase the use of its transit infrastructure, the two stated goals of the UTHTC. I see them as different objectives, and I'm not seeing how one gets you the other, so I'd love more clarity on that.

      Hypothetical question: If New Jersey had had anti-piracy rules in its UTHTC, would Panasonic have left the state? It was definitely going to move someplace.

      The real problem in New Jersey, which you don't address, is the home-rule problem. Every municipality wants ratables and not residential development, because each municipality is wholly responsible for funding its own schools and there's no way residential property taxes can cover those costs. So municipalities poach commercial development mercilessly from each other, just the way states do from other states, rather than make the hard decisions about regionalization and allocation of tax levies so that all land-use decisions can be made in a more sane and rational manner. THAT would go a long way toward your anti-piracy goal.

      The school-funding issue is particularly a problem for distressed urban areas, which don't have the rich tax base to fund their schools that the wealthy suburbs do, so anything they can do to raise their tax base, they're going to do. Ergo, the UTHTC.

      Again, I'm not debating the size or wisdom of the subsidy, merely asking that you acknowledge its stated purpose, which was NOT to create jobs, and its success in achieving its stated purpose, which was to incentivize further private investment. Thanks.

    3. I'm not sure of the significance of your first sentence. I wrote on p.268 my 2000 book *Competing for Capital* that relocation subsidies are "the most objectionable of present practices, which is 12+ years before the GJF report, so it's nothing new to me (and Greg LeRoy was fighting subsidized relocations back in the 1980s, so it's not new to him either). You are quite right that regionalization would reduce poaching incentives, but local governments often resist steps toward regionalization. We have a sales tax pool in St. Louis County (mostly west of the city of St. Louis), but not all cities are part of it, and most of the worst abuse of sales tax TIF takes place outside the pool.

      Since I did not address it in my last comment, I should mention that I don't think "net benefit" requirements are worth the paper they're printed on. I have strong doubts about the cost-benefit analyses normally used and, more importantly, cost-benefit analysis generally ends at the jurisdiction border, despite the fact that the costs of a relocation almost always occur outside the jurisdiction's border. This principle is why, in the European Union, the Commission makes the ultimate decision on whether subsidies may be granted, not the Member States. Only a bigger entity will take all the costs and benefits into account.

      I'm not sure why you emphasize "incentivizing further private investment" as something distinctive about the UTHTC. That's a characteristic of all investment incentives, regardless of any more specific purpose. What I took you to be saying was unique about it, and which I did acknowledge in my last comment, was that it incentivizes taking advantage of underused transit infrastructure. And I said that was a valuable goal. But that doesn't let us avoid the question of "size or wisdom" of the subsidy, because they are costly, both directly and in terms of opportunity cost. And it doesn't excuse a design flaw like not having an anti-piracy clause.

      Regarding your hypothetical, I don't know whether Panasonic would have moved had UTHTC included an anti-piracy clause and, unless you are a top executive at Panasonic, you don't know either. A company has every incentive to say it's moving, whether it would move or not. MasterCard in Missouri said it would move to Dallas unless it received a subsidy to keep its operations here (it got the subsidy and stayed here), but guess what? There was not a single article in the Dallas press about MasterCard possibly coming, and the business editor of the Dallas Morning News told me he'd never heard any rumors of MasterCard moving there.

      I didn't comment on home rule before because you had not raised the issue. We see poaching of retail in Missouri all the time, precisely to capture tax base. But it hasn't generated sales tax growth exceeding regional income growth and, with each subsidy, the tax base has actually been cut.

  2. "43rd worst of the 50 states" makes it the 8th BEST.

    You might want to rephrase that.