Risky Business, a new report by New Jersey Policy Perspective, urges the state to improve subsidy accountability and protect taxpayers from bad economic development deals. Such reforms are needed now more than ever as spending on subsidies has sky-rocketed under the Christie administration: $5.1 billion has been awarded since 2010, four times the amount awarded in the previous ten years.
One of NJPP’s key recommendations is to change the “net benefits test,” which is intended to ensure that the new tax revenue generated by a subsidized project exceeds the cost of the subsidy. The current formula is lopsided: benefits are counted over 35 years and subsidy costs over 15 years, the latter being the length of time the company must meet its performance obligations to receive the maximum award. NJPP’s analysis of a $260 million tax break to Holtec International shows how this works. If Holtec keeps performing for 35 years, the state gets a net benefit of $156,000. Yet if it were to leave the state or significantly downsize after 15 years, the New Jersey would experience a loss of up to $105.7 million.
Changing the nets benefits test to equally weigh costs and benefits might rein in some of New Jersey’s more extreme subsidy awards. But it still avoids the most important question: do the benefits of awarding a subsidy outweigh the benefit of investing the money in other proven economic development assets like education and infrastructure? Research has shown the answer to this question is almost always no.