New Jersey Economic Opportunity Act 2013: Tax Incentives Analyzed

Executive Summary

This study evaluates the tax incentive programs that New Jersey introduced in 2013 under the New Jersey Economic Opportunity Act. The program consists of the Grow NJ (Grow New Jersey Assistance Program) and the ERG (Economic Redevelopment and Growth Program). The goal of Grow NJ is to provide tax incentives to firms, thereby creating more job opportunities. The goal of ERG is to enhance investment in capital projects. The study also carries out a SWOT analysis of the programs, and the findings reveal that New Jersey stands to enjoy several opportunities from their implementation. However, the state will also face constraints during program implementation. Overall, the analysis reveals that New Jersey will stimulate economic growth and create more job opportunities through these programs.

The economic downturn experienced across the United States has led many states to implement strategies to boost economic development by using various economic incentives to attract investors. Recognizing the need to remain competitive both nationally and globally, the New Jersey legislature sponsored the "New Jersey Economic Opportunity Act II of 2013" with the aim of fostering economic development in the state. With the goal of maintaining a competitive advantage among states, the New Jersey legislature introduced the Economic Opportunity Act to improve the range of economic incentives available to encourage companies from within and outside the United States to invest in the state, thereby boosting employment opportunities and state revenues.

Introduction and Background

The goal of the New Jersey Economic Opportunity Act is to enhance business attraction into the state through economic programs that strengthen retention and job creation, while also advancing New Jersey's competitive position in the global economy. Under the program, the state introduced Grow NJ (Grow New Jersey Assistance Program) and ERG (Economic Redevelopment and Growth Program). The goal of Grow NJ is to implement a job creation incentive program, while ERG focuses on economic redevelopment and growth. Stakeholders in the state have extended both programs through July 1, 2019 (New Jersey Economic Development Authority, 2013). New Jersey intends to use ERG to implement a tax incentive program by allocating tax credits for residential projects to achieve the state's developmental goals. The state also intends to use Grow NJ to allocate base tax credits ranging between $500 and $5,000 per job to create employment opportunities.

Several other states in the United States have implemented similar programs to enhance economic growth and create jobs. These include Wisconsin, Mississippi, North Carolina, and Missouri. Notably, Missouri used the BUILD (Business Use Incentives for Large-scale Development) program to stimulate 1,410 permanent jobs by fiscal year 2011. Following the introduction of the program, companies such as IBM and Express Scripts created additional jobs in the state to qualify for the offered incentives.

New Jersey will therefore be positioned to stimulate job growth and enhance economic development within the state through its new programs. However, the state may face constraints during implementation, including potential public criticism that officials are directing state funds toward private firms.

Faced with a harsh economic climate, many states in the United States have introduced tax incentives to generate economic growth. Lawrence, Briskin, and Qu (2013) argue that Michigan introduced film tax incentives in 2008 to promote the growth of film production, allowing between 40 and 60 percent in tax credits depending on the community in which a film is shot. Since that program was introduced, more than 100 films have been produced in the state. Many states also use property tax exemptions to enhance investment growth and create jobs. In 2009, Ohio launched real personal and real property tax incentives in exchange for capital investments, and since then Ohio has received projects worth $440 million (Ohio Department of Development, 2009).

Some states use tax exemption programs to reduce taxable income and thereby lower tax bills for participating entities, attracting businesses through sales tax exemptions on overhead costs. For example, Missouri currently offers a variety of economic tax incentive programs targeted at inducing economic growth and boosting employment opportunities (The Pew Charitable Trusts, 2012). Missouri introduced BUILD (Business Use Incentives for Large-scale Development) to create 1,410 permanent jobs by fiscal year 2011. Following the launch of BUILD, the IBM Service Center committed to employ several hundred workers to meet the state's incentive requirements, increasing staff at its Columbia facility from 143 to 349 employees and hiring 800 technical personnel in 2012 (Jacob, 2012).

Similarly, Express Scripts received tax incentives under the BUILD program, resulting in the employment of 3,129 workers across various state facilities earning approximately $71,000 per year. The company also committed to creating 1,079 new full-time jobs in exchange for the incentives received, spent over $270 million on capital improvement investments within Missouri, and generated an annual economic impact on the metropolitan area worth $986 million per year.

History of Tax Incentive Financing and Proposed Model of Analysis

"By any metric, the long-term investments by Express Scripts represent the type of high-profile projects that provide the real economic development originally envisioned when the tax incentive programs were developed" (Lawrence, Briskin, & Qu, 2013, p. 36).

North Carolina offers a similar program through its Job Development Investment Grant Program, which became effective in January 2003 and provides grant disbursements to new and expanding businesses (Lawrence, Briskin, & Qu, 2013). Following the launch of the program, it generated net positive returns for the state. For example, Red Hat, Inc. invested $30 million in capital expenditures in North Carolina, creating 240 new jobs with an average salary of $80,526 per annum (North Carolina Department of Commerce, 2011). The state expected to receive a boost of $729 million in gross state product and a $21 million gain in cumulative net revenue after incentives from that project alone (Lawrence, Briskin, & Qu, 2013).

Despite these positive cases, Chirink and Wilson (2010) offer a contrasting view, pointing out that some states do not receive economic benefits from the incentives they introduce. For example, California's Enterprise Zone Program, launched to create employment opportunities for economically disadvantaged workers, did not produce significant effects on job creation. Hagen (2013) further argues that economic development incentive programs may not always be cost-effective because firms tend to invest in states with abundant skilled workforces, affordable suppliers, and quality infrastructure, regardless of incentives.

Following this review of the literature, the evidence suggests that New Jersey will enjoy economic growth and increased employment opportunity through the New Jersey Economic Opportunity Act II of 2013. Historically, economic incentive programs have been cost-effective tools that assist states in reaching their development goals. As shown in Table 1, states such as New Mexico, Louisiana, and Hawaii have experienced significant revenue growth from their economic incentive programs within a few years of launching them.

Table 1: Economic Incentive Program Outcomes

New Mexico — "High Wage Job Tax Credit": FY2011 $9.3 Million.
Louisiana — "Severance Tax Exemption for Horizontal Drilling": FY2007 $285,000 → FY2010 $239 Million.
Hawaii — "Renewable Energy Tax Credits": FY2010 $34 Million → FY2013 $260 Million.
Source: The Pew Charitable Trusts (2013).

Buss (2001) argues that states have been offering tax-related incentives to businesses since the British colonization of the United States, and the number of incentives has increased steadily since that time. During the colonial period, colonists used tax-related incentives to attract skilled craftsmen and entrepreneurs to colonial towns. For example, New Jersey offered Alexander Hamilton tax incentives in 1791 to attract entrepreneurs to relocate their factories to the state. States also financed infrastructure and offered capital incentives to private industries as early as 1800. By 1844, Pennsylvania had invested over $100 million in 150 corporations, and cities such as Philadelphia and Pittsburgh engaged in intense rivalry that led to substantial investment in railroads, banks, roads, and bridges (Buss, 2001).

Mississippi introduced a tax-exempt bond program to attract entrepreneurs and industry to the state. In 1949, Maine authorized the first statewide business development corporation, and by 1959 twenty-one states had similar corporations (Buss, 2001). In 1955, New Hampshire granted loans to industries using an industrial finance authority, and by 1963 nineteen more states had created similar authorities. Between 1956 and 1963, seventeen states introduced tax concessions. Following the unemployment crises of the 1970s and 1980s, states engaged in economic growth incentive competition, and by the 1990s several states were competing intensely through tax incentive programs (Buss, 2001).

Between the 1980s and 1990s, states in the United States began to replicate one another's programs by offering variations of tax incentive packages (Markusen, 2007). As shown in Table 2, half of the states in the United States used the fifteen most common economic tax incentives to attract investment during this period. By 1996, twelve of these incentives were used by two-thirds of all states, and between 1986 and 1996, tax incentives grew substantially in usage (Buss, 2001).

The New Jersey Economic Opportunity Act of 2013

Table 2: States Using 15 Most Common Tax Incentives, 1986 and 1996

Tax exemption from corporate income: 1986 — 33 states; 1996 — 37 states (change: +4)
Tax exemption from personal income: 1986 — 26; 1996 — 33 (change: +7)
Excise tax exemption: 1986 — 18; 1996 — 24 (change: +6)
Tax exemption from capital and land improvements: 1986 — 33; 1996 — 37 (change: +4)
Tax exemption on machinery and equipment: 1986 — 35; 1996 — 42 (change: +7)
Tax exemption on goods in transport: 1986 — 47; 1996 — 49 (change: +2)
Tax exemption for manufacturers' inventories: 1986 — 44; 1996 — 46 (change: +2)
Sales and use tax exemption on new equipment: 1986 — 42; 1996 — 47 (change: +5)
Tax exemption on raw materials for manufacturing: 1986 — 45; 1996 — 49 (change: +4)
Job creation tax incentive exemption: 1986 — 31; 1996 — 44 (change: +13)
Tax incentive for industrial investment: 1986 — 29; 1996 — 39 (change: +10)
Tax credit for specified state products: 1986 — 4; 1996 — 6 (change: +2)
Tax stabilization agreements: 1986 — 5; 1996 — 8 (change: +3)
Tax exemption for research and development: 1986 — 24; 1996 — 36 (change: +12)
Accelerated depreciation: 1986 — 34; 1996 — 41 (change: +7)
Source: Buss (2001).

The New Jersey Economic Opportunity Act of 2013 is a significant economic development policy designed to enhance growth at both the state and local levels by creating jobs. The job creation tax incentive exemption program is theoretically aimed at increasing overall employment opportunity in New Jersey, with the expectation that rising employment will act as a catalyst for broader economic development. Furthermore, economic development is expected to reduce the consumption of vacant office space and stimulate additional growth through multiplier effects.

The NJ Economic Opportunity Act has four main components: (1) phase-out of three former programs (BEIP, BRRAG, and UTHTC); (2) substantial expansion of the tax credit program under Grow NJ for mega projects and projects located in the Garden State Growth Zone and Urban Transit Hubs; (3) allocation of $600 million in tax credits under the ERG program for qualified residential projects in eight South Jersey counties and Urban Transit Hubs; and (4) authorization to create Garden State Growth Zone Development Entities (Windels Marx, 2013).

The two primary components of the program are the Grow NJ (Grow New Jersey Assistance Program) and the ERG (Economic Redevelopment and Growth Program). Both programs aim to stimulate economic development in the state through July 2019. The Grow NJ program is designed to increase the state's capacity to offer economic incentive packages to businesses. "The Grow NJ is a tax credit program" (Deloitte, 2013, p. 1), while ERG is primarily designed to boost capital projects within the state. Both programs offer substantial credits to qualified employers.

To attract investment, Grow NJ offers base tax credits between $500 and $5,000 per job per year. Bonus credits range from $250 to $3,000 per job per year. The program also aims to expand eligible geographical boundaries within the state. The ERG component offers tax credits for residential projects to enhance project development. The Act also extends into offshore wind development and public-private partnerships. Using Grow NJ, the state seeks to attract mega projects in sectors such as energy, defense, manufacturing, logistics, and aviation.

Under the mega project scenario, the state intends to attract: capital investment of approximately $20 million with 250 jobs retained or created, or 1,000 jobs retained or created; and businesses from Urban Transit Hubs with capital investment of approximately $50 million with 250 jobs retained or created. Grow NJ also aims to provide assistance to distressed municipalities through the Municipal Urban Aid program. To be eligible for tax credits, a company must meet minimum capital investment requirements, summarized as follows:

Requirements for Minimum Capital Investment ($/Square Foot):
Industrial — Rehabilitation Projects: $20
Industrial — New Construction: $60
New Construction Projects: $40
Office — New Construction: $120

Minimum Full-Time Employment Requirements (New and Retained FT Jobs):
Tech Start-Ups and Manufacturing Businesses: 10/25
Other Targeted Industries: 10/25
All Other Businesses and Industries: 10/25

Despite the careful design of the NJ Economic Opportunity Act, several limitations remain. The Grow NJ program does not impose an overall program cap on the total number of combined projects. The Act does impose caps and limits on the total number of credits available for individual projects. Additionally, there is a shortcoming in the 50% rule for retained jobs: the program offers 100% credit for each new job created but only 50% credit for each job retained. This creates an incentive for employers to prioritize new hires over retaining existing workers in order to maximize their credit allocations.