New Jersey Tax Incentives Need a Periodic Checkup

Tax incentives—when they work as intended—can be useful components of a successful economic development strategy. They can also be costly disappointments. In the coming weeks, the New Jersey Legislature will make important decisions about two of the state’s largest business incentives, the Grow New Jersey Assistance Program (Grow NJ) and the Economic Redevelopment and Growth Program (ERG), both of which are scheduled to close to new applicants on June 30. With billions of dollars of state revenue at stake, lawmakers face the challenging task of determining how these programs or future state incentives will be designed—including which companies are eligible and how the benefits are structured.

To make these hard decisions, however, New Jersey lawmakers don’t have to rely on intuition or anecdote. Instead, they have the benefit of recent programmatic evaluations of New Jersey’s incentives, including studies by the state auditor, state comptroller, and Rutgers’ Edward J. Bloustein School of Planning and Public Policy. These evaluations draw valuable conclusions about the design, administration, and effectiveness of New Jersey’s incentives. Since their release, the evaluations have sparked substantive conversations between policymakers and other stakeholders that are informing the debate over Grow NJ and ERG.

But there’s no guarantee that future lawmakers will have the same level of information at their disposal. That’s because New Jersey, unlike 31 other states, does not require that tax incentives undergo periodic evaluation. The recent studies in New Jersey were one-time reports. As lawmakers design a new generation of incentives, they should also adopt a plan for rigorous and recurring evaluations of these programs.

Periodic evaluation of tax incentive programs is a proven approach. Less than a decade ago, few states consistently examined their incentive programs. But today, as The Pew Charitable Trusts’ research shows, state after state is using evaluations to answer hard questions about incentives, such as to what extent they successfully influence business behavior and what return on investment they provide.

This information is helping legislatures make decisions. For instance, the Maine State Legislature relied on an evaluation in 2018 to fix a flaw in a program that allowed state businesses to receive incentives merely for promising to create jobs. A tax credit for rehabilitating historic buildings in Maryland received strong marks in an evaluation, so lawmakers decided in 2016 to continue the program beyond its scheduled expiration date. And the Oregon State Legislature has found that reforms made in response to evaluations have resulted in significant savings—not by solely eliminating incentives, but by modifying existing programs to be more cost-effective.

To achieve similar results, New Jersey policymakers should consider the key details for an evaluation process, including who is best positioned to assess the programs, which incentives to include, and over what time period evaluations should occur. For example, many states have adopted multiyear review schedules in which selected incentives are evaluated annually, an approach that helps lawmakers focus more closely on a subset of incentives each year.

New Jersey lawmakers last engaged in a wholesale reconsideration of the state’s business incentives six years ago, when the state adopted the current version of Grow NJ and ERG in the Economic Opportunity Act of 2013. At that time, the legislature recognized the need for reliable evidence-based data to measure the effectiveness of the programs. The Economic Opportunity Act mandated an independent study of Grow NJ and ERG, a provision that led to the Bloustein School’s rigorous, detailed evaluation.

This time, lawmakers can go one step further by establishing an ongoing evaluation process. That way, as lawmakers reform New Jersey’s incentives this year, their successors will have the information they need to assess the revised programs. As the experiences of states around the country shows, this evidence is crucial for New Jersey to ensure that tax incentive programs intended to spur economic development serve the interests of the state’s budget, businesses, workers, and taxpayers.

Josh Goodman is a senior officer with The Pew Charitable Trusts’ state fiscal health initiative.

This was originally published in The Star-Ledger on June 9, 2019.