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A New Jersey task force last week wrapped up a serious investigation into the Garden State’s corporate tax incentive programs, issuing its third and final planned report. (My previous coverage of the investigation can be found here, here, here, and here.)
Like the prior two installments, the report is excellent: It provides loads of details about how companies systematically ripped off New Jersey taxpayers by hiring consultants who specialized in creating false threats to leave the state in order to unlock tax breaks. The task force says it has referred a total of $578 million in improper awards to state officials, law enforcement, or both.
But I want to focus on a small section near the end of the report that deals with a somewhat wonky term: transferable tax credits. Many states, New Jersey included, allow tax credits to be sold if the company that qualified for them doesn’t have enough tax liability to take advantage of its full complement of credits — i.e., they can be transferred. There’s a whole industry around the tax credit market.
The task force reported that a whopping 70-80 percent of New Jersey tax credits are ultimately sold to someone else. This causes a host of problems.
First, and perhaps most obviously, it means tax incentive programs benefit companies for which they were never intended. In New Jersey’s case, the prime beneficiaries of tax credit sales are banks and big insurance companies. (A separate NorthJersey.com investigation found that between 2014 and 2017, Horizon Blue Cross Blue Shield was the largest purchaser of New Jersey tax credits.)
Lawmakers didn’t intend to give those companies a rake-off on their taxes via these incentive programs; they were simply able to buy up tax breaks from other companies whose tax bills were literally too small to make full use of them. As one person the task force spoke to put it, buying a tax credit is a “backdoor grant” from the state.
Second, transferable credits make state budgeting a nightmare, since companies cash in the credits they bought at different times. As the task force noted, “The State does not control the credit after its sale and does not know who might attempt to use the credit and when.” Thus, “the State cannot accurately predict which revenue streams will decline in any given year, and by how much.”
In my book, I laid out a similar situation in Massachusetts, wherein film and TV tax credits the state had doled out were being sold and then cashed in years later by random companies, creating a massive headache for the state’s bookkeepers. A recent report in Bloomberg detailed how Illinois’ film tax credits are similarly being sold to everyone from Walmart to Apple to Oprah.
Finally, since the state doesn’t track tax credit sales beyond one degree — meaning if a purchaser sells a credit on again, no one knows about it until the final purchaser cashes in — nobody can track the full extent of which industries are being subsidized. The state does have a plan to remedy this in the near future, but it doesn’t intend to make all the sales information public. Like so much in the corporate tax space, this clouds democratic accountability, since voters can’t hold officials responsible for actions they can’t find out about.
The task force made some good recommendations for fixing this problem, from capping the number of credits a single company can hoover up, to ensuring they use the credits within a set amount of time, to making all sales records public. I’m a bit more of a purist: End the transferability of tax credits entirely and fix the whole mess in one fell swoop.
As I say every time I write about this investigation, yes, New Jersey is a total wreck in the corporate tax department, but it’s not unique. It just bothered to look under the hood of programs that had been tootling along for years with no oversight. Many other states would find the exact same stuff — or worse — if they bothered to check their own programs. For instance, a recent audit of just one tax incentive program in Illinois found nobody at the state was doing, well, anything, to track or verify applications.
So good on the Garden State. Hopefully Gov. Phil Murphy can use this information to push reforms through a legislature that, despite the overwhelming evidence the task force provided, seems to still think the status quo is fine.
Let’s talk about Google: It looks increasingly likely that there will be a big antitrust case against Google launched sometime this summer. Me and my colleagues at the American Economic Liberties Project are collecting stories and contacts from folks who interacted with Google through their business, or have even worked there and know some of the ins and outs of the company. If that’s you or someone you know, please fill out this form and share it around. We’d love to chat with you. And we’ll never share this info without permission.
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— Pat Garofalo