New Jersey’s Subsidy Shakedown

'Nice jobs you have there. Shame if anything were to happen to them.'

Most of the biggest tax boondoggle news at the moment is coming out of New Jersey, and for good reason. Democratic Gov. Phil Murphy initiated an audit which showed the state’s economic development programs are a wretched hive of scum and villainy that have cost taxpayers billions of dollars.

That investigation — you can catch up on some of the details herehere, and here — has led to many journalists taking their own whack at the Garden State’s corporate spending. Which brings me to a piece this week in the New York Times. It shows how 12 companies used a made-up threat to move to the same office building in New York as a way to extort tax breaks from New Jersey:

 In total, over five years, 12 companies threatened to leave New Jersey and move to Blue Hill Plaza unless the state provided tens of millions in tax credits.

None followed through on the threat. In fact, an investigation by The New York Times suggests that nearly all of the 12 companies never seriously considered moving to New York.

But all 12 received lucrative tax credits from New Jersey to stay — more than $100 million in total, according to documents obtained by The Times.

Click through for all the sordid details. It’s a really good piece of work.

I want to zoom out a little bit and put this piece in context. Corporations play this game all the timeall over the country: They say to local lawmakers, “nice jobs you have here, shame if anything were to happen to them,” and then reap tax breaks and other giveaways from officials scared to see their name under a newspaper headline about a company leaving town.

This is the flip side of the argument over things such as Amazon’s HQ2, wherein a corporation says “pay us to come.” What happened in New Jersey and so many other locales was “pay us or we’ll leave.” (Since I grew up in New Jersey, I shall nobly refrain from making a “Sopranos” joke here.) And because there’s an information imbalance between the corporate leaders and the folks running econ development programs, companies are able to act as if those threats to leave are real, even if they’re not.

The thing to keep in mind though, is that taxes are way, way down on the list of things that a corporation actually factors into a location decision. According to Timothy Bartik of the Upjohn Institute, at least 75 percent of corporate tax deals had no impact whatsoever on the corporation’s decision to locate somewhere.

It’s like former Alcoa CEO and Treasury Secretary Pail O’Neill said: “If you're giving money away, I'll take it, you know. If you want to give me inducements for something I'm going to do anyway, I'll take it. But good business people don't do things because of inducements.” There are loads of other factors that go into business locations that have nothing to do with a tax rate, but cities and states treat taxes like they’re the only things that matter.

There’s, also, of course, a collective action problem here, in that lawmakers in every state feel beholden to throw around tax breaks because other states do. Missouri and Kansas recently made a pact to stop poaching companies from each other in the Kansas City metro area. A similar arrangement has been floated for New Jersey, New York, and other surrounding states, which would be a good way to get rid of this particular problem.

It can be easy to ding New Jersey for having so many incompetent people running so many obviously corrupt economic development programs. But we’re only hearing these stories because New Jersey officials actually bothered to take a look at what was going on. If the same sort of investigation occurred in other states, I’m certain the results would be identical, if not worse. So keep it up, Garden State. You’re doing everyone a favor.

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