When either the state or local governments grant tax breaks, other taxpayers ultimately bear the cost. A policy brief released by Stockton University political science professors this week took a critical look at the State of New Jersey’s so-called “tax expenditures,” better known as tax breaks in which certain categories of items, services or property, such as affordable housing, are treated differently by the state’s tax code.
263 Tax Breaks, $23.5 Billion Dollars In Costs
Identified within the report were 263 tax breaks in effect within the state. According to the New Jersey Department of the Treasury expenditures are projected to cost nearly $23.5 billion. A statement released by Stockton University in addition to the report noted that “This figure only includes estimates for 51 percent of the authorized tax expenditures – estimates for the other 49 percent are unavailable in the 2016 report.”
The researchers identified four types of tax expenditures that currently exist within New Jersey, including:
- Exemptions – Certain goods and services that are exempted from sales or other taxes by statute.
- Exclusions – Items such as pensions, in which only a portion of the amount is taxed.
- Deductions – which “reduce income or receipts subject to tax by a specified dollar amount, percentage amount, or a specific category of recipient.”
- Credits – “direct deductions from the amount of taxes that must be paid.” The researchers noted that of all categories of tax expenditures, credits have a greater impact on revenues than the other types listed here.
The breakdown of known tax expenditures included the following, according to the researchers:
- $3.2 billion worth of income tax credits for taxes paid to other jurisdictions
- Tax exemptions including: $948.6 million for clothing and footwear and $80.7 million for disposable household paper products
- Tax exclusions including: $2.87 billion for purchases for resale; $234 million for eggs, fish, meat and poultry; $80.1 million for garbage removal and sewer services; $4 million for massage therapy services and $13 million for business retention and relocation assistance grants.
The researchers found that each of the top 3 categories of tax expenditures “…exceeds the dollar value of all areas of state direct expenditure except aid to K-12 education.”
At the local level in Ocean County, tax expenditures are often seen in the form of P.I.L.O.T. (payment in lieu of taxes) agreements, such as the Costco shopping center in Manahawkin and other such tax abatements prescribed by state law that are given out at the local level by municipal governing bodies. Under those schemes, rather than be subject to property tax rates such as those imposed on homeowners, the developer (often the Walters Group) instead pays a percentage of their revenue “in lieu” of traditional property tax payments after being specifically exempted by local governing bodies. As municipalities satisfy their state-mandated affordable housing quotas, such PILOT agreements have been seen in towns including Stafford, Lacey, Little Egg Harbor, and South Toms River, among others.
As logic would dictate, when the municipality or other taxing entity does not collect taxes because of these tax expenditures, ultimately that cost is borne by different taxpayers, resulting in a shift of the tax burden and the same result as if taxpayer dollars were expended.
“In other words, when New Jersey does not collect tax revenue it would otherwise be able to collect, the granting of special tax relief is the same as if it had expended dollars,” Drs. Daniel Mallinson and David Carr explained in the policy briefing.
According to the policy brief, proponents of these tax abatements have often argued that they are an incentive to attract business and economic development, that they can be used to encourage certain behaviors by private actors that are beneficial to society. “Most governments have provisions in their tax codes to provide preferential treatment to reward those individuals, activities, or organizations that it believes deserve special treatment or, more broadly, as an indirect way of achieving public purposes,” Mallinson and Carr noted.
Other arguments advanced by advocates of the tax expenditures include that that they can be used to correct inequities in the state’s overall scheme of taxation, among other goals.
Critics, on the other hand, have claimed that the “indirect” nature of tax expenditures has led to a reduction in fiscal transparency, and that once written into law, tax breaks are rarely revoked. One argument advanced by critics of tax expenditures on transparency is that they are rarely on the agenda for public debate. “Lack of transparency means that tax expenditures rarely become part of the fiscal debate,” the researchers wrote. “Once established they tend to maintain themselves.”
Tax break opponents have also noted that the inherent nature of tax expenditures can be perceived as giving “special treatment” to those benefitting from them, and little evidence has confirmed that they even achieve their intended purpose.
The report was released by the University’s William J Hughes Center for Public Policy and can be viewed in PDF format below: