Tuesday, May 1, 2012

Corporate Welfare in New Jersey

Among the most notorious corporate welfare programs in the US is the State of New Jersey’s Business EmploymentIncentive Program, which grants subsidies to a relocating or expanding firm based on the personal income withholding taxes generated by its employees. In 2011, the BEIP accounted for roughly $73.4 million in Fiscal Year 2011 (FY2011), $178 million in FY2010, and over $1.4 billion since 1996

Business incentives have been a part of the tax codes of states since the beginning of the Republic. In 1791, New Jersey’s legislature created the “Society for Useful Manufactures,” an incorporation of business participants within a geographic district that would have their properties exempted from taxation and fees. Supporters claimed that economic incentives for manufactures would produce jobs, beneficial new products and technology, and additional revenue to the state through economic growth. Opponents argued that providing incentives would place state finances on a path to bankruptcy and interstate competition would harm the finances of neighboring states as well. It was also argued that by creating the Society and subsidizing its members, the State of New Jersey was picking winners and losers in the marketplace, setting up monopolies of already powerful elites at the expense of other producers, and establishing a preference for partial interests over general interests.

Flash forward to today and it a picture is easily painted of a deeply flawed incentive system that appears geared entirely towards firms with market power and huge profit margins. These firms receive public services without having to pay full price for them, so their tab must be picked up by others, especially smaller firms without market or lobbying power. 

Researchers from Rutgers University have defended the problem, concluding that the benefits of BEIP far outweigh its costs. I find their methodology highly questionable, and their conclusions may rest on a number of troubling assumptions. New Jersey Policy Perspectives is a vocal skeptic of the program, estimating that each “new job” (if it is in fact a marginally created job) costs the state roughly $17,000. NJPP contends that there are a number of more productive uses of state money that can produce the same amount of new jobs for a lower overall cost.

The most controversial aspect, however, may be the way BEIP is used by New Jersey: to induce firms to move to NJ from neighboring states, especially New York and Pennsylvania. Critics argue that these tactics lead to a “race to the bottom,” where only corporations who can price shop will benefit.

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