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Focus on Tax Incentives Throws New Jersey's Approach to Jobs Out of Balance

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New Jersey has a big problem holding and attracting jobs. It is a laggard in recovering from the Great Recession. Its unemployment rate of 9.3 percent is the seventh highest in the country. To date, it has recovered only 44 percent of the jobs it lost when the nation's economy came close to meltdown. Next door, New York has restored 125 percent of its lost jobs; Pennsylvania, 76 percent.

It's no wonder, then, that the state is in real danger of losing its standing as a high-income, high-wealth state that draws smart, highly-educated, enterprising workers from around the world. Working and middle-class families are struggling, losing ground against historically low inflation rates. The median household income has dropped 8.4 percent between 2008 and 2011. But the cost of living didn't drop, so the squeeze is on.

What's our problem? If you listen to the state's leaders, the explanation is that New Jersey's taxes are too high and its government too big. If we just cut both tax rates and public services, the state will bounce back. At least that's what we're told... over and over again.

New Jersey has great assets. We're in the middle of the worlds largest market. We border the world's capital -- New York -- and a revitalized Philadelphia to the south. We offer scores of small, verdant, bustling communities with great public schools and convenient access to cultural hubs. Our workforce has the highest proportion of researchers, scientists, and engineers in the nation.

When Bausch and Lomb located its pharmaceutical division in New Jersey, its CEO reported, "We came for the talent and the location." And when Allergan chose Bridgewater for its research and development center, its CEO said: "The biggest driver [of the company's relocation decision] is the ability of the educated, trained workforce." Incidentally, both companies received tax subsidies.

Yet, with all of these attributes, New Jersey pursues a single strategy to restore jobs and prosperity: tax cuts and incentives. In the last three years, the state has awarded $2.1 billion in subsidy grants in an effort to boost the economy, as we reported in a recent study. This aggressive uptick in incentives has been heralded as the way to put New Jersey's economy back on track, but by making this tool the sole focus of our economic development efforts, the state's approach is severely out of balance.

Let's be clear: as long as most other states offer similar incentives in their drive to attract and hold jobs, New Jersey must not disarm. The answer is not to exit the battlefield, but to broaden and enrich the alternate strategies we pursue.

Here are just some of the problems with New Jersey's over-reliance on bountiful tax subsidies:

  • Subsidies go to companies that do not really need them, for projects and jobs that would have happened without taxpayer support. Prudential, for example, was founded in Newark in 1877 and stayed after the 1967 riots. Did it really need a211 million subsidy to stay in the Brick City?
  • The difficulty of assessing the threat to the state of losing jobs to competing neighbors. A cottage industry of site location consultants has grown up to "document" that a Jersey corporation visited three sites in Pennsylvania, negotiated a package of incentives, checked commuter times, etc. Sometimes the threat is real, frequently it's not -- it calls for a tricky judgment.
  • In recent years, the awards have gone to job "shufflers" -- not job "creators." Corporations like Prudential, Panasonic, Honeywell, Goya and Burlington Coat Factory were all given large grants largely to shift jobs a short distance.
  • New Jersey's future taxpayers pay the bill and the state suffers the loss of tax revenues for investment in infrastructure and improved opportunities for working and middle class families.
  • Most importantly, the drumbeat message that tax rates explain our economic woes shuts out the public conversation on making the kinds of investments -- in education, infrastructure, and other public goods -- required to exploit New Jersey's great assets.

New Jersey could have learned a lesson with the departure of thousands of pharmaceutical research and management jobs in the last two years. When Roche and Sanofi-Aventis departed they did not chose low-tax states like Mississippi or Kansas, but, instead, picked the three most expensive cities in the United States: San Francisco, Boston, and New York. The good jobs go to places where there are great universities (think Princeton and Rutgers) and a welcoming culture for highly educated persons.

Does this mean businesses don't want subsidies? Of course not. If tax incentives are on the table, companies would be foolish to pass them up -- after all, they must protect their bottom line.

What it does mean, as economists and CEOs alike will tell you, is that these subsidies are more often than not merely icing on the cake -- they aren't at the top of the list when a company is deciding where to locate. Yet subsidies do remain at the top of one crucial list: New Jersey's list of tools to attract good jobs. And that's what needs to change.