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TRENTON – A new research report today shows that New Jersey is at high risk for misuse of tax revenue thanks to a problematic system of funding commercial development. The report outlines problems with the growing trend among cities to borrow against future growth and divert tax revenues as a way to attract economic development.
“Localities too often use tax-increment financing, as an all-purpose subsidy for developers rather than its original purpose as targeted tool to revitalize neighborhoods with chronic underinvestment,” said Gideon Weissman of NJPIRG, the New Jersey Public Interest Research Group. “New Jersey has some of the biggest potential for abuse because in most states, revenue is limited to property taxes, but in New Jersey government officials can tap up to 19 separate sources of incremental local and state revenue for use in tax-increment financing.”
There have already been signs of abuse. The Triple Five Group, a Canadian firm, is set to receive up to $350 million in tax breaks through tax-increment financing (TIF). New Jersey TIF law was expanded specifically to accommodate the Triple Five Group to encourage its development of the American Dream Mall at the Meadowlands, and is an example of the potential for expensive corporate baiting that is possible under the guise of tax-increment financing. Details of that deal can be found here.
Sarah Stecker, Policy Analyst for New Jersey Policy Perspective, and author of the organization's report on tax-increment financing, explained how this subsidy tool can be misused: "Tax increment financing in New Jersey is a generous subsidy for developers that can take advantage of an unrivaled number of state and local revenues in over 80% of New Jersey municipalities. This is not a targeted subsidy for struggling areas but rather a big business giveaway."
Forty nine states have legalized TIF deals, according to NJPIRG’s new report. These deals divert future growth in the tax base from a prescribed area toward special development projects over many years, sometimes hurting school departments and other public structures that must then be financed from a narrower tax base.
“It’s not hard to understand why municipal officials like a sudden infusion of cash and developers like the subsidies, but localities need to ensure that use of these tools is closely targeted to advance clear long-term needs rather than development in general, “ said Weissman.
“If done badly, tax-increment financing can steer development away from the places that most need it,” added Weissman. “It can also leave municipalities with unexpected shortfalls or create slush funds with little public oversight.”
The report recommends stronger guidelines to ensure TIF becomes more targeted, transparent, accountable, and democratically governed. For instance, TIF deals should be:
• Used only as part of advancing part of a specific development strategy in limited areas.
• As temporary as possible, with unspent funds promptly returned to the general budget if left unspent after a certain number of years.
• Capped by the state as a percent of a municipality’s land that can be placed under TIF agreements.
• Conducted through a fully open and democratic process, with information about TIF projects placed online like other best practices for spending transparency.
• Accompanied by clear, measure benchmarks for the responsibility of developers.
The report can be accessed at njpirg.org.
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