Gov. Phil Murphy this month announced a sweeping plan to invigorate the New Jersey economy. It’s intended to focus on getting improvements that people can feel, in things like the poverty rate and wage growth.
Much of it sounded familiar from many past plans, including initiatives in job training, transportation and housing. But at its center was a new idea — the state will partner with venture capitalists to fund startups in New Jersey that they hope will succeed.
This would be a significant departure from past practice, in which the state has lavished incentives — typically credits on future taxes — on companies that relocate to or merely don’t leave New Jersey. Murphy said he wants to prioritize job creation over job retention and to revamp two expiring tax-credit programs awarding about $1 billion annually.
Companies only get those tax credits if their earnings in New Jersey generate the taxes to write off. In the well-known Atlantic City example, the former Revel casino hotel was eligible to have $260 million in state taxes reimbursed over a 20-year period, but didn’t have the earnings and tax liability to claim the incentive.
Under Murphy’s plan, a startup would get the investment up front. The state as an investor would make money if it succeeded — as well as benefit from its jobs and business activity — but lose its money if the startup failed as many do.
Venture capitalists would propose projects to the state and if selected, would be half partners in the investment. Murphy said this would help ensure the startups have merit.
The governor deserves credit for coming up with a novel approach to encouraging new business in New Jersey. But his funding mechanism is the same old borrowing against the future.
The state’s $250 million share over five years would be generated by auctioning off future tax credits to existing businesses. That’s just taking tax revenue from the future and spending it today, no different than the borrowing binge the state has been on for years.
The main problem, though, is that Murphy’s plan is another attempt at alleviating a symptom — companies fleeing the state, too few coming here or enlarging their operations — instead of addressing the underlying sickness.
The week before his announcement, the nonprofit and nonpartisan Tax Foundation provided the usual annual reminder. Once again, for at least four years in a row, it found New Jersey has the worst business tax climate of any state. Income taxes, property taxes, corporate taxes and sales taxes are all at or near the highest in the nation.
The Murphy administration’s corporate tax surcharge and higher personal income tax bracket couldn’t sink the state’s business climate ranking further, but it did reduce its Tax Foundation overall score, which was already the lowest. That strengthens New Jersey’s claim as worst state in which to do business.
Murphy is correct that the New Jersey economy isn’t working for many residents, with poverty increasing at a faster rate than in all but three other states and median wages falling faster than in all but one.
He’s wrong, though, to think that state subsidies — even of startups — will make a difference. Only deep reform of the tax and regulatory climate can do that.