Every year, New Jersey gives away billions of dollars through tax credits, deductions, exemptions and cooperative agreements that – once enacted – seldom get reviewed. No one knows how much money the state forgoes because few people have been interested – until now.
Despite not being found in any appropriation line in the state budget, these “spending initiatives” represent spending. Unlike the spending that takes place in the budget, which must be reauthorized each year, these credits, deductions and exemptions – collectively known as tax expenditures – are part of the tax code. Because this form of spending is largely invisible, it gets little scrutiny.
Every program that receives no scrutiny has the potential to crowd out more important programs. That is because every dollar the state doesn’t collect is a dollar that must be raised by increasing an existing tax rate, taxing something else or providing fewer services.
Like traditional spending, tax expenditures are policy decisions that reflect government’s priorities. They cost state treasuries money in much the same way as direct spending for schools, health care or road construction. The only real difference is that instead of collecting and paying out money, this money isn’t collected at all. One might think this is more efficient than collecting and redistributing revenues. That is the case only if the benefits of these programs are reviewed annually along with programs requiring a direct appropriation.
Some tax expenditures are good and reflect taxpayers’ beliefs. In New Jersey, for instance, we do not collect sales tax on food, clothes or prescription medicine. These policy decisions cost the state hundreds of millions of dollars a year in revenue, however most New Jersey residents would agree with those choices. There would be less agreement about the decision to grant special interest tax credits to a specific business, especially if that business costs the state a lot and there was no proof of its overall benefit to every resident, not just to the few recipients of those credits.
Another costly example of a tax expenditure is the long-standing agreement between New York and New Jersey that taxes residents’ income based on where they work instead of where they live. New York State actually tracks and publishes this information. Based on their reporting, in 2004, that agreement cost New Jersey about $1.5 billion a year, a number that is likely higher now. Under this agreement, most people who live in New Jersey but work in New York pay more to New York than they would to New Jersey. New Jersey has a different agreement with Pennsylvania. As a result of that agreement, New Jersey and Pennsylvania incomes are taxed where a person lives, not where he or she works. Whether that is a benefit or a cost to New Jersey is unknown because we don’t collect and analyze the information.
Although most states track this information and make it public, New Jersey does not. This would change if a bill introduced by Sen. Barbara Buono, chairwoman of the Senate Budget and Appropriations Committee, becomes law. Sen. Buono’s bill would require the governor’s annual budget message to include a tax expenditure report, which would list each tax expenditure and its cost to the state.
In all likelihood, the totals would be significant. Washington State, for example, has reported that its 567 state and local tax expenditures cost nearly $99 billion a year in lost revenue; Oregon reports that its 362 expenditures cost nearly $29 billion; and Illinois’ 214 cost nearly $7 billion.
The idea of reporting this information is nothing new, even in New Jersey. In January 2006, Gov. Corzine’s transition team recommended that the state produce a tax expenditure report. Later that year, the state Division of Taxation developed a basic framework for a report, identifying 121 sales and use tax exemptions and exemptions, 44 gross income tax exclusions and 28 corporate business tax exclusions. Then, in November 2007, Gov. Corzine signed a bill into law requiring the state treasurer to produce an annual report with information on development subsidies. This report has yet to be produced.
Understanding how much the state spends through its tax code is even more critical now, as declining revenues will force New Jersey lawmakers to make more difficult decisions about how to spend taxpayer dollars. A tax expenditure budget is not a panacea. It will not automatically provide all the money the state needs to resolve its precarious fiscal situation. But, it will lead to more information, which can only lead to better choices, more appropriate spending and more accountability.
It is time for New Jersey to join the 41 other states, the District of Columbia and the federal government in recognizing that informed choices, whether they are direct appropriations in the annual budget or revenues foregone through the tax code, are ultimately better choices.