Ashley Balcerzak North Jersey Record
Published 5:04 AM EDT Jul 3, 2019
Unlike other corporations awarded tax breaks, Horizon Blue Cross Blue Shield — New Jersey’s largest health insurer — didn’t go through the months-long application process that ends with a public vote before winning a major financial concession in exchange for creating jobs or spurring development.
It simply bought more than $83 million worth of tax credits from 29 companies that did.
New Jersey’s tax break programs allow companies to sell their credits — a practice that close to half of states allow — meaning that a business that either doesn’t qualify or doesn’t jump through all the hoops and prove its benefit to New Jersey can still subtract millions from what it owes to the state.
New Jersey businesses that win major tax breaks more often than not turn around and sell that credit to someone else. The public has no way of knowing what new company is using the tax incentive past the first sale, and until recently it was nearly impossible for the state government to track that information.
That means New Jersey residents can’t learn who profited from these lucrative sales. And they don’t know how much has been paid past the first transfer due to taxpayer confidentiality rules. Tax credits can be sold an unlimited number of times.
Tax break programs were designed to spur economic development and job growth and in some cases targeted some of New Jersey’s poorest cities. Opponents say they diverted tax revenue that could have been used for aid to public schools and other state services. Now, spurred by an audit that claimed there were few safeguards and reports that politically-connected insiders benefited, the programs face intense scrutiny.
“You need to see the web to be able to tell if inappropriate dealings are going on, and who’s befitting,” said Julia Sass Rubin, who studies tax incentive programs at Rutgers University. “You could have self-dealing and not even know it.”
Taxpayers also don’t know which companies are actually using the tax credits and getting millions of dollars back that they would have had to pay to the government. That means less money in the state’s hands to use for its priorities. And the practice has created an unregulated industry in buying and selling credits, often involving the same politically connected firms tied to tax credit laws.
“We think the lack of transparency in these markets is a big problem,” said Greg LeRoy, executive director of Good Jobs First, which tracks state and local subsidies across the country. ”The public may think differently about tax credits if companies they don’t like, say fossil fuel companies or banks that do predatory lending, are the ones that end up getting the tax breaks.”
In 2018, companies that received residential Economic Redevelopment & Growth (ERG) tax credits, which reward residential project development, sold all of the tax breaks the Economic Development Authority issued. About 63 percent of Grow NJ credits, which encourage job growth and retention in the state, were sold in 2017, the last year with complete data available, or $94 million out of $151 million issued, according to a NorthJersey.com and USA TODAY NETWORK New Jersey analysis of EDA data of initial tax credit sales that from 2013 to part of 2018. This data does not include sales to affiliated companies.
And looking from 2014 to 2017, companies on average sold 72 percent of their residential ERG or Grow NJ tax incentives, or $216 million out of $300 million, according to EDA data. Horizon Blue Cross Blue Shield bought the most amount of major business tax credits in that time frame, followed by a slew of insurance companies, according to Treasury data.
Story continues below graphic. Hover over to see the amount of distributed tax incentives that were sold:
It’s not just the public that is kept in the dark: Even the two agencies overseeing the programs, the Treasury Department and the Economic Development Authority, weren’t able to see all the links in the chain until a credit was eventually cashed in. But since they couldn’t track the progress, they had no way to predict what company would eventually use the credit and when. Businesses have up to three years after they receive a break to use it.
And since companies can use these incentives against two different types of taxes, corporation and insurance taxes, the Treasury Department wouldn’t know where in their books to expect less revenue, which complicates its budgeting projections.
“What we don’t know with any certainty is how approved tax credits are being utilized by taxpayers,” Treasurer Elizabeth Maher Muoio said to state legislators in 2018.
New Jersey’s two major tax incentive programs, GrowNJ and ERG, are the subject of multiple investigations and expired June 30. Reports from the state comptroller and a task force hired by Gov. Phil Murphy highlighted apparent shortcomings in how the Economic Development Authority administered the tax breaks.
The comptroller, the state’s government spending watchdog, said the agency appeared to lack processes that would verify whether or not companies created the jobs they promised in order to win millions of dollars in incentives. The governor’s task force said in a report that the EDA didn’t properly train its staff and in some cases didn’t catch discrepancies on applications that may have been grounds for denying the tax breaks.
Legislators sent a bill to Murphy that would extend the deadline of these programs through the end of January, so the tax credit fight wouldn’t be dragged into budget negotiations. Murphy said he would veto the bill.
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State can finally track credits
This summer the Treasury Department launched an online tool that will, for the first time, allow the agency and the Economic Development Authority to track transfers between companies as they happen, instead of waiting to see when a paper certificate would be used.
“Quite frankly, we were surprised and a bit alarmed to find out that the previous administration had very little oversight in place, particularly when it comes to tracking the transfer of tax credits,” said state Treasurer Maher Muoio. “With more than 70 percent of tax credits transferred to date, the need for additional oversight and monitoring is critical.”
Before then, a company that wants to sell its tax credit fills out a form that Treasury’s taxation branch reviews to make sure meets the requirements: Does the buyer have a tax liability? Was the credit sold at a price that is at least 75 percent of its value?
But after this first sale from Company A to Company B, the state didn’t have a way to track any subsequent transfers until the tax break was cashed in, and there is no limit to how many times a credit can be sold. And while the public can request information about this first sale, the state won’t give New Jerseyans the name of the final company that used the credit, citing strict tax confidentiality rules. This new online system also won’t be available for the public to see.
Why allow sellable credits?
The ability to sell incentives isn’t unique to New Jersey; about 20 states allow businesses to transfer a tax credit in some way, according to a May 2019 analysis by Moss Adams, a public accounting firm that among its services helps clients buy and sell tax breaks.
Story continues below map. Light blue states allow sales of tax credits.
Sellable credits make those programs more attractive to businesses. Companies that win a credit may not have as big a tax liability as the amount they get in a tax break, like nonprofits or developers that don’t pay certain taxes, or start-ups that haven’t yet become profitable.
So for example, Company A may only owe $100,000 in corporate business tax to the state, but the EDA awarded the business $200,000 for a year’s tax credit. That would leave $100,000 essentially useless if Company A couldn’t sell that amount to someone else.
“Calling them tax credits is a misnomer,” said LeRoy of Good Jobs First. “The value of the credits is usually so many more times how much a company actually owes in tax liabilities. They need some way to get value out of them.”
And as an additional perk, companies no longer have to pay taxes on the tax breaks they sold. Before Chris Christie signed a bill in Jan. 2018, companies that sold awards had to pay state gross income tax or corporate business tax on the earnings from the tax credits.
Biggest buyers and sellers
Insurance companies buy about half of all EDA tax credits sold, Treasurer Maher Muoio told state lawmakers in her April revenue update, noting that the state didn’t collect as much money from the insurance premiums as expected.
Horizon Blue Cross Blue Shield bought the greatest value of tax breaks, or approximately $83 million worth of incentives from 2013 to 2018.
A Horizon spokesman said the Newark-based health insurer first purchased the tax incentives to help support the mixed-use housing and retail project in Newark, and later to help redevelop urban areas including Camden, Jersey City and Atlantic City.
“Horizon also purchases tax credits that support community development projects that have no tax benefit to Horizon,” said spokesman Thomas Vincz. ”When a tax benefit is achieved, savings are ultimately returned to our members through lower premiums or reinvested to deliver improved products and services that help our members get the care they need.”
Story continues below chart:
Horizon has given tax savings back to its members in the past: After President Donald Trump’s tax law was enacted, the company said it would return $150 million from its tax windfall to its 3.8 million customers this year.
Other insurance companies high on the buyers’ list include Metropolitan Life Insurance Company, Liberty Mutual and New York Life Insurance.
Horizon didn’t buy all their credits from one source; they came from a mixed bag of businesses including the Cooper Health System, Rent the Runway and Forbes Media.
Among the top overall sellers: electronics company Panasonic Corporation, insurance company Prudential Financial and supermarket company Wakefern Food Corporation.
“New Jersey businesses face some of the highest costs and taxes in the country, and these credits helped make it possible for Wakefern to keep our operations in New Jersey and not go out of state,” said Karen Meleta, a communications vice president at Wakefern Food Corp. “The tax credits supported the building of two new facilities in New Jersey — one in Newark and the other in Elizabeth — and resulted in hundreds of jobs in the region.”
Companies may also transfer their incentives to their own branches that have greater tax liability, like in the case of Prudential Financial. Prudential transferred $15.5 million worth of credits to its subsidiary Pruco Life Insurance.
Story continues below chart:
An industry created
Where there are buyers and sellers, there will be someone to connect the two.
Brokers are cropping up that help companies navigate this market, and they don’t need to be licensed and aren’t regulated by the EDA or Treasury.
“We would not consider these individuals ‘brokers’ as they are not purchasing and selling the tax credits themselves, but are merely facilitating a transaction between two parties. The NJEDA does not track or publicize a list of these individuals,” said EDA spokesperson Virginia Pellerin.
Pellerin said the EDA does post online a list of companies that bought credits in the past and agreed to listing their names. Six companies are the list. Close to 100 businesses bought credits from award-winners, according to EDA data requested by NorthJersey.com.
To understand the job of a broker, take Parker McCay. The law firm advertises on its website: “We have negotiated complex, long-term tax credit purchase and sale agreements for national companies looking to acquire credits to offset various business taxes resulting in substantial savings, including a 10-year tax credit purchase agreement valued at over $13 million.”
Murphy’s task force reported that an attorney at Parker McCay had a hand in crafting the legislation that created the tax incentive program, and represents many of the companies that won tax breaks in Camden. Parker McCay is helmed by Philip Norcross, the brother of insurance executive George E. Norcross III. Companies linked to George Norcross received $1.1 billion in tax breaks out of the $1.6 billion awarded in Camden since 2013, when the tax break programs were revamped, according to a ProPublica and WNYC investigation.
Or look at a power point presentation prepared by brokerage firm Garden State Incentives Group for a Chamber of Commerce Southern New Jersey 2015 financing workshop, included in emails released between Parker McCay and EDA employees.
“How can I leverage my credits into cash for: early capital and fee payments,” the slideshow text says. “Finding a group to purchase is not an easy task. GSIS works hand in hand with businesses to make this happen.”
The presentation includes a step-by-step list about how the process works, starting with the EDA applications (time frame: 30 to 90 days, depending on company size) to the application approval (time frame: 45 to 60 days, it says.) Garden State Incentives Group said companies should even line up potential buyers before they ever receive their tax credits.
As the two major programs, GrowNJ and ERG, expired June 30, Murphy proposed a new five-pronged tax incentive system that includes changes to how companies can sell their incentives. State lawmakers admitted they haven’t examined the plan in-depth, and instead requested to extend the existing programs.
One major difference? The incentive can only be sold once.
“Transfers can play a role in making tax credits better for specific companies and certain circumstances, but you want to make sure they’re appropriately calibrated and measured, so there are fewer opportunities to take advantage of the system,” said Tim Sullivan, the new chief executive officer at the EDA.
Other tweaks will make sure tax breaks are sold for at least 85 percent of their original value, instead of 75 percent, and the EDA will publish that sale information on its website for the public to easily access.
“One of the hallmarks of governor’s plan that is so smart is that it’s committed to transparency and accountability,” Sullivan said. ”The public has a right to know what it’s been asked to invest in and what it should expect in return and the ins and outs of how that investment works and letting the sun shine in.”
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