Report: N.J. tax incentives misguided

New Jersey in recent years has lavished generous tax incentives on big, established companies such as JPMorgan Chase & Co. and Subaru, in an effort to bring more jobs to the state or keep corporations from leaving.

But a new evaluation of the state's sluggish economic conditions suggests taxpayers could get more return on their investments with policies that target younger companies.

The economic report prepared by the international management consultants McKinsey & Co. holds up startups and firms that are less than 10 years old as the state's real "net-job creators."

It also points to policies adopted in other states that have aggressive angel-investor tax credits and incentive-monitoring programs as models for New Jersey.

"Other states have gotten higher returns by continuously monitoring the economic gains from their investment, enforcing clawback provisions for incentives that do not produce returns, and focusing investment in industry clusters where young companies can blossom," the report says.

According to its authors, the evaluation was prepared to help inform policy discussions with nonpartisan recommendations to boost a state economy that has been mired in slow growth coming out of the Great Recession.

The report's other recommendations include calling for a modernization of New Jersey's transportation infrastructure and launching a stronger effort to help match the state's workforce with the jobs that its employers are seeking to fill.

"No single institution or sector can make the changes the state needs," the report says. "It will take dedicated efforts by the private, social, and public sectors - and the involvement of us all - to make the Garden State a growth leader again."

New Jersey's 4.1 percent unemployment rate is lower than the national average, but the report from McKinsey, which has offices in Jersey City and Summit, focuses on the state's gross domestic product, which has grown at only half the national rate in recent years.

In 2013, Gov. Christie, a second-term Republican, worked with Democratic legislative leaders to overhaul the state's economic-development tax-incentive programs in an effort to boost economic growth.

Since then, more than $4 billion in incentives has been awarded through the Grow New Jersey program. But the ramped-up tax incentive effort has also drawn criticism from the right and the left, and an audit released this year identified weaknesses in the state Economic Development Authority's oversight of the incentive programs.

The McKinsey report, released Tuesday, says its own analysis revealed that more than 80 percent of the state's tax incentive deals have been directed at "older domestic companies." And that trend has been followed "even though younger firms and foreign companies, on average, invest more capital in operations and create more jobs."

The firm's analysis, which included interviews with more than 70 state business leaders, also determined that New Jersey spends roughly $174,000 for each job that is created or retained by one of the older firms, but $110,000 for every job in companies younger than 10 years.

"Large companies generally create relatively few new jobs, but young companies can double in size in a year or two and may be adding jobs for many years to keep up with growth," it said.

States like Virginia are also doing more to analyze the effectiveness of their economic-incentive programs, while a tracking of New Jersey's incentives that was authorized in 2013 isn't due to be released until 2018, the report says.

"The key is continuous exploration of these incentive programs and [determining] what's working and not working," said Steve van Kuiken, a senior partner with the firm who outlined the findings in a conference call with reporters.

On the issue of transportation infrastructure, Christie worked with legislative leaders last year to reauthorize the state Transportation Trust Fund for another eight years, boosting the annual spending of state dollars to $2 billion thanks in part to a 23-cent gas tax increase.

But some questions have also been raised about how infrastructure projects will be selected for funding as the reauthorization plays out, and as total investment soars to near $32 billion, counting federal matching dollars.

In the area of workforce development, McKinsey highlighted recent efforts in Maryland to better link job training with the industries that are looking for more workers, including the formation of nonprofit partnerships between companies, secondary schools, and trade associations.

Another recommendation involved focusing the state's economic efforts on its core strengths, including the blossoming logistics and warehouse sector and areas like biotech and cybersecurity.

That way New Jersey can take advantage of its top-notch universities and proximity to a financial services industry that has become a leading target of hackers, the report says.