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New N.J. incentive: Stimulus or drain?

Some builders may get a share of a project's tax revenue. Critics say the public needs the money more.

Supporters of an economic-development tool signed into law by Gov. Corzine last week say it will kick-start construction projects and create much-needed jobs.

But critics argue the Economic Redevelopment and Growth Grant will drain untold millions in tax revenue from local and state governments to line developers' pockets.

The program, a form of tax-increment financing, allows developers to receive a share of the new tax revenue generated by their malls, hotels, offices, and other projects. In theory, the financing is provided only to developers who otherwise could not build a project.

Part of a wide-ranging package of measures designed to stimulate the economy, the incentive will allow developers who need financing help to essentially receive up to 75 percent of new state and local tax revenue generated from their projects for up to 20 years.

Developers may receive grants for up to 20 percent of the cost of their project, from 22 different taxes and fees, including sales and use taxes, property taxes, and corporate business taxes, making the program the most generous tax-increment financing law in the nation, according to one expert.

Proponents say it is a vital step in jump-starting the state's economy.

"The alternative is no job growth, a failing economy, and a lot of suffering for our residents," said State Sen. Raymond Lesniak (D., Union), who championed the idea.

Michael McGuinness, chief executive officer of the New Jersey chapter of NAIOP, the Commercial Real Estate Development Association, argues that New Jersey, more than other states, needs to make an effort to attract business growth.

"We are in a very high-cost state, highly regulated state, and the cost of doing business here is greater than in other states, so this 20 percent differential that the state is willing to put in to make these projects go is really needed and can make all the difference in the world to make New Jersey a bit more competitive than it currently is," McGuinness said.

Critics have a very different take.

"At a time when the state and so many municipalities are finding it so difficult to raise the money they need to continue providing essential services, it seems an especially poor time for state officials to authorize this kind of blatant giveaway to developers," said Naomi Mueller Bressler, a policy analyst for the think tank New Jersey Policy Perspective.

Environmentalists worry the program could subsidize development in environmentally sensitive areas.

"This is what we call 'sprawlfare,' " said Jeff Tittel, director of the New Jersey Sierra Club.

Conceived to promote redevelopment in blighted urban areas, tax-increment financing incentives have been criticized in various states for encouraging sprawl instead.

Almost every state has some form of tax-increment financing laws. New Jersey has had one little-used program since 2002.

The state's newest version expands the number of taxes and fees that can subsidize development, increases the number of areas where the grants can be applied, and cuts through some of the previous version's red tape.

Greg LeRoy, executive director of Good Jobs First, a national policy resource center that argues for greater accountability for development subsidies, called New Jersey's law "the most radical legislation in the country" for tax-increment financing.

"No state allows nearly so many forms of revenue to get diverted," he said. "The idea of diverting so much revenue and not even costing it out at a time like this when revenues are so depressed already strikes me as breathtaking."

No one knows exactly how much the program could cost taxpayers. A fiscal analysis of the legislation that created the Economic Redevelopment and Growth Grant concluded that potential cost and revenue were "indeterminate," and the enabling legislation set no limit on the amount of grants that may be awarded to developers.

It will be up to the state's Economic Development Authority to determine whether a project truly needs more financing than is available in the private sector and whether the state and local governments will benefit by providing the subsidy.

Many tax-increment financing laws, including New Jersey's, contain a "but for" clause that states developers may receive the grants only if they would not be able to build their projects but for the grants.

Critics argue it is nearly impossible to determine whether a developer truly needs the subsidy or just wants to increase profit.

LeRoy has written that the "but for" test "has in most states become at best a pro forma gesture and at worst a fig leaf enabling public officials to avoid the charge of 'giveaway' and claim credit even for projects that would have occurred anyway."

Bressler said studies showed tax-increment financing grants typically move businesses and development around within a region, say from one town to its neighbor, instead of drawing development from outside.

Another concern is that new revenue - especially with a substantial share diverted back to developers - might not cover additional services that need to be provided, such as schools and police protection.

Lesniak dismisses such criticisms.

"We're not diverting one dime," he said. "Without the financing, there will be no revenues."

Critics of the program, Lesniak added, "just don't want jobs.

"They don't understand the pain and the suffering of people who don't have jobs available to them," he said.

The grant program has already sparked interest across the state, said Caren Franzini, chief executive officer of the Economic Development Authority.

"We're hearing from a number of municipalities, a number of developers with projects they have been working on for some time and have not been able to proceed," Franzini said.

Among those who lobbied in favor was Stefan Pryor, Newark's deputy mayor for economic development, who called it "an ingenious method to help launch projects."

"We compete for projects nationwide and worldwide, and now we can legitimately say that Newark and New Jersey are positioned in a way that's competitive with almost any other player in the region, country or world," Pryor said.

"This legislation provides Newark and New Jersey with one of the finest toolboxes in the country," he said. "Now the challenge is to put the tools to work."