New Jersey's First Tax Expenditure Report: A Disappointment

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In January, New Jersey took an important step forward by enacting legislation that required it to finally join the vast majority of other states already producing “tax expenditure reports.”  These reports catalogue and measure the plethora of special tax breaks offered in a particular state, thereby providing policymakers with an invaluable tool for understanding the complex workings of their state’s tax code.  New Jersey’s first such report was issued earlier this month, and was advertised in Governor Christie’s budget as evidence of the Governor’s “commitment to transparency.”  Unfortunately, the report is a significant disappointment, and fails to even come close to living up to the basic legal minimum requirements established in the legislation the state enacted just two months earlier.

In some ways, the shortcomings of the state’s first tax expenditure report are unsurprising, and even forgivable.  As we pointed out when we first discussed the state’s new reporting requirement this past January, the legal requirements created for this report are quite daunting.  And with only two months to create the report, the state’s Department of Taxation can be forgiven for not being able to meet the full range of requirements.

What is less excusable, however, is the complete absence from the report of any indication regarding what information or other resources the Department would need to meet the state’s legal requirements, and what steps the Department plans to take to continue moving toward fulfilling these requirements in the future.  As things currently stand, the reader is left only to hope and wonder whether or not the Department possesses an interest, and capacity, for improving upon its current “bare bones” report in the years to come.

Looking specifically at the legal requirements, the report itself confesses that it fails to meet four of the seven requirements articulated in the law passed earlier this year.  Those four requirements are that the report:

(1) describe the objective of each State tax expenditure,

(2) determine whether each State tax expenditure has been effective in achieving the purpose for which the tax expenditure was enacted and currently serves, including an analysis of the persons, including corporations, individuals or other entities, benefitted by the expenditure,

(3) the effect of each State tax expenditure on the fairness and equity of the distribution of the tax burden, and

(4) the public and private costs of administering the State tax expenditures.

Presumably, the Department has at its disposable much of the information needed to produce the kinds of distributional analyses required by the third criterion above.  Adding these analyses to next year’s report would be the easiest way to maintain the state’s momentum toward greater transparency that was generated by the state’s new law.

The second criterion, by contrast, may be the hardest for the Department to fulfill.  Washington State is the only state that currently reviews the effectiveness of its tax expenditures on a systematic basis — and its experience makes clear that doing such reviews well requires a significant amount of effort.  New Jersey legislators should have done a better job outlining the types of criteria they would like to see used in conducting these evaluations, and should have provided the Department with the additional resources it will likely need to execute those reviews.  Clearly, the Department of Taxation and New Jersey’s elected officials have much work to do before the state’s tax expenditure report can be expected to live up to the requirements contained in state law.

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