The state’s UEZ program will allow for a revenue boost in places like Downtown Newark, but critics say it’s little more than a way to give businesses a tax break. (Terrence T. McDonald | New Jersey Monitor)
Questions about whether the Urban Enterprise Zone program actually helps residents living in designated communities have circulated for years.
The 38-year-old program allows businesses in certain economically disadvantaged areas to charge consumers a reduced sales tax rate of about 3.3%, while providing them with a series of other tax breaks meant to revitalize distressed communities.
The state finalized a slate of reforms last week supporters say will revitalize a program that saw its funding slashed under Gov. Chris Christie. But critics, who for years have questioned whether the UEZ program helps residents or is merely an avenue for business tax cuts, insist it remains a poor use of state funds.
“This resurrected program is yet another example of state lawmakers ignoring the research when it comes to the economic benefits of corporate tax subsidies,” said Sheila Reynerston, senior policy analyst at New Jersey Policy Perspective, a progressive think-tank.
The program is one of many state initiatives meant to lower unemployment and poverty rates while boosting incomes in target areas. Historically, the record is mixed.
A 2019 assessment of the UEZ program conducted by the Department of Community Affairs found the tax breaks provided to residents and businesses, but chiefly the latter, often succeeded in slowing down unemployment growth but largely failed to reduce poverty rates.
Most municipalities hosting an urban enterprise zone — places like Newark, Jersey City, and Camden, along with other cities and some shore communities in Cape May County — also saw less growth in area median income than comparable non-UEZ towns.
Some businesses have charged their patrons the reduced sales tax rate for more than 30 years, raising the question of whether they are actually economically viable or are being propped up by state subsidies.
Return of UEZ funding
The program’s proponents argue the aid is critical as New Jersey attempts to move its economy out of a pandemic-induced slump.
“When you’re talking about pandemic impacts on businesses in these challenged areas, that kind of help is needed and should be welcomed,” said Bob Considine, chief communications officer for the New Jersey Business and Industry Association. “We like to say great businesses make great communities. If a business can’t sustain in these areas, you’re compromising local jobs and local investment.”
The reforms Lt. Gov. Sheila Oliver signed into law last week did little to shift the balance of benefits to residents, though it did reintroduce Zone Assistance Funds much-missed by local officials.
Those funds — filled with a portion of local sales tax collections that are levied at half of the state’s 6.625% sales tax rate in UEZs — were used to bolster public and private development before Christie diverted the funding into the general fund to balance the state’s budget in 2011.
Fund investments before then were varied. Some were used to build affordable housing. Others were used to stand up vocational training programs, while yet others offered loans to businesses or boost funding for local law enforcement.
“The UEZ program is designed to benefit not only the residents of a community — who pay a discounted sales tax rate on goods bought at UEZ businesses — but also the communities themselves, which will receive a share of the $40 million in Zone Assistance Funds appropriated in FY22 that they can direct towards their own economic and community development priorities,” said Darryl Isherwood, a spokesman for the governor.
The $42.5 million appropriation made under the new law is set to increase by as much as $40 million in future years, to an annual total of not more than $82.5 million. The recently signed bill imposes caps on public safety and administrative spending using zone funds.
But even after the new reforms, the vast majority of UEZ programs are meant to benefit businesses within the zones, not people living in them.
On top of charging a reduced sales tax rate, qualifying businesses can purchase office supplies, construction materials, and similar items tax-free. Certain zone businesses are exempt from energy sales taxes, receive unemployment insurance subsidies and tax credits against the state’s corporate business tax. The latter is pegged to hiring local residents.
Critics see the balance of the program as a pro-business handout not unlike voluminous tax credit programs administered by the Economic Development Authority that have largely been a net loss for the state’s finances.
“It may have better guard rails and a smaller price tag, but don’t expect these reforms to generate tangible benefits for families living in the targeted zones,” Reynerston said. “It’s a tax break for businesses, plain and simple.”
A survey conducted as part of the DCA’s 2019 assessment found more than half of participating businesses (58%) increased capital investments, while only 35% said the program led them to hire a greater number of employees.
The recent reforms included some measures meant to limit some business benefits. Business-to-business purchases are only exempt from sales tax collections for the first $100,000.
Preparing to expand
Concerns over the program haven’t extended down to the local level, where officials tasked with administering enterprise zones are preparing to expand ahead of a surge in funding.
In Kearny, officials may resume a downtown streetscape project that stalled after the 2011 funding cuts, and the town is expecting to kickstart a business loan program that it was forced to deemphasize amid a funding shortfall, Kearny UEZ coordinator John Peneda said.
The town offers those loans to UEZ businesses for equipment purchases — new refrigerators for a restaurant, say — and capital improvements.
“I’m just happy,” Peneda said. “We’ve been through the desert, and we finally got to a little bit of an oasis now. It’s great to see funding coming back to help.”
But that aid likely won’t be around forever. The new law set expiration dates for zone designations, meaning benefits will eventually sunset absent more legislation.
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