Carlos Merced has lived in Camden, N.J., for 30 of his 34 years. He has worked a lot of jobs in that time, but only one of them — a short stint as a teaching assistant right after he graduated from high school — was actually in Camden.
He takes what work he can find to support his 3-year-old daughter, but eventually, he’d like to find a job in the city he lives in — and something to help ease the city’s 16 percent unemployment rate, 10 percentage points above the national average.
“Even a Walmart out here,” he says. “Something that people can actually come to and apply for and get a job. Some people don’t have the money to travel outside Camden to get a job. Some people don’t have cars. Some people can’t do it.”
A huge effort is now underway to try to fix that problem: $614 million in tax breaks promised over the past two years to bring big employers to Camden. So far, the state’s Economic Development Authority has made deals with Lockheed Martin, the Philadelphia 76ers, a hospital and a manufacturer of nuclear reactor components. And last week, it approved $117.8 million for Subaru, which is moving its headquarters out of neighboring Cherry Hill and into an old building just outside the city’s rundown core.
The incentives aren’t all the state has offered corporations. In the 2010s, it has handed out more than $4 billion in tax breaks, as competition for jobs has heated up in the Northeast corridor. That amount is dramatically larger than it was in previous decades, according to calculations by the left-leaning think tank New Jersey Policy Perspective (NJPP) — the cost of a job created by each deal has more than doubled. The subsidies started getting even more generous last year, when the legislature passed a measure that consolidated the state’s incentive programs and targeted them toward particularly distressed areas.
The increase, however, flies in the face of economics. Evidence has been piling up in recent years that such subsidies usually don’t work — and if they do attract companies to a place where they wouldn’t have ended up anyway, the return on investment often isn’t as high as promised.
Firms ultimately make location decisions based on factors such as proximity to transportation infrastructure, the availability of skilled workers, and the overall cost of doing business — tax incentives, as the chief financial officer of Panasonic in North America said after accepting $102 million to move from Secaucus to Newark in 2011, are just “icing on the cake.” Over time, they undermine the state’s tax base, which means citizens and other businesses must make up the difference — even though politicians get to take credit for ribbon cuttings before anyone notices.
“Their fingerprints are erased by the time the cost of these incentives will be realized,” says NJPP President Gordon MacInnes. “Nobody will be held accountable for that. It’s a politically painless way to make it look that we’re bringing our economy out of the great recession.”
But is Camden a special case? The state’s economic development officials have made a bet that recruiting a critical mass of large corporations to a depressed area will generate enough investment to turn it around — and are offering more for companies to move there than anywhere else, in a kind of massive Camden stimulus.
If they pull it off, they’ll have bucked economic orthodoxy, and won.
Merced remembers when Camden wasn’t a pit of crime and poverty. In the 1990s, even, it had multiple grocery stores — it now has one, as of recently, up from zero — and work for most anyone who wanted it. His father worked for the Board of Education, and his mother was a daycare teacher.
“It was nice, it was nice,” Merced says. “There was good jobs out here. And then they just started closing up.”
But by the end of the 1990s, suburbanization had taken its toll on Camden, with both jobs and residents fleeing to the smaller towns with their sprawling office parks. The rest of the state was adding jobs fast as it shifted from manufacturing to information processing, hosting the back offices of corporations headquartered in New York and across the world.
Many of those jobs, however, were rendered obsolete by technology in the 2000s. New Jersey’s job growth leveled off, and took a sharp dive through the recession. It never rebounded with the vigor that New York and Pennsylvania did, in part because of the impact of Hurricane Sandy, and the federal government’s slow response.
Now, it’s set to lose 10,000 more jobs with the near collapse of the Atlantic City casino economy. After the building boom of the 1980s and 1990s, New Jersey has a vast overhang of aging suburban office space that has fallen out of fashion with the young and upwardly mobile. And on top of that, the Tax Foundation rated its business climate 49th out of the 50 states, with high tax rates for individuals and businesses.
So, why not improve that climate by lowering taxes for everyone, rather than picking and choosing who gets a free pass? James Hughes, dean of the School of Planning and Public Policy at Rutgers University, says overhauling the state’s business-unfriendly tax code is harder than it sounds.
“To change that would be a monumental political feat, both sides coming together, and those who are getting special treatment now will fight it to the death,” Hughes says. “What the state has been forced to do has been to compensate for that.”
Meanwhile, New Jersey’s neighbors have been just as aggressive in offering tax breaks of their own — New York state, which ranks just below New Jersey on the Tax Foundation’s list, handed out $709 million just last week. That cycle is almost impossible to break (just one place, bifurcated Kansas City, Mo., has really tried).
“It’s led to a Darwinian tooth-and-nail struggle for economic development between New Jersey and New York and Pennsylvania and New Jersey and everywhere else,” says Joseph Seneca, a professor at Rutgers’ School of Planning and Public Policy who used to chair the state’s Council of Economic Advisors. “The economics profession is pretty united that money would be better directed to do broader things. The logic of no state doing it is pretty compelling, but the states have been doing it since we became a nation.”
What strikes Seneca as really concerning, however, is the idea of awarding incentives not just for new jobs recruited to the state — but also “retained” jobs, which the company says would go to some other state were it not for a tax break.
For example: Despite the dubious wisdom of tax breaks for individual companies generally, few have complained about the state abating $82 million in taxes for the Philadelphia 76ers, which agreed to move their headquarters and a practice facility across the river from Philadelphia to Camden, bringing 250 jobs. But more people raised eyebrows at the idea of awarding $117.8 million to Subaru, for shifting jobs four miles from Cherry Hill into Camden, or $107 million for Lockheed Martin, which is moving 250 employees from Moorestown. Now, what’s to stop other corporations from threatening to leave, just so they can extract a tax break to stay?
“Now it seems you can’t get anything done in New Jersey because everybody expects someone to come in with a wheelbarrow full of money.”
“To me, the EDA is supposed to be a group that helps bring businesses from out of state to our state,” says Jeff Land, head of the Cherry Hill Republicans, which protested the subsidy for Subaru. “Now it seems you can’t get anything done in New Jersey because everybody expects someone to come in with a wheelbarrow full of money.”
Of course, there are better and worse ways to offer incentives for companies to create jobs in a given place. Some states have gotten burned by providing grants up front and scrambling to fill a budget hole when the company goes bankrupt. Many more simply fail to regularly and accurately assess whether companies were creating as much value as they’d promised.
Because at the end of the day, tax incentives are just cost-benefit analyses. You add up the gains from having the company around, subtract what you’re refunding in taxes, and if you’ve got money left over, the deal pencils.
That’s why New Jersey argues that it’s not actually giving money away at all. The Economic Opportunity Act has a formula that adds up factors such as whether the company plans to locate near transit and how much it’s expected to invest in a new facility, and assigns a dollar value to each job created. In the end, the economic value of the company’s presence must exceed 110 percent of the subsidies granted over 35 years (except in Camden, the bar is lower; the state just has to break even). If the company doesn’t hold up its end of the deal each year — does not hire as many people as it promised, for example — it pays full freight.
That works, however, only if it’s clear that the company was going to leave the state without intervention. So how does the state decide whether that’s true?
Let’s take the example of Subaru.
The company had expanded to several buildings in and around Cherry Hill, and wanted to consolidate into a single new headquarters. So it hired a real estate firm to shop around, and ended up seriously considering Philadelphia’s Navy Yard, to which the city and the state had attracted the corporate offices of Glaxo Smith Kline and Urban Outfitters. Subaru determined that Navy Yard would’ve been cheaper than the location Camden offered — an old building owned by Campbells Soup — and provided the analysis to New Jersey, which then signed off on $117.8 million in incentives over 10 years, in exchange for a promise that the company would keep the 500 jobs it has and add 100 on top of that.
Now, despite the overall argument that tax incentives for individual companies are economically inefficient in a macro sense — because they can sway companies to locate to places where they’re not as productive, and because they weaken a jurisdiction’s focus on fundamentals such as education and transportation — it’s possible that focusing a lot of firepower on one place could actually make a difference where all else has failed.
If you live or own a business in Camden, for example, there’s no reason not to be encouraged by the influx of corporate behemoths. It’s not costing you anything, at least in the near term. There will be some initial construction activity, and as New Jersey Economic Development Authority President and Chief Operating Officer Tim Lizura argues, having large businesses in town raises the profile of the city in a way that might attract other investment.
“There are tangible and intangible benefits,” Lizura says. Plus, big corporations sometimes give back to their communities, sponsoring Little League teams and food banks and the like. “You all of a sudden have a nucleus of leaders who are ambassadors of the city, stewards of the city.”
Clarence Fullard, head of the Rutgers-Camden Small Business Development Center, thinks the reputation thing matters for franchises thinking about whether to open a branch in the city. Fast-food restaurants, hotels and other kinds of service chains consider the presence of other big businesses when making location decisions. “I envision a lot of small businesses coming in around the first of the year, saying, ‘I’m looking to expand a second location,’” Fullard says.
But if you were someone without a college degree looking for a job, like Carlos Merced, you might wonder what kind of opportunities these new businesses will bring. The 100 people Subaru will hire, and even the 400 people Holtec will need to manufacture nuclear reactor components, are likely to require specialized skills. There’s no binding commitment to hire from the local community to do the work.
“There is a level of concern that the jobs that are being created through these incentives aren’t matching people who are already here,” says Raymond Lamboy, president of the Camden-based Latin American Economic Development Association. There’s also a sense that small businesses aren’t getting the same kind of help — his family owns a furniture store, which hasn’t received millions of dollars in assistance. “Where’s my tax abatement?” Lamboy asks. (Camden is covered by one of the state’s Urban Enterprise Zones, which carries some benefits for existing businesses, but nowhere near the special deals for companies relocating to the city.)
In response to the tax break for the Philadelphia 76ers, a coalition of churches and community groups mounted a petition drive to measure the success of incentives by the number of well-paying, long-term jobs they generate. That’s not something that just happens: It’s easy to build a corporate campus that people drive to from the suburbs and then leave. In fact, another attempt to infuse the city with cash for large projects already failed in the 2000s when the state took over the city, a Philadelphia Inquirer investigation found in 2009, leaving Camden’s neighborhoods just as poor and plagued with crime as before.
“The entire trickle-down assumption is people going to buy sandwiches at lunch, and that’s not going to have a big impact on the city.”
“A lot of these jobs are going to be fly-in, fly-out-type jobs,” says NJPP Deputy Director Jon Whiten, noting that Subaru’s staffers won’t need to move to Camden to work there (only one percent of Campbell’s Soup’s 1,200 employees live in the city). “The entire trickle-down assumption is people going to buy sandwiches at lunch, and that’s not going to have a big impact on the city.”
These days, the announcements of new employers and the construction of a few housing projects — plus the proclamations of a relentlessly optimistic mayor — have the headlines shading positive in Camden. It might take a while, though, before the city’s longtime residents really feel a difference.
“Invest in me,” Merced says. “Me as in I mean everyone in Camden city — then think about it, the people in Camden city can actually invest in the community. If we had jobs, then Camden would flourish again.”
Merced, for example, has a criminal record, which can be a barrier to employment. What he needs, and what thousands of unemployed residents want, is an entry-level job — or the training to do something higher level. So far, Camden’s newest corporate citizens have promised neither.
Correction: A previous version said that Subaru was moving into a building once occupied by Campbell’s Soup. Campbell’s owns the building, but never occupied it.