New Jersey Urban Enterprise Zone Program Assessment 2019

Authors

Thomas Edison State University
PEL Analytics
Anderson Economic Group
The John S. Watson Institute for Public Policy

Document Type

Article

Publication Date

2019

Abstract

In 2019, the State of New Jersey sought an evaluation of its Urban Enterprise Zone (UEZ) Program to determine the program’s economic impact and make recommendations for the program’s future. The John S. Watson Institute of Public Policy of Thomas Edison State University joined with PEL Analytics and Anderson Economic Group to produce the following study. The main recommendation of this analysis is to retain the UEZ Program while instituting various changes to make it stronger. Recommended changes in brief include reinstating some form of Zone Assistance Funds (ZAFs), creating a better system to collect data and track outcomes, assisting smaller municipalities with issues such as administrating revolving loan funds, linking the UEZ Program with similar state supported incentives, graduating businesses out of the program after a maximum of 10 years, developing a marketing component and similar measures that will be outlined in full later in this Assessment.

Both the quantitative and the qualitative data indicate that there are a variety of benefits that UEZ municipalities receive from the program, including suggestions that it assists with unemployment and poverty based on Municipal Revitalization Index data. However, it is unrealistic to believe that any single economic development program can lift a municipality with entrenched problems of distress and poverty to health and sustainability. The UEZ Program is only one tool in the state’s economic toolbox, but it appears to be a valuable tool. Therefore, there is no recommendation to replace or sunset the UEZ Program.

Since 2013, the UEZ Program has generated increased economic activity that has led to new state revenues as UEZ-certified businesses experienced greater output, earnings, and employment growth than nonparticipating businesses that were also located in UEZs. In addition, the program has had some success in attracting businesses from outside of New Jersey to the state. However, while the program created jobs and fostered economic growth, it is not clear whether the new economic activity generated tax revenues in excess of the taxes foregone by the State due to UEZ incentives. The net economic and fiscal impact analysis of the program was limited by the available data, as discussed in Chapter 3. This led to one of the main recommendations — that the State should strengthen its data collection and tracking system of UEZs in order to better determine outcomes and pinpoint possible improvements. Although the program appears to benefit participating businesses, an analysis of several place-based socioeconomic metrics in Chapter 10, including household income, unemployment, and home value show that individuals living in UEZs are not necessarily better off than individuals living in comparable non-UEZ areas.

The New Jersey UEZ Program was created in 1983 to stimulate revitalization in urban communities through various incentives, the most well-known of which is the ability of UEZ businesses to charge only half the standard sales tax rate. The program’s focus was job creation and economic development. Criteria for creating the zones mostly centered on unemployment figures. Currently, there are 32 zones, which are spread across 37 municipalities and home to approximately 6,800 UEZ-certified businesses. The first five municipalities joined the program in 1986; the most recent joined in 2002. The original UEZ designations granted to municipalities were set to expire after 20 years. Sixteen-year extensions were granted in 2001, and then another extension was given more recently to the original five UEZ municipalities whose designation had terminated. All UEZs are currently set to expire between 2023 and 2025.

At its simplest form, UEZ is a dedicated funding source for local economic development. The dedicated funding source is the State sales tax. As the incentive exists today, these State sales tax funds are deployed in UEZ communities to promote economic development by allowing local businesses and consumers to pay less in State sales tax, which amounts to a State subsidy (and therefore an expense) to those same businesses and consumers.

At the time of its inception, a portion of the sales tax generated by UEZ-certified businesses was used to create Zone Assistance Funds (ZAFs), a flexible revenue source used by UEZ communities for a broad range of activities in support of economic development. Following a study of the program in 2011, and under heavy criticism by the then-governor, ZAFs were eliminated. In addition, in the wake of the 2011 Assessment, administration changes were made to streamline the program’s certification, annual reporting, and recertification applications.

Disagreement over the program and its benefits led to this Assessment. Critics maintained the program has been ineffective and sought to end it. Proponents laud its opportunities for disadvantaged communities and their residents and are interested in expanding it. This Assessment seeks to provide quantitative and qualitative data on the effectiveness of the UEZ Program and recommendations for its improvement as the State considers its future.

New Jersey’s Municipal Revitalization Index (MRI) ranked all but one of the UEZ municipalities in the bottom 20th percentile with the majority in the 10th percentile. The UEZ municipalities also generally scored worse than the state average on factors like unemployment and median household income. But UEZ municipalities outperformed non-UEZ municipalities in terms of the average change in certain MRI indicators, indicating benefits from the program. For example, on average the unemployment rate in UEZ municipalities grew by 1.3 percent compared to an average increase of 1.6 percent in non-UEZ municipalities.

Furthermore, a review of UEZ enabling statutes suggests that earlier eligibility criteria more closely aligned with legislative intent while recent designations relied only on population and place, which could have the impact of diluting the program. Statutory language also grants extension of the UEZ benefit for both communities and businesses with few requirements, a situation that merits review by the state. For businesses, granting them an advantage that in some cases has lasted for decades raises the question of whether they are viable or are simply being propped up by the state.

As previously noted, the economic impact study in this Assessment determined that UEZ- certified businesses experienced more robust growth than non-UEZ-certified businesses located in zones, the program has attracted out-of-state businesses that would not have otherwise relocated, and the State has received new revenues from the program. However, these results must be viewed in the context of data limitations that makes a clear net economic impact difficult to discern.

The research team conducted interviews and surveys with businesses, UEZ coordinators, local and state elected officials, and other program stakeholders which provided additional program insight and a review of UEZ accomplishments. Chapter 7 of this Assessment contains several New Jersey municipalities’ UEZ Program case studies. Among them includes the creation of Steamworks, a satellite college program that exposes students and other City of Bridgeton residents to STEM-related training; the construction of the $320 million Mills at Jersey Gardens on a brownfield site in the City of Elizabeth; and the City of Trenton’s $30 million Roebling Market, which employs 360 people. The projects were made possible not only by the UEZ designation, but by the ZAFs component that was removed from the program after the 2011 Assessment. During interviews, UEZ coordinators as a whole lamented the elimination of ZAFs, which have been used to remediate properties, build necessary and supporting infrastructure, demolish unstable structures, and support project funding to attract private equity, among other uses including marketing the UEZ Program. ZAFs were one of the few sources of flexible economic development funds available to these municipalities. UEZ coordinators called for the reinstatement of some form of ZAFs, along with better tracking of the UEZ Program, better linkage between UEZ and other state economic development incentives, using a more regional model to assist smaller municipalities and creating additional roles for the State board that oversees UEZs. Coordinators also cited marketing and advertising of the program as one of UEZ’s weaknesses due to the lack of ZAFs.

The elimination of ZAFs profoundly changed the nature of the UEZ Program, which shifted from a comprehensive government program to a series of broad-based tax cuts and other smaller fiscal incentives.

The pre-2011 UEZ Program made significant targeted investments back into UEZ communities through ZAFs. Municipalities were given the freedom to choose how to invest that funding, focusing on local priorities upon approval by the State and the Urban Enterprise Zone Board. The post-2011 UEZ Program makes investments only through broad-based tax expenditures — i.e., tax cuts — to businesses and consumers. The consumer sales tax incentive is by far the most widely known aspect of it. But for municipalities, it is the ZAFs that tend to be the most missed.

The end of Zone Assistance Funds left a significant gap that no other program has replaced. While the state government and, to a lesser extent, the federal government, have enacted new significant place-based and other low-income community incentives that cover most UEZs, those new programs do not have the flexibility of the UEZ Program. The UEZ Program filled financial gaps for local priority projects when State and federal incentives came up short, often in the form of a direct grant or low interest loan.

UEZ-certified businesses that responded to a survey for this Assessment were generally very satisfied with the program. Most of the respondents were small businesses, with retail and manufacturing the largest categories. A majority indicated that they made more capital investments than they would have without the program, while one-third indicated that they hired more employees. Not surprisingly, businesses cited the sales tax incentives as the most important benefit. Interestingly, UEZ businesses that responded to the survey have been certified an average of 13 years with some businesses receiving the tax incentive for more than 30 years. In a review of programs in other states, most limit similar tax incentives for businesses to 10 years. Less than one-quarter of the surveyed businesses said they would move if UEZ ended, raising the issue of how necessary the benefit is to those businesses that have been in the program at this point. Most businesses did not notice a change between the program as it exists now and its original version.

Program administration, however, changed significantly with the elimination of ZAFs and other reforms. UEZ is administered by the New Jersey Urban Enterprise Zone Authority (UEZA) and its nine-member board, which is also responsible for disseminating criteria for zone designation. Currently, UEZA is mostly focused on the certification and recertification process of UEZ businesses, including reviews of required annual reporting. Prior to the elimination of ZAFs, the UEZA Board reviewed and approved use of those funds at the local level. With that task gone, the UEZA staff was reduced from 19 in 2011 to between six and nine since then. On the plus side, all UEZ applications are now streamlined through an online portal, thus reducing redundancies and more efficiently certifying businesses. But the post-2011 changes also diminished the relationship between the UEZA and the zones. Data is no longer collected on zone activity other than what is required for the certification process and marketing has greatly reduced, largely falling to local coordinators and host municipalities. The number of participating businesses also dropped in recent years due at least in part to the 2016 expiration of the UEZ designation in five municipalities. While the designation was reinstated in June 2018, the number of participating businesses has not fully recovered to the pre-2011 level. Besides the certification lapse, the lack of aggressive program marketing might be another factor in the failure to attract more new businesses.

A review of Enterprise Zones in other states and internationally shows mixed results. It appears that some Enterprise Zone programs have been effective at creating jobs and increasing development, depending on how they are structured. In addition, local governments in certain cases have seen growth in local tax revenue. But critics of Enterprise Zones note that often jobs are simply cannibalized from neighboring municipalities or even from within the municipality itself, and frequently the jobs and development that are created have been highly subsidized. In some cases, the program appears to be benefiting wealthier areas as opposed to those that are more distressed. Programs should be structured to avoid excessive inflation of land values in order to prevent incentives to property owners to increase rents hence, limiting business expansion, retention, or attraction in the zone. To avoid pitfalls, the literature suggests targeting programs to needs of the specific geographic area rather than adopting a generic, blanket approach, and incorporating other resources such as job training and infrastructure development. New Jersey’s original UEZ Program appeared to be more robust than those reviewed in other states, in part because of the ZAFs that are now gone except for limited second-generation funds. However, one area where New Jersey could emulate other states is regulating the amount of time that businesses can be certified in the program, for example, a period of 10 years, so that the State is not supporting the business in perpetuity.

In conclusion, the recommendation of this Assessment is not to eliminate the UEZ Program but to restructure and strengthen the program through measures like annual reviews of outcomes, increased collaboration between the UEZ Authority and the UEZ coordinators, more flexibility in the boundary revision procedure, development of a better data tracking system and data base, and related measures that are outlined throughout this Assessment and more specifically in the recommendations contained in Chapter 11.

Publication Title

The John S. Watson Institute for Public Policy of Thomas Edison State College

First Page Number

1

Last Page Number

209

Recommended Citation

Thomas Edison State University, PEL Analytics, Anderson Economic Group, and The John S. Watson Institute for Public Policy, "New Jersey Urban Enterprise Zone Program Assessment 2019" (2019). Urban Mayors Policy Center. 8.
https://digitalcommons.kean.edu/urban-mayors/8