LEGISLATIVE FISCAL ESTIMATE

[Third Reprint]

ASSEMBLY, No. 4189

STATE OF NEW JERSEY

217th LEGISLATURE

 

DATED: DECEMBER 22, 2016

 

 

SUMMARY

 

Synopsis:

Extends duration of first five designated UEZs for two additional years; specifies permissible use of UEZ funds; requires DCA Commissioner to assess and issue report on UEZ program.

Type of Impact:

Increase in municipal revenues and decrease in State General Fund and Property Tax Relief Fund revenues.

Agencies Affected:

Department of Community Affairs, Department of the Treasury, and certain urban enterprise zone municipalities.

 

Office of Legislative Services Estimate

Fiscal Impact

CY 2017 

CY 2018

CY 2019

 

State Revenue

($18 million –

$20 million)

($17 million –

$19 million)

$17 million –

$19 million

 

Local Revenue

$1.6 million –

$1.8 million

$1.5 million –

$1.7 million

($1.5 million –

$1.7 million)

 

 

 

 

·         The Office of Legislative Services (OLS) estimates that the enactment of Assembly Bill No. 4189 (3R) would result in State revenue losses and municipal revenue increases in Calendar Years 2017 and 2018 and a State revenue increase and municipal revenue decrease in Calendar Year 2019.

·         The extension of the Urban Enterprise Zone (UEZ) designation in five municipalities will allow qualified businesses in Bridgeton, Camden, Newark, Plainfield, and Trenton to receive the tax benefits of participating in the UEZ program.  Information on the amount of State tax revenues not collected in the five zones due to the application of these benefits is not available at this time.

·         The OLS cannot predict how proposed restrictions on the use of Enterprise Zone Assistance Fund monies will affect the use of funds transferred to the UEZs pursuant to budget language in November 2011.


 

BILL DESCRIPTION

 

      Assembly Bill No. 4189 (3R) of 2016 extends the duration of the first five designated urban enterprise zones (UEZ) for two additional years, specifies the permissible use of UEZ funds received from the taxation of certain retail sales made by qualified businesses in those zones, and requires the Commissioner of Community Affairs to review and issue a report on the UEZ program.  The bill extends the UEZ designation for certain existing UEZs located in the cities of Bridgeton, Camden, Newark, Plainfield, and Trenton.  The UEZs located in these cities were the first five zones to receive a UEZ designation from the New Jersey Enterprise Zone Authority in 1983 and, absent the bill, will expire on December 31, 2016. 

      During the two-year extension, the UEZs in those cities will retain their designation and continue to participate in the UEZ program to the economic benefit of the communities in which the zones are located.  Qualified businesses that participate in the program will continue to be eligible for certain UEZ incentives and benefits currently available through the program, including the corporation business tax employees tax credit, the investment tax credit, the sales and use tax exemption for qualified business purchases, and the sales and use tax exemption for energy and utility services, and, if certified, will continue to be permitted to collect the sales and use tax on retail sales made from a place of business located in the zone at one-half the Statewide sales and use tax rate.

      The bill establishes a statutory dedication of revenues received from the taxation of retail sales made by qualified businesses from business locations in the UEZs in Bridgeton, Camden, Newark, Plainfield, and Trenton during the two-year extension.  The bill provides that, after depositing the first 10 percent of the gross amount of all revenues received from the reduced taxation of retail sales made by qualified businesses into the account created in the name of the New Jersey Urban Enterprise Zone Authority in the Enterprise Zone Assistance Fund, the remaining 90 percent of revenue received from those retail sales is to be deposited in the State General Fund. 

      In addition, the bill amends current law to limit the permissible use of moneys deposited in the Enterprise Zone Assistance Fund.  The bill provides that moneys deposited into the fund from tax revenues collected by qualified businesses located in Bridgeton, Camden, Newark, Plainfield, and Trenton, as well as UEZs in other locations throughout the State, are to be used solely to assist qualifying municipalities in undertaking economic development projects.  Currently, moneys deposited in the Enterprise Zone Assistance Fund can be used for certain other purposes, such as undertaking improvements, economic development projects, and to upgrade eligible municipal services in designated enterprise zones.

      Finally, the bill directs the Commissioner of Community Affairs to review and analyze the UEZ program and to issue a report on the commissioner’s findings and recommendations to the Governor and the Legislature no later the six months from the effective date of the bill.  The report is to assess whether, as UEZs expire, an alternative location-based program to assist fiscally distressed municipalities is appropriate, and, if so, the commissioner is to recommend the parameters of such a program that provides a sufficient return on State investment.

 

 

FISCAL ANALYSIS

 

EXECUTIVE BRANCH

 

      None received.

OFFICE OF LEGISLATIVE SERVICES

 

Impact on Sales and Use Tax Collections

      The OLS estimates that the enactment of Assembly Bill No. 4189 (3R) would result in State revenue losses of approximately $18 million to $20 million in calendar year 2017 and approximately $17 million to $19 million in calendar year 2018.  The five UEZ municipalities affected by the bill (Bridgeton, Camden, Plainfield, Newark, and Trenton) will experience revenue increases totaling $1.6 million to $1.8 million in calendar year 2017 and $1.5 million to $1.7 million in calendar year 2018.  If the UEZ designations are allowed to expire, these five zones would not receive any new revenues.  The State revenue losses are comprised of the amount of the sales and use tax revenues that would have otherwise been collected if the five UEZ designations were to expire in accordance with current law and the sales and use tax revenues deposited in each zone’s Enterprise Zone Assistance Fund Account.

      On January 1, 2019, the two-year extension of the UEZ designation will expire and the State sales and use tax will be charged and collected in each zone at the normal rate (6.625 percent).  All sales and use tax revenues will be deposited in the State General Fund and no revenues will be deposited in each zone’s Enterprise Zone Assistance Fund account.  In calendar year 2019, the State will experience a revenue increase of approximately $17 million to $19 million while the five UEZs would incur revenue losses of $1.5 million to $1.7 million.  This fiscal estimate accounts for reductions in the sales and use tax rate required by P.L.2016, c.57.  The sales and use tax rate will be reduced from 7 percent to 6.875 percent on January 1, 2017 and to 6.625 percent on January 1, 2018.  The OLS estimates that the sales and use tax rates in the five UEZs will be 3.4375 percent and 3.3125 percent in calendar years 2017 and 2018, respectively.

      The bill requires 90 percent of the sales and use tax revenues collected in the five zones to be deposited in the State General Fund and the remaining 10 percent to be deposited in each UEZs account in the Enterprise Zone Assistance Fund.  The OLS estimates that the State will receive approximately $14.7 million to $16.2 million in Fiscal Year 2017 while a total of $1.6 million to $1.8 million will be deposited into the zone accounts.  In Fiscal Year 2018, $15.4 million to $17.1 million will be deposited in the State General Fund and a total of $1.5 million to $1.7 million will be deposited into the zone accounts. 

      The OLS notes that the extension of the UEZ designation in Bridgeton, Camden, Newark, Plainfield, and Trenton would allow qualified businesses in the five zones to continue to receive certain financial benefits of participating in the UEZ program.  For example, qualified businesses in the zone are permitted to purchase items for the use of that business without payment of the sales tax.  According to the Fiscal Year 2017 New Jersey Tax Expenditure Report, the State revenue losses due to the 100 percent sales and use tax exemption for UEZ businesses and purchases of tangible personal property and services for exclusive use at their UEZ location totaled $224 million.  Information on the amount of State tax revenues not collected in the five zones due to the application of this exemption and other tax and financial benefits is not available at this time.

      The OLS notes that language provisions in the Fiscal Year 2017 Appropriations Act directs all sales and use tax revenues collected in all UEZs to be deposited in the General Fund.  If this language is reauthorized in future fiscal years, the increase in local revenues projected in this estimate will not be realized.  This estimate does not reduce potential State General Fund revenues by the amount of sales and use taxes that must be deposited into the Property Tax Relief Fund pursuant to subparagraph b. of paragraph 7 of Section I of Article VIII of the New Jersey Constitution.

Use of Enterprise Zone Assistance Fund Monies

      The bill amends current law to limit the purpose for which Enterprise Zone Assistance Fund moneys may be used.  Under the bill, moneys deposited in the zone accounts may be used to fund activities which will lead to the creation of new jobs and increased economic activity within a UEZ, marketing, advertising, and special event activities, and costs of economic analyses.  Currently, moneys deposited in the Enterprise Zone Assistance Fund can be used for certain other purposes, such as undertaking improvements, economic development projects, and to upgrade eligible municipal services in designate enterprise zones. 

      It is unclear how this change to current law might impact individual UEZs.  A budget language provision in the Fiscal Year 2012 Appropriations Act required the disbursement, by November 1, 2011, of the unexpended balances in the Enterprise Zone Assistance Fund Account of each UEZ attributable to local projects and administrative costs in each UEZ.  In accordance with that language provision, account balances totaling $152.8 million was transferred to the zones.  The use of these funds does not require the approval of the New Jersey Urban Enterprise Zone Authority.  Information the amount of unexpended Enterprise Zone Assistance Fund moneys, and the purposes for which those funds are used, is unavailable at this time. 

 

Commissioner’s Review of the UEZ Program

      The OLS notes that the State conducted two studies of the UEZ program.  A language provision in the annual appropriations act permitted the New Jersey Enterprise Zone Authority to use administrative monies from the Enterprise Zone Assistance Fund to perform a fiscal impact study of each original zone and 11 new UEZs established by P.L.1993, c.167.  Pursuant to this mandate, the authority commissioned Response Analysis Corporation and Urbanomics to prepare the “New Jersey Urban Enterprise Zone Fiscal Impact Study.”  The study, dated July 31, 1998, addressed whether the UEZ program was carrying out the legislative intent of the "New Jersey Urban Enterprise Zones Act" P.L.1983, c.303 (C.52:27H-60 et seq.); whether the program was effective; and whether increasing the number of zones adversely impacted the UEZ program.

      In 2010, the New Jersey Economic Development Authority hired two independent consultants, the Delta Development Group, Inc. and HR&A Advisors, Inc. to study and report on the efficacy of the UEZ program.  The “New Jersey Urban Enterprise Zone Program Assessment” was submitted to the NJEDA on February 28, 2011.  The program assessment concluded that:  the current UEZ program offers no quantifiable results relative to the original legislative intent for local business investment and expansion and job creation; the lack of accountability from fund recipients and the absence of program data and tracking systems have resulted in an inability to calculate true return on State investment, and does not justify continued allocation of public resources in the “present fashion”; and the current UEZ program diverts significant sales tax revenues without demonstrating return on State investment in the face of a budget deficit.

      The program assessment also issued three recommendations regarding the future of the UEZ program.  First, the State should eliminate the New Jersey Urban Enterprise Zone Authority, current UEZ program, and all program incentives by the end of Fiscal Year 2011 and transition to a new place-based community and economic development program.  Second, the State should provide incentives for community and economic development within localities participating in the program with a streamlined process that eliminates the business certification process.  Third, the new program should provide for increased accountability through robust performance metrics and an annual review based on established performance standards.  In a memorandum transmitting the report to the State Treasurer, the Commissioner of Community Affairs and CEO of the New Jersey Economic Development Authority recommended terminating the Enterprise Zone Assistance Fund program on July 1, 2011, but also recommended the continuation of zone business tax incentives and the reduced sales tax rate for the purchase of goods.

 

 

Section:

Local Government

Analyst:

Scott A. Brodsky

Senior Fiscal Analyst

Approved:

Frank W. Haines III

Legislative Budget and Finance Officer

 

 

This legislative fiscal estimate has been produced by the Office of Legislative Services due to the failure of the Executive Branch to respond to our request for a fiscal note.

 

This fiscal estimate has been prepared pursuant to P.L.1980, c.67 (C.52:13B-6 et seq.).