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New Jersey's long-term tax abatement law has flaws that prevent it from being used as intended, according to findings in a new New Jersey Policy Perspective report made public Wednesday. The report finds a need for strict state oversight, enforcement and standards to ensure that decisions to grant tax abatements are necessary and benefit all taxpayers.

Originally intended to lure skeptical developers to invest in areas where they might otherwise not build, abatements are now used in the most desirable areas, according to the report. The report finds the use of abatements to lure development has serious consequences for the municipalities that grant them, as well as for the counties and school districts that receive little or no money from them.

The report, "All That Glitters Isn't Gold: Property Tax Abatements in Jersey City,'' was written by NJPP policy analyst Naomi M. Bressler and Carolyn Topp, a senior executive for a national Internet catalogue retailer.

The report specifically focuses on Jersey City, which has awarded countless long-term tax abatements to developers building on its "Gold Coast'' waterfront. Once home to rundown factories, abandoned rail yards and rotting piers, Jersey City's waterfront is now lined with luxury condominiums and office buildings of some of the country's largest financial firms. Although abatements may have helped spur development along the waterfront in the late 1970s and 1980s, they are likely no longer necessary, the report states. However, the city's dependence on them continues to grow. In 1990, the city collected $6.6 million, less than 3 percent of its budget from abatement projects; in 2008, it received $80 million, or 17 percent of its budget. The city expects to receive $89 million this year. Hudson County receives only a fraction of this money and the city's schools receive none of it.

"Jersey City's decision to allow developers to pay less than their fair share of taxes is unfair to everyone who hasn't received an abatement," Bressler said. "The city's policy takes the risk away from developers and places it on the backs of the owners of non-abated properties in the city, county and state."

Although Jersey City gives out more tax abatements than most other municipalities in the state, it is far from the only municipality to use them. Tax abatements are given to companies throughout New Jersey, as well as throughout the country, who say that without them, their projects would be unsuccessful and that they would locate elsewhere. This ignores two significant factors, the report states. First, as is the case in Jersey City, compelling advantages often exist that have nothing to do with taxes. Second, taxes make up only a small portion of a company's cost of doing business.

The report identifies nine problems with the state's long-term abatement law and Jersey City's abatement policies. They are:

• Vague definitions provide overly broad discretion to municipalities.
• The public does not have enough time to challenge abatements and is excluded from negotiations between the municipality and developer regarding the abatement.
• New Jersey law does not limit the number of abatements a municipality can grant or the amount of a municipality's revenue that can come from them.
• Municipalities are not required to audit abated properties for compliance with the abatement agreement.
• The justification used by governing bodies in awarding tax abatements is often lacking.
• Many of the developers who receive abatements make political contributions to the officia ls who granted those abatements.
• Despite the availability of some abatement-related information online, abatement information in Jersey City is not well maintained or readily available.
• Only a small percentage of the people working on abated projects are Jersey City residents, despite the requirement that abatement recipients make a "good faith effort" to hire city residents.
• On at least two occasions, the Jersey City City Council amended an existing long-term tax abatement agreement after it was asked to do so by the developer.

The report finds these issues are even more glaring since there is no conclusive evidence that tax abatements work. Many economists believe that although abatements may help companies decide where to locate within a specific area, they do not play a role in their decision to choose one metropolitan area over another. And, even if it did, it is difficult to determine if the benefit - a small increase in the tax base and the possibility of new jobs - outweighs the cost of providing municipal services to the new residents and businesses.

In addition to identifying shortcomings with the law, the report makes 11 recommendations NJPP believes would turn a program that benefits developers into one that targets abatements to projects that would benefit the municipality and its residents.

The recommendations are:

• Amend the long-term abatement law so abatements can only be granted in "blighted areas" where development would otherwise not take place.
• Require that abatement negotiations between a municipality and a developer be made public when they begin.
• Limit the percent of a municipality's revenue that can come from abatements so that municipalities do not rely on tax abatements to balance their budgets.
• Municipalities should be required to continuously evaluate their tax abatement policy to determine if it benefits its residents.
• Prohibit developers from receiving both a tax credit and other incentives from the state and an abatement from the municipality.
• Grant abatements for no longer than 10 years and phase out the amount of the abatement as the property is transferred from the first owner of a condominium or office building to later ones.
• Require state review and approval of20all property tax abatements over a certain value.
• Make available online information regarding tax abatements including ordinances, agreements and compliance reports.
• Bar elected officials from granting abatements to developers who have contributed to their campaigns.
• Provide the county with a greater share of the money from abatement agreements. School districts should also receive a proportionate share of the money.
• Set financial penalties for developers who fail to hire local residents for at least half of the jobs on a project.

— TOM HESTER SR., NEWJERSEYNEWSROOM.COM