July 27, 2010
Melissa E. Liebermann, Chief of Staff
Office of the State Comptroller
P.O. Box 024
Trenton, NJ 08625
Dear Melissa:
First, I would like to thank you for your letter of July 20, 2010 enclosing an exerpt from a report describing a tax abatement that was granted to a power station project in the City of Bayonne. I very much appreciate the opportunity to provide you with my comments on your report.
Let me begin by clarifying an important fact related to your description of this project. Although the total project cost is $400 million, less than $100 million of the improvements are subject to real estate taxes. This is because the most expensive cost of constructing a power station is the generators which, under current New Jersey law, are not subject to real estate taxes. For this reason, the $400 million project reference is somewhat misleading. Other than this number, the other information in your report is accurate as of the time of the article you cited.
In addition to this comment, I would like to give you my reaction to the balance of the exerpt you asked me to review. I understand that I reviewed a very small section of a much larger, more comprehensive report. Based upon what I did read however, I believe that you may have incorrectly concluded that the municipalities primarily decide to grant tax abatements because it is in their interest to do so. This, of course, ignores the applicable law. As I am sure you know, the Long Term Tax Exemption Law requires that, as a condition to the granting of a tax abatement, the municipality must determine that the abatement will have a positive influence on the locational decisions of probable occupants of the project. In other words, the municipality must determine that the abatement is important to the project (as opposed to being important to the municipality). This is not to say that municipalities do not consider the impact of the abatement on their budget. They do. However, this cannot be the legal basis for granting an abatement.
A number of important things should also be considered in your report. First, as in the case of our project, there is often no impact on the school district from the project. By this I mean that the power plant will not add school children to our schools and, as a result, the fact that the BayonneSchool District doesn’t receive taxes on the improvements will not have a detrimental impact on its budget. They will not have any increased revenues or expenses. Secondly, many projects have ancillary benefits. Again, as in the case of Bayonne’s power station project, the proposed power station will provide our local municipal utilities authority with a significant revenue source. Our local municipal utilities authority has a “take and pay” contract with the North Jersey Water District Water Supply Commission. And, it does not use all of the water it pays for. Thus, a significant new customer, such as the proposed power plant, will add a revenue source to that entity without adding expenses. In the end, the taxpayers of Bayonne and its rate payers, which by and large are the same people, will benefit.
Finally, I would also like to point out that tax abatements are only available in redevelopment areas.[1] As a result, their use is limited to places where development is not occurring and, in which, a government subsidy is often required. This is an important consideration in any review of abatements in new Jersey.
In summary, I believe that your analysis of abatements may miss the mark if you focus on the benefits to a public body with or without the abatement. If done properly, and legally, an abatement can not be granted unless the determinations set forth in the Long Term Tax Exemption Law are met. In fact, if one determines that the project requires the abatement in order to be constructed within the time frame and in the form desired by the municipality, then the real question is are the school district and county worse off with an abated project and than they are without the project. The choice of having the project without the abatement is, in fact, often not an option at all.
Thank you for the opportunity to provide you with some feedback on a portion of your report. Although I believe that the current abatement laws are very important redevelopment tools, I would be more than happy to participate in any effort to improve New Jersey’s short term and long term tax exemption laws.
Very truly yours,
Mark Smith