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New Jersey gave companies credit for millions in ‘phantom’ property taxes to qualify for incentives

Amid the ongoing controversy over the state’s economic development programs, the so-called “phantom tax” has come under scrutiny from policy experts and a special task force appointed by Gov. Phil Murphy.

The outside of the Holtec International facility in Camden. Holtec was credited with $4.8 million dollars in annual phantom property taxes, which appears to have helped the company win $260 million in economic development incentives from New Jersey.
The outside of the Holtec International facility in Camden. Holtec was credited with $4.8 million dollars in annual phantom property taxes, which appears to have helped the company win $260 million in economic development incentives from New Jersey.Read moreTYGER WILLIAMS / Staff Photographer

When the State of New Jersey set about approving a huge tax-incentive package for the nuclear energy firm Holtec in 2014 — worth $260 million over 10 years — it went through a series of calculations to see how much economic activity the deal would generate for the state in return.

One of the factors state officials used: Holtec’s future property taxes on the manufacturing campus it was proposing to build in Camden.

But Holtec doesn’t actually have to pay property taxes on those new facilities, because the company built on tax-exempt land.

In calculating the award, though, officials essentially assumed otherwise — and they weren’t making a mistake. Rather, state officials were following an unusual provision in a 2013 state law that credited companies with paying millions of dollars in local property taxes, even though they were likely to get tax exemptions on their new buildings.

This “phantom tax” has come under scrutiny in recent months as policy experts and a special task force appointed by Gov. Phil Murphy have asked whether that part of the law short-changed the state.

In a state where homeowners pay among the highest property taxes in the nation, the Economic Opportunity Act — signed into law by then-Gov. Chris Christie — ensured not only that businesses could get property tax abatements for moving into poor cities, but that the exempted taxes would still count as a benefit of their projects.

Phantom taxes

Internal records from the Economic Development Authority show that the agency credited at least seven applicants with paying $14.7 million in combined annual property taxes — money the companies would not have to pay if they took advantage of the property-tax exemptions available to them in Camden.

The data suggest that the exempt property taxes helped two companies, including Holtec, qualify for the economic development incentives they won.

“Why would you include property taxes as a benefit when you’re not collecting them?” said Michael Lahr, director of Rutgers Economic Advisory Service. Lahr was part of a team at Rutgers that evaluated the cost-benefit model for the tax-credit awards last year, and recommended revising that part of the formula.

Lahr made a similar suggestion at a state Senate hearing last month when he testified about how to improve the controversial incentive program.

“You’re putting a thumb on the scale by putting benefits into the calculation that will never be realized,” said researcher Will Irving, another coauthor of the Rutgers study.

The tax-incentive law gave companies options for five-year and 10-year property-tax abatements. The statute also requires the Economic Development Authority “to account for the property tax abatements” when calculating the economic benefits of a project, a spokesperson said.

It was one of several provisions the task force pointed to in arguing that special interests had a significant impact on crafting and implementing the law. In particular, task force investigators have examined the influence of Parker McCay, a politically connected law firm that helped write the legislation, and would later represent companies like Holtec as they sought tax credits.

Documents obtained by The Inquirer through a public records request shed new light on the extent to which certain companies benefited from the so-called phantom tax.

For Holtec, getting credit for just one year’s worth of property taxes — $4.83 million — helped nudge it over the line of a crucial test used to determine whether it was eligible for incentives, the records suggest. After factoring in the phantom tax, the company’s “net benefit” to the state was just $155,000, according to the Economic Development Authority’s calculations.

Because Holtec’s 600,000-square-foot manufacturing facility sits on land owned by the tax-exempt South Jersey Port Corp., the company and others that operate there don’t pay property taxes. However, Holtec is expected to reach an agreement with Camden to provide payments in lieu of taxes, a common arrangement for companies that receive abatements.

Holtec did not respond to requests for comment. The company has been under fire for other aspects of its application, including its failure to disclose that it had been temporarily prohibited from contracting with a federal agency in 2010.

» READ MORE: Holtec funneled $50,000 to federal employee in bid to win contract, inspector general report says

‘Net benefit'

Supporters of the law say that however the EDA made its calculations to determine awards, the incentives were badly needed to spur development in Camden after decades of disinvestment. They say the projects will create thousands of jobs and, eventually, more revenue for the city.

“Based on the legislation the city was able to attract the national headquarters of several corporations including several Fortune 500 companies that have made transformative changes in the city,” Mayor Frank Moran and Camden County Freeholder Director Louis Cappelli Jr. said in a statement.

To qualify for a tax-break award, companies had to pass what state officials called a net benefit test. They needed to show that the future benefits from their project — from new economic activity like construction and employment — would either exceed the cost of the deal by 10 percent, or break even.

In Camden, projects just had to show they’d break even. It was one of several measures in the bill that lawmakers and public officials said would help one of the poorest cities in New Jersey.

» READ MORE: Camden has a ‘severe’ revenue problem, and N.J. tax-break projects aren’t helping, internal report says

Property taxes were factored into the net benefit analysis of each project automatically, usually as 3% of the project’s construction costs. Companies didn’t have control over the formula. Several firms told The Inquirer they never saw the full net benefits calculation for their award.

Another company that appeared to benefit from the phantom tax provision was ResinTech. When the EDA approved a $138.8 million award for the manufacturing company, it estimated a net benefit to the state of $2,500 — also far less than one year’s worth of property taxes, which the state calculated to be $2,518,853. A Parker McCay lawyer representing ResinTech’s application told the EDA that the company anticipated getting a real estate tax abatement, emails show.

“ResinTech is not responsible for calculating the net benefit to the state, nor privy to the assumptions used by the EDA when calculating the net benefit,” CEO Jeffrey Gottlieb said. “We were required to provide significant amounts of information and, after a long and difficult process, we were informed of our award.”

Gottlieb said that because ResinTech’s project is still under construction, it has not filed for, or received, any tax abatement on the project. No one from the company discussed the phantom tax provision with Parker McCay, Gottlieb said.

“Most importantly, we are a manufacturing company who is bringing jobs to Camden from our other facilities across the country and winning back jobs from overseas,” Gottlieb said. While the company committed to employing 265 people, he said, “our target is to exceed 400 full-time jobs, plus 100 to 150 others.”

At a May 2 public hearing on the tax programs, a lawyer for Murphy’s task force asked Tim Lizura, the EDA’s former president, whether the phantom tax “essentially allowed projects to get through even though they weren’t paying for themselves.”

“I would say that's a pretty accurate statement,” Lizura testified.

Lizura said he didn’t remember exactly how many companies received an advantage from the phantom tax, but in his testimony, he named seven that did, including Holtec, and six other companies that received property tax abatements in Camden, including the Philadelphia 76ers and Subaru.

With the exception of Holtec and ResinTech, the data The Inquirer obtained suggest that the phantom taxes alone did not make a difference in whether the companies passed the net benefit threshold. Property taxes for the other companies accounted for between 15% and 22% of their annual benefit to the state, the EDA data show, whereas for Holtec and ResinTech that figure was much higher — more than 40% of each company’s annual benefit.

Four of the firms that Lizura mentioned — Subaru, Conner Strong & Buckelew, the Michaels Organization, and NFI — all told The Inquirer that they would have passed the net benefits test, regardless of whether property taxes were included in the calculation.

Subaru said it signed a community investment agreement with the city, and has donated more than $5 million to Camden initiatives like job training and local charities.

American Water — another company that Lizura named — said it had spent $13 million with local businesses and made other charitable donations. American Water also said it has a $1.6 million property tax abatement in Camden. (The Inquirer’s records request for the data used in American Water’s net benefits calculation remains pending at the EDA.)

The 76ers declined to comment.

Conner Strong, NFI, and Michaels said they had “invested more than $300 million in Camden’s future and are proud to be part of the city’s nationally heralded renaissance, a transformation any visitor to the city can clearly see.”

“Each believes that Camden’s best days are ahead,” the companies said in a statement.

The three companies filed a lawsuit against Murphy in May, alleging the task force had been created unlawfully. They were joined in the complaint by Cooper University Health Care, Parker McCay, and South Jersey power broker George E. Norcross III, who is Conner Strong’s executive chairman and the chair of Cooper’s board.

A judge dismissed the lawsuit in July, though an appeal is pending.

» READ MORE: ‘Permanent’ damage? Trenton, N.J. Democrats gripped by George Norcross-Phil Murphy feud over tax credits.

Avoiding tax liability

In its June report on the tax-incentive programs, the task force published a 2013 email written by a government official involved in drafting the legislation that refers to “the ‘phantom tax’ notion for NBT that Phil and Kevin laid out in [the] original bill draft” — an apparent reference to Parker McCay CEO Philip A. Norcross and his law partner Kevin Sheehan. Philip Norcross is George’s brother.

Kevin Marino, an attorney who is representing Parker McCay in the lawsuit against Murphy, said the firm “provided input on the Economic Opportunity Act on a volunteer basis in 2013.”

He added the firm was proud of its work on the issue and had not been “retained or paid by anyone” to lobby on the legislation. Any assertion to the contrary is “blatantly false,” Marino said.

Emails obtained by The Inquirer through a public records request show Parker McCay lawyers pressed state officials to make sure clients had the lowest tax liabilities possible.

Case in point was the Philadelphia 76ers, which in June 2014 agreed to build a new 120,000-square-foot practice facility and team headquarters in Camden in exchange for $82 million in corporate tax breaks.

Barely a month after the ink dried on the incentive deal, Economic Development Authority officials received an email memorandum from Sheehan, the Parker McCay lawyer, saying the Sixers had a “problem”: They were concerned the project wouldn’t qualify for a property-tax abatement, “creating a significant tax liability that was not anticipated.”

Over the next few months, Sheehan hashed out an ownership structure with city and state officials that EDA found acceptable.

The arrangement effectively shielded the Sixers from paying real estate taxes on the practice facility. But on its EDA-approved tax-credit award, the team still got credit for paying those property taxes — $1.08 million a year, in the EDA formula — just as the legislation intended.