NJ State Comptroller Releases Report Critical of Municipal Tax Abatements/PILOT Agreements

The New Jersey State Comptroller released a report Wednesday entitled “A Programmatic Examination of Municipal Tax Abatements.”  The Comptroller’s report is critical of both five year abatements and long term abatements granted by municipalities and was being widely reported in the press yesterday.

Referring to five year abatements (NJSA 40A-21-1 et seq.) and long term abatements (NJSA 40A-20-1 et seq.), the Comptroller’s report finds “numerous weaknesses in the regulation, implementation and oversight of these programs” including:

  • PILOTs paid to municipalities are at the expense of counties, school districts and other taxpayers;
  • There is lack of transparency and centralization of information about abatement agreements;
  • Criteria and processes for evaluating potential abatement agreements are weak;
  • Directly affected stakeholders are not adequately involved in the decision making process;
  • Municipal follow up on abatement terms and benefits is lacking;
  • Redevelopment areas in which abatements are granted are not periodically reviewed to account for neighborhood changes or improvement;
  • Municipalities often fail to use abatements to bring in the type of redevelopment that would address community needs or bring appropriate improvement;
  • The State does not closely monitor the use of abatements or offer significant guidance to municipalities on how to interpret relevant statutes or implement abatement programs.

The report states that “Tax abatement should be used carefully and sparingly given the multitude of pitfalls, their far-reaching impact, and the reality that exemption from taxation is a departure from the normal allocation of tax obligations.”

The report outlines recommendations for addressing the deficiencies, including:

  • Adjusting the current abatement structure to account for the interests of all affected entities;
  • Granting abatements only when it is in the public interest;
  • Ensuring appropriate transparency and follow-up review of abatement agreements;
  • Having the State play a more active role in the abatement process through guidance, records and monitoring.

Much more will follow on this topic but, preliminarily, most informed observers would agree that tax abatements, especially under the long term law, have been a significant spur to major development in urban areas that would not have occurred to the extent it has, absent abatements. In short, the program has worked.

Moreover, many of the issues with abatements have been explored previously. Long term exemptions were the subject of extensive litigation until major revisions were made by the Legislature in 2003 that addressed, among other issues, the first bullet above, i.e., that payments are at the expense of counties, districts and other taxpayers, by providing a revenue sharing mechanism. The 2003 amendments appear to have largely if not entirely brought peace on the litigation front.

The issues in the report are worthy of close examination. The need for wholesale changes has to be reviewed very carefully.

Russell B. Bershad is a Director in the Gibbons Real Property and Environmental Department.
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