N.J. taxes report: Businesses say fix N.J. now

HOLMDEL - Ralph Zucker walked into the Bell Labs building one day in 2007, looked around and saw the once-bustling site contained only a vast, eerie silence.

The shell was intact. Four separate pavilions connected by a ring of walkways were under one glass-paneled roof that allowed sunlight to stream in. But now it looked like a giant’s greenhouse, where nothing grew.

Google wasn’t coming here. Apple wasn’t coming here. So Zucker, the president of Somerset Development, decided he would need to turn the iconic — and seriously outdated — corporate office into a campus not only with technology companies, but also with retailers, houses, a health center and hotel.

“If we create great places ourselves, then people will not have to get up in the morning and travel an hour, an hour and a half,” Zucker said. “People (here) get up every morning and travel into Manhattan and sit in line or take the ferry or take the bus or the train, and that’s an arduous commute. But they go there because those are great places.”

New Jersey could use more great places, but building them is a chore. The state suffers from heavy tax burdens that leave it among the toughest for businesses to operate, many surveys show. And yet, with a transportation fund that is nearly broke, it needs more tax revenue to fix broken down roads and bridges.

It has prompted both the state and towns like Holmdel to dig deep into their playbook to provide tax relief, doling out billions of dollars in potential tax breaks to employers promising jobs in return.

Their strategy has barely kept New Jersey’s economy afloat. The state’s economic growth of 0.4 percent in 2014 ranked 46th lowest in the nation.

It wasn’t always this way. New Jersey was once a low-cost alternative to Manhattan, the prototype for America’s suburbanization after World War II. Giant companies and their workers moved here in tandem. And the state — with its cheap land, skilled workers and transportation system — was to be envied. As recently as 2000, the state’s unemployment rate was 3.5 percent.

Now, its biggest assets are unraveling.

The long march from a global capital for innovation to bottom of the pack has prompted business leaders to say enough is enough. They’re crying out for lawmakers to come up with a long-term strategy that paves the way for a new generation of workers. It’s a generation that doesn’t want to sit in traffic or on a train for hours. They don’t have to; with technology, they can live anywhere.

“There’s just too many issues that we’re facing as a state and too many issues we’re facing in the future, that if we don’t start taking action and making some improvements, we’re going to dig our hole deeper,” said Tom Bracken, president of the New Jersey Chamber of Commerce. “I don’t know where it ends, but it doesn’t end in a good place.”

Empty shell

The Bell Labs building is symbolic of New Jersey’s fall from grace.

The facility was designed by Eero Saarinen, the architect of the Gateway Arch in St. Louis. It was built in the late 1950s and early 1960s and housed as many as 7,000 researchers and developers from AT&T and the Western Electric company, the Bell system’s manufacturer.

AT&T was the nation’s long-distance call provider, and with the benefit that comes with owning a monopoly, Bell Labs became known as an idea factory. Its employees in Murray Hill and Holmdel did ground-breaking research on cosmic radio waves, transistors, lasers, satellites, cellular phones and fiber optics. They won eight Nobel Prizes.

The Holmdel site is 2 million square feet, almost as big as the Empire State Building tipped on its side. And it features open space — a vast atrium and a maze of walkways that encouraged chance encounters among researchers who could turn small talk about their weekend into a groundbreaking idea.

The company was a gold mine. It accounted for 20 percent of Holmdel’s tax revenue. And it attracted money from consumers nationwide who had no choice but to get their phone service from Ma Bell, as the maternal company was called.

“It was wonderful for New Jersey,” said James W. Hughes, an economist and dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. “Ninety-seven percent of AT&T’s revenue came from outside New Jersey.”

It didn’t last. AT&T’s monopoly was broken in 1984. The plodding company didn’t generate enough money to maintain its research arm, Hughes said.

Not that Bell Labs went quietly. AT&T spun off the division in 1996 by creating Lucent Technologies Inc. Lucent spun off start-up companies of its own. And New Jersey continued to reap the rewards; its unemployment rate bottomed out at 3.5 percent in 2000.

But the Internet bubble burst. Lucent was acquired by Paris-based Alcatel in 2006. A year later, the company consolidated and shuttered its Holmdel building.

(Communications equipment maker Nokia in April said it would acquire Alcatel-Lucent for $16.6 billion).

Everyone thought AT&T would be the 800-pound gorilla after its break-up, swatting away competitors, Hughes said. “It turned out to be a sitting duck.”

Mirror of failure

On a Saturday afternoon in August, a group organized by TEDx Navesink, the annual speaker conference, gathered at the former Bell Labs building for a tour. Among them were dozens of Bell Labs veterans who spoke with a sense of corporate pride that is rare today about the freedom they had that fostered creativity.

Bruce McLeod, 87, of Holmdel worked on Telstar, the first telecommunications satellite that relayed television pictures, telephone calls and fax images from space. He looked around the cavernous building. It was as empty as an airplane hangar.

“There’s no word to describe it,” McLeod said. “It’s like visiting another building.”

New Jersey’s economy has mirrored Bell Labs’ plight.

The Garden State’s challenges aren’t confined to the telecommunications industry. Its strong pharmaceutical industry, which in 2012 invested more than $8.7 billion in research and development in New Jersey, is shifting major research centers to hubs such as Cambridge, Massachusetts, and Silicon Valley in California. Its nearly $3 billion casino industry crumbled under competition, mainly from neighboring Pennsylvania.

And it has suffered high-profile losses. Mercedes-Benz USA, which made its headquarters in Montvale, Bergen County, for 50 years, earlier this year moved to Atlanta, where living costs are cheaper, taking about 1,000 jobs with it.

“It became apparent that to achieve the sustained, profitable growth and efficiencies we require for the decades ahead, our headquarters would have to be located elsewhere,” Stephen Cannon, president and chief executive officer of Mercedes-Benz USA, said at the time. “That brought us to Atlanta.”

New Jersey hasn’t drummed up enough new employers to replace them. Its economy is lagging the nation. And its remnants from a different age are being left behind. A summary:

•New Jersey’s $504 billion economy, measured by the gross domestic product and adjusted for inflation, was the nation’s eighth biggest last year. It is driven by high-paying industries — finance, real estate, science and technical services. But the state’s economy has grown a meager 0.8 percent a year since 2000, about half the rate of the U.S., according to the U.S. Bureau of Economic Analysis.

Since 2002, New Jersey’s economy has outperformed the nation just twice — in 2008 when it grew by 0.4 percent while the U.S. contracted by 0.5 percent, and in 2012, when it grew by 2.5 percent compared with the U.S. rate of 2.1 percent.

New Jersey’s economy the past two years slowed, growing 0.9 percent in 2013 and 0.4 percent in 2014, according to the U.S. Bureau of Economic Analysis. By comparison, the nation’s economy grew 1.9 percent in 2013 and 2.2 percent in 2014 to a pace that was nearly six times faster.

•New Jersey has a glut of office space that was developed in an era when companies like AT&T built suburban campuses, where companies, pouring money into research and development, could isolate themselves from their competitors.

The state has 128 buildings with more than 100,000 square feet that have had a vacancy rate of at least 14 percent for at least five years. Of those, 45 are completely vacant. All told, it’s enough space for 115,000 jobs, according to a report by PlanSmart NJ, a research group in Trenton.

“It is a sign that the economy’s not doing well, but I also think there has been a shift in preferences” among workers, said Ann Brady, PlanSmart’s executive director. “It’s harder for employers to attract people to these single-use suburban sites.”

•New Jersey has cut back its funding for higher education. It risks losing the edge that it long has had on the rest of the nation: a highly skilled, innovative work force, educators said.

But the state’s higher education funding has fallen 28.3 percent since the recession, compared with 18.9 percent nationwide, according to a report by the State Higher Education Executive Officers Association, a trade group based in Boulder, Colorado.

“It’s just going in the wrong direction,” said Barbara Gitenstein, president of The College of New Jersey in Ewing.

•New Jersey has recovered 70 percent of the jobs that it lost in the Great Recession — six years after the recession ended. By comparison, U.S. employment has grown more than twice as fast, and New York employment has grown more than four times as fast, according to the New Jersey Policy Perspective, a left-leaning research group.

From September 2014 to September 2015, it added 39,600 jobs for a growth rate of 1 percent, only half as fast as the nation, according to preliminary Labor Department statistics.

New Jersey’s economy is “going nowhere, slowly,” said Patrick J. O’Keefe, director of economic research for CohnReznick, a New York-based accounting firm. “The blueprint (from policymakers) for the last 40 years has been nothing. We talk a lot. We appoint commissions. We review blueprints. But we continue to drive down the same bumpy road that has a downhill inclination.”

While New Jersey tries to fill its empty office parks, it continues to scramble to keep companies from leaving. The Christie administration has turned to giant incentive packages that have won praise from the state’s business leaders.

Most prominent: Grow NJ, an economic development program that started in 2013, provides tax credits for up to 10 years to companies that consider moving to — or leaving — the state. Eligible are companies that propose mega projects, companies that move to distressed towns, companies that move near transit stations and companies that are in one of seven targeted industries — transportation, manufacturing, defense, energy, logistics, life sciences, technology, health and finance, according to CBRE, the commercial real estate company.

Companies receive the tax credit only after they show they have hired the employees they plan to hire.

Recipients range from WorkWave, a technology company that could receive $3.2 million in tax credits over 10 years for expanding at its Neptune headquarters and employing 109 workers instead of moving to Boston, to JPMorgan Chase, the giant Wall Street company that could receive $187.8 million in tax credits over 10 years for moving from Manhattan to Jersey City and creating 2,150 jobs.

“We definitely debated about going to Boston because we already have space, but all of our people are here,” Chris Sullens, chief executive officer of WorkWave, said. “They love living here, and the people are what drive our business.”

The program, however, has generated criticism. If everything goes perfectly, New Jersey would provide nearly $3 billion in tax credits over 10 years for 143 projects that would create, save or retain about 37,000 jobs, according to a New Jersey Economic Development Authority report. It amounts to more than $80,000 per job.

Assuming the worker makes New Jersey’s average wage of $53,920 a year, is single and has no dependents, the state would receive $1,400 in income taxes per worker, Len Nitti, an accountant with Wilkin & Guttenplan in East Brunswick, said. The economic impact is greater when you include the worker’s spending power.

The total jobs generated by the program represent less than 1 percent of New Jersey’s total employment. And taxpayers have no certainty that those companies won’t pick up and move after 15 years, leaving the workers who don’t go with them scrambling to find another job.

New Jersey, however, is a high-tax state. It has the nation’s highest property taxes, the fifth highest corporate income tax and the sixth highest individual income tax, the Tax Foundation, a Washington, D.C., research group, found.

“Our tax structure in the state is overly complicated, and we never seem to get the political will to take on true reform,” said Michele Siekerka, president of the New Jersey Business and Industry Association, a lobby group. “We’ve gotten close at times and then we back away. What we can do then is focus on mitigation. Mitigate the tax burden” through programs like Grow NJ.

Catching up

New Jersey is playing catch-up in an economy that looks far different than when the Bell Labs building opened — and even when it closed 45 years later.

The millennial generation, the first to be raised in the digital age and bigger even than the baby boomers, is in their 20s and 30s. Armed with technology that can fit in their pocket, they can work anytime, anywhere. While the baby boomers moved in waves to the suburbs, millennials are moving back to the cities, Rutgers’ Hughes and his colleague Professor Joseph J. Seneca found.

Shaun Savage, 32, and a Howell High School graduate, started GoShare Inc. last year. The company makes an app that connects customers who need a pickup truck or van to help them move, say, a couch, with people who own those types of vehicles. The idea is similar to ride-sharing companies like Uber.

Savage moved to San Diego in 2011. His co-founder works in Hawaii. One of his developers works in Brazil. He set up shop in a co-working space with other small technology companies in downtown San Diego, a 10-minute bike ride from his apartment.

“Living downtown, in an urban environment, for me is preferable,” Savage said.

Bell Labs’ building in suburban Holmdel, once a model for American innovation, is as outdated as the typewriter.

The irony isn’t lost on Ralph Zucker. The inventions that came out of the Bell Labs building ultimately led to it becoming one of the nation’s biggest white elephants.

The 53-year-old Lakewood resident never understood the appeal of suburban living, where people lived on dead-end cul-de-sacs and braved hour-long commutes to get to work. His instinct finally has been validated, with the help of millennials.

As he looked around the empty Bell Labs building in 2007, he decided it could be saved.

He agreed to buy the building from Alcatel for about $27 million. He spent five years convincing residents that he had a viable plan. And he took advantage of a state redevelopment program that allows him to pay taxes based on the income generated in the building instead of property taxes.

He said the tax break comes in handy. Zucker declined to disclose the operating cost of keeping the building open and the grounds manicured. But when the project is done, he expects the price-tag to be $200 million — about 10 times Holmdel’s annual budget.

It hasn’t been easy, but eight years after the Bell Labs building closed, prospective tenants are showing interest in coming to Bell Works, Zucker said.

As he spoke, Somerset Development was preparing to announce its first lease to Symbolic IO, a data storage start-up that has set up shop in Bell Works and plans to expand.

It could be the spark the project needs. The company has 30 employees and expects to grow to 100 in the next year if the business goes according to plan, Brian Ignomirello, founder and chief executive officer, said.

But the deal is contingent on millions of dollars in tax breaks it has applied for through Grow NJ. It began the application process last spring and is waiting to hear the verdict.

“We want to move fast,” Ignomirello said recently, looking at a blueprint of a floor plan where engineers will work in open space that includes plenty of room for pool tables and other games. “We need our home.”

Michael L. Diamond; 732-643-4038; mdiamond@

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