How Will This Recent Decision Impact New Jersey Tax Abatement Programs?

Third Circuit Decision To Affect New Jersey Tax Abatement Programs

A recent decision by the Third Circuit Court of Appeals reinstates a legal challenge to Jersey City’s tax abatement ordinance, which requires developers of certain privately-funded projects to sign a project labor agreement (PLA). How will this impact New Jersey tax abatement programs?The suit maintains that the ordinance provision requiring the PLA is preempted by the National Labor Relations Act (NLRA) and the Employee Retirement Income Security Act (ERISA), and runs afoul of the U.S. Constitution’s dormant Commerce Clause.

Jersey City’s Tax Abatement Ordinances

Under New Jersey’s Five-Year Exemption and Abatement Law, N.J.S.A. 40A:21-1 et seq., and the Long Term Tax Exemption Law, N.J.S.A. 40 A: 20-1 et seq., municipalities may enter into a written financial agreement with developers that calls for the payment of a set, lower fee (payment in lieu of taxes or PILOT) for a specified period of time in place of traditional real estate taxes on improvements.

Jersey City has one of the most extensive tax-abatement programs in the state, which is a substantial reason for the booming development throughout the city. Since taking office in 2013, Mayor Steve Fulop has overhauled the city’s policy on tax abatements in an effort to target areas most in need of development and bring jobs to the city.

Under Jersey City’s local tax abatement ordinance, developers of projects with a total project cost exceeding $25,000,000 must enter into a PLA with the city, which requires the developer to pay prevailing wages on labor and mandates employment levels for Jersey City residents. Of particular relevance to the suit, the PLA specifically requires that an employer negotiate with a labor union and that all employees be represented by that labor union as part of the negotiations— even if the developers, contractors, and subcontractors do not ordinarily employ unionized labor and the employees are not union members.

Third Circuit Reinstates PLA Ordinance Challenge

In Associated Builders and Contractors v. City of Jersey City, Associated Builders and Contractors Inc. filed suit to enjoin enforcement of the Jersey City ordinance, citing that its PLA requirement prevented non-union contractors from bidding on tax-abated projects. The district court dismissed the suit. However, the Third Circuit ruled that the plaintiffs’ claims under the NLRA, ERISA and the Commerce Clause may be cognizable and remanded the case back to the district court for further proceedings.

Federal preemption does not apply under the NLRA, ERISA or Commerce Clause if the state or local government is acting as a “market participant” rather than a regulator. As described in the Third Circuit opinion, the rationale is that “a government, just like any other party participating in an economic market, is free to engage in the efficient procurement and sale of goods and services.”

To determine whether a government is acting as a market participant, the Third Circuit relies on a two-part test. The first question is whether “the challenged funding condition serve[s] to advance or preserve the state’s proprietary interest in a project or transaction, as an investor, owner, or financier.” Hotel Emps. & Rest. Emps. Union, Local 57 v. Sage Hosp. Res., LLC, 390 F.3d 206, 216 (3d Cir. 2004). The second is whether “the scope of the funding condition [is] ‘specifically tailored’ to the proprietary interest,” (in essence, whether the action is so broad as to be considered, in effect, regulatory).

Under this framework, the Third Circuit held that Jersey City was acting in a “regulatory” role and not as a “market” participant. In so ruling, the court rejected Jersey City’s argument that it has a proprietary interest in the tax-abated projects. In reaching its decision, the Third Circuit relied on the Supreme Court’s decision in Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564 (1997). In that case, the Court held that “[a] tax exemption is not the sort of direct state involvement in the market that falls within the market-participation doctrine.”

As explained by the panel, “Jersey City here does not purchase or otherwise fund the services of private developers or contractors who are constructing tax abated projects, or the goods used in those projects; nor does it sell those services or goods or invest, own or finance the projects.” Rather, the panel concluded, “the City simply reduces the developers’ tax burden for a period of time.”

What’s Next for Developers and Municipalities?

New Jersey developers and municipalities should closely monitor the lawsuit and consult with an experienced tax abatement attorney regarding the potential ramifications. The court’s ultimate decision will not only impact Jersey City’s future use of PLAs, but may alter obligations regarding existing tax-abated projects in the city. In addition, municipalities with similar tax abatement ordinances in place may need to consider revising their requirements to reflect the court’s decision.