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New Jersey Raises Corporate Tax Rate to 2nd Highest in Nation, in Deal Averting Government Shutdown


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7/6/2018
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New Jersey Raises Corporate Tax Rate to 2nd Highest in Nation, in Deal Averting Government Shutdown

Days before the 4th of July holiday, legislative leaders brokered a deal to pass a state budget and avoided the 2nd straight government shutdown in as many years.

“Let me be clear: There will be no shutdown,” Mr. Murphy said at a news conference in Trenton on Saturday. “The parks and beaches are open.”

Gov. Philip D. Murphy, standing alone, and House Speaker Craig Coughlin and Senate President Stephen Sweeney, on the other side of the debate, had sparred all week on ideological differences between a further tax on individuals (the “millionaire’s tax” and “sales tax hike”) and an additional tax on large corporations (a progressive “corporate business surcharge tax” which would phase out after several years).

The Compromise Agreement

New Jersey will have a “millionaire’s tax” for individuals making over $5 million per year, raising their income tax rate to 10.75% from 8.97%.  A corporate tax surcharge of 2% will be put into place on companies that earn more than $1 million annually, which will remain in place for four years.  The sales tax will not be increased and will stay at 6.625%.  This will cause the tax increases to be borne predominantly by the very wealthy and by large corporations and lessens the impact on everyday consumers and small businesses.

The revenue raised in the $37.4 million budget will be allocated between transit projects ($242 million for New Jersey Transit), educational spending (i.e., $25 million for community colleges), and a booster shot to the failing state pension system ($3.2 bn price-tag).

Sweeney and Coughlin were afraid millionaires would flee the state, and countered Murphy’s original budget with a 36.5 billion budget paid for in part by a graduated hike in the tax on business, which legislators claimed was affordable because of the reduced corporate rates under the federal tax cuts contained in the Tax Cuts & Jobs Act.

Murphy, who took a “take it or leave it” attitude, eventually agreed to levy the higher income tax on people making $5 million because lawmakers agreed to the 10.75 percent, up from their earlier proposal of 9.95 percent.

New Jersey Last in Nation to Pass Its New State Budget

New Jersey was the only state in the nation that had not passed a fiscal budget before the start of the new fiscal year on Sunday.  Democratic thought leaders like Al Gore, Bill de Blasio and Howard Dean had all spoke out vocally in recent weeks and advocated for the Governor’s plan and his liberal vision of “tax fairness” which has the wealthy and successful paying for the lion’s share of the state’s tax burden.

New Jersey’s Corporate Business Tax Increase

Under the new bill the Corporate Business Tax goes up 2.5 percent, to a total 11.5 percent, in the first two years, then 1.5 percent, to 10. 5 percent, in the final two years.  The bill requires that corporations use “combined reporting,” which prevents businesses from shifting income to other states.  This leaves businesses who don’t want to pay the 2nd highest tax in the nation with no choice but to leave the state. 

In terms of the corporate income tax, New Jersey previously ranked sixth-highest nationally. With New Jersey’s increases 11.5 percent this years, it jumps into second place, tying with Iowa — and there is a huge and widening gap between the state and regional competitors such as Pennsylvania (9.99 percent), New York (6.5 percent) and Massachusetts (8 percent) – making New Jersey the least desirable and most uncompetitive state to do business in within the Northeast region.

Big companies, which each employee tens of thousands of individuals, earn about 80% of the state’s profits: Verizon, Wal-Mart, UPS, Wakenfern Food Corporation, Barnabas Health, Meridian Health, Johnson & Johnson, Prudential Financial, Virtua, TD Bank, Wells Fargo, and Bristol Meyers Squibb.  If even one or two of them leave, the revenue expected under the Governor’s budget would not come in and the shortfall would easily be greater than $1 bn.  If all of them reduce their allocable New Jersey income, the state might be on the verge of bankruptcy.

https://www.nj.gov/njbusiness/at-a-glance/employers/

According to the NJBIA, the 14 percent of New Jersey companies earning more than $10 million (340 companies) accounted for nearly 73 percent ($14.89 billion) of total allocated net income for all companies earning $1 million or more in 2015.

Michele Siekerka, President of the NJBIA, said, “While most states have either reduced or maintained their corporate tax rates, New Jersey is poised to go in the wrong direction… Some studies link an increase in CBT to a reduction in employment and income, and a decrease in CBT to quicker job creation. A CBT surcharge would only incentivize our larger corporations to expand their operations elsewhere. And, if they’re stagnating here, that’s just as bad as outmigration for New Jersey.”

Adding insult to injury, legislators have tried to tie corporation’s hands and force them to maintain in-state operations – and approach doomed to certain failure – by requiring what is known in the accounting world as “combined reporting.”

 “Combined reporting, where did that come from?” Michael Egenton, vice president of the New Jersey Chamber of Commerce, said. “We were under the assumption that was put on hold.”

The New Jersey Business & Industry Association (“NJBIA”) estimates that the corporate tax increase will impact about 2,373 corporations.  NJBIA noted that New Jersey’s ongoing resident outmigration has resulted in a net loss of $25 billion in adjusted gross income over the past 12 years.

The democratic administration is hoping that the CBT tax increases will result in a few hundred million dollars of additional revenue.  But, given the outmigration rate of individuals and businesses is much higher on an annual basis than the expected revenue receipts (which assume no outmigration), even a small exodus would eat up all of the potential gains and leave the state bankrupt.  It is hard to imagine why Verizon, for instance, wouldn’t simply move operations elsewhere.  This is what has happened every time an increase in the CBT has been tried anywhere in the country.  What will be different this time?  And businesses are saying they’ve already cemented plans to leave the state.  So where will the extra money come from?  And where will our state be once jobs move elsewhere.

“This concerning data should serve as fair warning to our policymakers that higher CBT, millionaire’s or sales taxes, on top of the cumulative costs from our recent and increasing business mandates, are only giving our business owners and residents more reason to leave our great state,” said NJBIA CEO and President Michele Siekerka. “And, if they aren’t leaving, they’re certainly not planning to grow here. This analysis speaks to our declining competitiveness in the region and the nation. We need to improve our state’s economy through comprehensive planning, rather than excessive taxation. This is the only way to reclaim our regional competitiveness and to reverse the disturbing trend of outmigration from New Jersey.”

Certainly, New Jersey has just made itself a pariah for big businesses and the lease competitive regional player in the market for corporate growth and development.

New Jersey Chamber of Commerce CEO and President Tom Bracken also felt the move was counterproductive: “Raising taxes will not help either of the issues of affordability or business competitiveness, which we need to desperately work on,” he said. “The resolution of that (in the budget) is probably going to be the most impactful for the business community.”

Errors in Earlier Drafts of the Corporate Business Tax Bill

In addition to surprises, early versions of the bill had outright errors which would have cost corporations billions if they had not been caught by the business community.  For instance, an error in tax rates on a “repatriation holiday” where a one-time lower tax is imposed on repatriated earnings would have led to a $ 7bn tax bill for corporations.

“If you talk to everybody from AT&T, Verizon, Pfizer, all those groups, there’s great commonality, this is a $7 billion [tax],” Senate Minority Leader Tom Kean, R-Union, said Thursday. He complained of the way the bill was “drafted in the dark of night.”

Bill A-4202 which came out on Tuesday quickly had to go back to the drafting table when corporate lobbyists began complaining on Thursday, days before the Saturday deadline to reach a deal.

Sweeney brushed off the error, “We knew the language had an issue.” “We had the bill to fix it the same day we had the legislation. The Republicans wouldn’t give us an emergency. We passed the bill today to fix the mistakes.”  Corporations were ramping up to mount a legal challenge even as the legislation was corrected.

Final Thoughts from the NJBIA

“Millionaires have grown around the nation during a time of economic upswing, but New Jersey’s percent change of growth is slower than most of our regional competitors,” Siekerka said. “We should be wary of our tax policies making New Jersey more dependent on the highest income earners who are being given more reasons to consider leaving the state. We need our policymakers to pause until the State Tax Policy Working Group, created by Senate President Steve Sweeney, and the Economic Growth Council, created by Gov. (Phil) Murphy, complete their work and advance comprehensive recommendations. We need them to plan and adopt long-term, sustainable solutions rather than attempt to tax our way out of fiscal challenges.”

Additional Reading

https://www.nytimes.com/2018/06/30/nyregion/new-jersey-shutdown.html

https://www.wsj.com/articles/new-jersey-governor-lawmakers-reach-budget-deal-avoid-shutdown-1530409878

https://www.nj.com/politics/index.ssf/2018/06/nj_budget_5_things_you_need_to_know_about_the_new.html

https://www.reuters.com/article/us-usa-new-jersey-budget/new-jersey-averts-government-shutdown-with-last-minute-budget-idUSKBN1JR12L

https://www.politico.com/states/new-jersey/whiteboard/2018/06/30/sources-new-jersey-leaders-reach-last-minute-budget-deal-495637

https://www.northjersey.com/story/news/new-jersey/2018/06/27/new-jersey-legislature-7-billion-tax-mistake/735638002/

https://www.roi-nj.com/2018/06/07/politics/njbia-state-chamber-insist-higher-taxes-would-exacerbate-not-alleviate-n-j-s-budget-woes/



Category: Tax Law


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