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In Shutdown Standoff, Will New Jersey Tax Job Creators or Embrace the Highest Corporate Tax Rate in the Country?


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6/30/2018
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In Shutdown Standoff, Will New Jersey Tax Job Creators or Embrace the Highest Corporate Tax Rate in the Country?

The New Jersey government is set to shutdown on Saturday, June 30, 2018 (today!) if lawmakers cannot strike a deal by midnight.  

Gov. Phil Murhpy on Tuesday proposed raising the state’s sales, personal income and business taxes to the highest rates in the nation in order to avert fiscal disaster and avoid a government shutdown. The democratic administration has come in with a budget packed with spending, spending, spending, most of which is aimed to be spent on key components of their voting base (teachers, state employee pensioners, & transit workers). The proposals come with heavy price tags and an $855 million-dollar budget shortfall. In essence, Gov. Murphy is proposing raising the total state budget by more than $1.7 bn over the levels the budget reached during the Christie administration, with few offsetting spending cuts – a completely unprecedented experiment in monumental state tax increases.
 
Gov. Murhpy’s plan calls for a sales tax hike to 7%. Assembly Speaker Craig Coughlin, a prominent democrat, voiced concerns that the plan would drive high-wage earners and ob creators out of the state, while the sales tax increase would add to what is already one of the heaviest tax burdens in the nation. There is nowhere to go with property taxes, which are currently the highest in the nation, and the continued tax creep is leading to a high-income earner exodus of Biblical proportions, where businesses and high net-worth individuals are fleeing in record numbers.
 
An article on Observer Politics pointed out that “New Jersey leads the nation in outmigration, and residents consistently list the state’s high tax burden as one of its biggest problems. In 2016, 63 percent more people moved out of New Jersey than moved in, according to United Van Lines 40th Annual National Movers Study.” http://observer.com/2018/06/nj-politics-digest-murphy-state-budget-cuts/
 
 

Murphy’s Plan – The Millionaire’s Tax

The overall tax increases proposed by Gov. Murphy total more than $1.7 bn. The state tax rate on millionaires would increase to 10.75% (an increase of 2%) and the sales tax rate would increase to over 7% (an increase of ¾ of 1%). In theory, Murphy’s “tax the rich” scheme would yield $765 million a year from the State’s millionaires. But would they stay? Would they keep their businesses, assets and business interests in State?
 
The impact of these measures would fall squarely on small business-owners who are job creators and on wealthy consumers that fuel the economy through spending on homes, cars, luxury items and other extravagances—eliminating this upper echelon of the consumer market would make New Jersey an even less attractive state in which to own a business.
 
State Senate President Stephen Sweeney, D-Gloucester, and state Assembly Speaker Craig Coughlin, D-Middlesex, rejected the governor’s plan, offering instead to hike taxes on corporations in some of the ways outlined below.
 
The millionaire tax debate has raged in Trenton all week as a government shutdown seems all but assured due to the stalemate between opposing democratic camps. Sweeney & Coughlin oppose the millionaire tax on individuals, favoring large corporate tax increases which would be borne more widely and not necessarily by New Jersey residents. Sweeney and Coughlin tried to bridge the divide, offering an olive branch Friday by suggesting a tax for individuals earning over $5 million (rather than $1 million) annually would be acceptable. Murphy shrugged off the proposal, noting that there were only “1,760 people in the state who earn that,” and, adding, “I was not even one of them, if you look at last year’s tax returns,” while there were more than 20,000 people who earned more than $1 million.
But, Sweeney and Coughlin will not back the millionaire tax signature piece of the governor’s plan as proposed, no matter how much Murphy puts his foot down and wields the bully pulpit. Sweeney said he opposes the tax because the GOP tax law already punishes wealthy New Jersey taxpayers by capping at $10,000 the amount of state and local taxes they can deduct from their federal taxes. No doubt, extreme tax hikes on individual job creators would put negative pressure on hiring and consumption, and would be highly visible to high-profile voters, lobbyists and major campaign contributors.
 
Sweeney decried Murphy (formerly of Goldman Sachs) for his reluctance to hike up corporate taxes, saying he is “more concerned about protecting corporations that had a billion-dollar windfall from Donald Trump.”
 
Ostensibly, although the increased business taxes would have the same inevitable effects – fewer jobs and shrinking sales – it would not lead to the outmigration of wealthy taxpayers and democratic supporters (think David Tepper). Sweeney and Coughlin seem to think “tax hikes” would at least sound better to the party base if those arrows were aimed at the backs of corporate enterprise instead of at the cash register and at the bi-weekly paycheck of successful party patrons.
 
After long meetings Thursday to reach compromise, Senate President Stephen Sweeney (D., Gloucester) increased the rhetoric in a press conference Friday where he said, you know Chris Christie wanted it ‘my way or the highway,’ too.”
 
Sweeney recognizes that looking at the justification for the governor’s budget and tax plan through “rose colored” glasses – it is attractive to liberals on an ideological basis – but the reality of the plan in the real world is an unmitigated disaster. Murphy’s “behavior is exactly like Chris Christie, but he smiles more,” Sweeney said, in reference to the “idealized” way in which Murphy stuck to his ideological guns on aspects of the tax increase that are philosophically desirable, but practically unworkable. Amazingly, Sweeney said: “Unnecessarily raising taxes will only accelerate the decline of our economy.”
 
 
Sweeney and Coughlin’s Plan – Tax Big Corporations
 
Raising the Corporate Business Tax to the highest level in the nation (proposed to go up to 13%) was the main counter-proposal that Sweeney and Coughlin offered to bridge the gap between spending and funding, in lieu of a further tax on individuals. Taking a look at the proposed business tax increase favored by Sweeney and Coughlin, it puts New Jersey’s largest employers (Verizon, Merck, Johnson & Johnson, Prudential, Virtua, Hackensack Medical Center, Bank of America, UPS, Wal-Mart, and Wakefern Foods) squarely in the cross-hairs. The proposed bill imposes a 4 percent surcharge on corporate taxes for businesses with profits of $25 million more, bringing the tax to 13 percent, the highest in the nation. The surcharge would be 2.5 percent for companies with $1 million to $25 million in profits.
 
Don’t just pass over that. There are 2,000 businesses in New Jersey earning profits of $1 million or more, but less than $25 million. Of the 820,000 small businesses in the State of New Jersey, these small businesses represent ¼ of 1% of all businesses. But, they employ a majority of the 1.7 million workers in New Jersey. These are the magna cum laudes of the business world who are all-star profit-makers and job-creators. And New Jersey is about to tax each of these all-stars an additional $25,000 surcharge as the “entry fee” for having the privilege of doing business in New Jersey. While this sounds suicidal to anyone with a free-market capitalist bent, the shareholders of Verizon, Merck or Johnson & Johnson are geographically scattershot and unlikely to feel the pinch in their pocketbooks overnight. While the Board of Directors might not start expanding New Jersey leases and buying up office towers in Newark, these individual shareholders probably won’t move to Texas because of the corporate tax hike.
 
Not every business is highly mobile, but it is doubtful that those which are will stand for increasingly high corporate taxes for long before reducing their New Jersey head-count. Moreover, “profits” is a tricky concept, and smaller companies tottering on the brink of that $1 million threshold are going to be loath to cross the Rubicon and incur a $25,000 fee for passing “Go.”
 
 
Moreover, the ideological rationale for the corporate tax hike is tough to swallow. We are taxing a surcharge on success and job creation, which is likely to cause creative accounting and job suppression—both undesirable. We are taxing a surcharge on business size and commitment of resources to our state – in, what I can only take as a warning to any business foolish enough to consider moving corporate operations here – a message that they are better off in Texas. We are taxing a surcharge on healthcare, banking, food, and communication. One cannot imagine a plan that could have a more detrimental effect to the economy and which would lead to a larger loss of jobs, albeit, not in the short term. Moreover, the messaging is tragically misguided. We want large corporations, particularly in core areas of the economy, centralizing in our State, not fleeing from it.
 
What does the Office of Legislative Services think about the proposal? The OLS review of the corporate-tax bill by Sweeney/Coughlin suggested the state could be vulnerable to creative accounting, warning that “actual revenues may be lower than predicted due to impacts related to taxpayer behavior, such as delaying the realization of income, intended to avoid the imposition of a higher tax rate during the two tax years for which the surtax is in effect.” In short, to the extent businesses, especially large businesses, would “stay the course” and maintain their New Jersey operations after a tax hike of this magnitude – they simply wouldn’t pay the tax – but, would find ways around it, leaving the state underfunded and on the brink of insolvency.
 
On the tax-amnesty bill, the OLS said it was “unable to estimate a precise amount of revenue” to support the lawmakers’ projection. Why is that? It is not clear, but it would seem that the Great Recession and the hit that New Jersey citizens took over the last decade depleted both businesses and individuals to a degree that they simply don’t have an ability to pay – even if they want to – and even if tax amnesty is offered.
 
Democratic legislators are also targeting the “gig economy” and intrepid entrepreneurs who are running their own side businesses, trying to benefit from their entrepreneurial zeal to vault over the widening tax gap. The governor and legislature support new taxes on home-sharing services like Airbnb, ride-sharing services like Uber and Lyft, and tobacco products and electronic cigarettes.
 
Of course, small businesses have the most difficult time accounting for all of their side income in a sophisticated fashion with proper bookkeeping to get credit for all necessary deductions. Most of these are “operations of one” that are relatively unsophisticated. Adding additional taxes and increased bookkeeping and accounting burdens to these businesses to push back against these new taxes may bring in a few dollars, but it is also likely to dampen a growing and vibrant sector of the state economy that brings value to consumers.
 
The latest incarnation by Sweeney and Coughlin of a patchwork to increase the revenue projections on a tax that wouldn't hit individual taxpayers included a proposed tax on summer rentals which would hurt tourism in New Jersey’s shore towns that are still reeling from a string of natural disasters. The promised revenue from the new proposal? An additional $360 million in new taxes from short-term rentals and some real estate transactions that would help Murphy with the budget shortfall.
 
 
New Jersey Shore Tax?
 
The Governor came out swinging at the idea of taxing shore rentals: “In his infinite wisdom and glory, God granted New Jersey two great gifts: We don't have to pump our own gas, and we have the Shore. Gov. Jon Corzine messed with the first a decade ago, when he suggested that gas stations should be free to force us out of our cars in the snow, rain and sleet. The roar of protest left him so beaten he felt the need to apologize in his next State of the State address. ‘Jersey girls don't pump gas,’ he said. Now Senate President Steve Sweeney is messing with the second, proposing a new tax on Shore rentals. Mark this: If Sweeney's proposal carries the day, I hereby promise to light what's left of my hair on fire. It's just not going to happen.”
 
 
Murphy’s Enormous State Budget and What It Buys for New Jersey
 
The proposed increased spending is centralized in three main areas: (1) education funding (proposed $284 million dollars a year of state aid); (2) pensions (proposed $3.2 bn for the state employee pension system); and (3) transit (proposed annual spending of $242 million). Other less prominent elements of Gov. Murphy’s proposed budget include free community college for low-income residents and expansion of state pre-k programs.
 
 
Additional Reading
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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