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Some Bad Corporate Tax Ideas in New Jersey Governor's Economic Recovery Proposal

Addressing the recession affecting New Jersey, as well as many other states, New Jersey Governor Jon Corzine last week presented a plan for reviving the state economy.  Some of the proposals - such as speeding up work on infrastructure projects and putting $500 million of state pension money in community banks to spur lending to local businesses - are smart and desperately needed. 

But the plan also includes misguided corporate tax giveaways that will do nothing to revive the state economy and will cut state revenue just when it would be better directed to anti-recession spending or tax relief for working families. 

Corporate Tax Giveaways Without Transparency: Mary Forsberg at New Jersey Policy Perspective last week analyzed the problems with a number of the corporate tax cuts proposed by legislators and endorsed by the Governor.  Each individual proposal has problems, but worst of all, as is common in too many states, there is no transparency regarding which businesses receive tax benefits and how much it costs the state.  Forsberg cited a study which found that in 2001, 77 percent of companies paid only $200 in state taxes - the minimum back then - and that included 30 of the largest 50 companies operating in the state. 

Forsberg warns that business lobbyists are already taking advantage of job fears to drive special interest legislation:

This is a dangerous time for New Jersey and the nation -- not only because of what's happening to the economy but because of what's happening in response to the economy. We have to be on guard against proposals that use the economy as an excuse to do things that couldn't -- and shouldn't -- otherwise be done.

Some Specific Corporate Tax Giveaways to Avoid:  The Governor's plan included two particular corporate tax proposals that it and other states should avoid, namely so-called "single sales factor apportionment" of taxes and eliminating "throwback" or "throwout" rules:

  • Single Sales Factor apportionment is the wrong approach:  Currently, in New Jersey as in many other states, the state taxes only a portion of the profits of businesses operating in multiple states.  The formula used to determine the portion taxed takes into consideration the corporation's total property owned, its payroll and sales in all state.  But business lobbyists want to shift the formula to only measuring the proportion of sales in the taxing state. While the argument is that this will encourage companies selling in other states to locate in New Jersey (or any state adopting the single sales factor formula), analysis shows this doesn't work, but it will likely lead to substantial tax losses for the state.  The point of having a multi-factor test for state taxes is to assure that companies gaining the benefits of state action -- whether in helping sales, or developing property or training its workforce -- all pay a fair share of state taxes, which single sales factor apportionment undermines.
  • Eliminating the "throwback" rule is bad policy:  Because companies selling goods or services in a state are required to have a threshhold presence or "nexus" to be subject to state taxes, companies are often able to escape between 50 and 100 percent of taxes on profits by selling to states where they don't have that nexus.  A "throwback" rule means that, instead, their home state collects taxes on the portion of their profits not taxed elsewhere.  Half of states have the throwback rule and if all of them did, companies wouldn't be able to game state tax laws based on where they locate and where they sell their products.  New Jersey abandoning the throwback rule is a step in the wrong direction for state corporate tax policy.

Every state needs good job creation ideas, but after years of disasterous national results in deregulation and corporate tax giveaways, states need to avoid abandoning sound multi-state tax approaches or listening to failed cant from business lobbyists looking out for their interests, not the public's.