TRENTON - Overhaul of New Jersey's system for taxing businesses in 2002 was a big step in the right direction, and further action is needed to make the system fully fair and equitable, according to a new report from New Jersey Policy Perspective. "The system we should have is now within reach," concludes A Question of Balance: Taxing Business in the 21st Century. The report by NJPP Senior Policy Analyst Mary E Forsberg analyzes changes made last year to the Corporate Business Tax structure, examines the history of taxing business in New Jersey and makes recommendations for further action.

NJPP is a nonprofit, nonpartisan organization that has conducted research on state issues since 1997. "Corporations for years have gotten tax breaks that people can't get," said Jon Shure, president of NJPP. "New Jersey has moved forcefully to change that, and the rest of the nation is watching closely. The findings of this report can help show the way." As recently as 2000, 77 percent of New Jersey's corporations paid only $200 apiece in state corporate income taxes though the stated rate was 9 percent of net income they made in New Jersey. Indeed, while corporate profits in New Jersey nearly doubled from 1990 to 2000, corporate business tax revenues in New Jersey grew by only 4 percent. The report identifies factors that played a major role in the stagnation of business tax revenue, including multi-state corporations growing more aggressive in state tax planning, playing states off against each other to get the best deals and vigorously taking advantage of tax-law provisions that could save them money. Four strategies have been especially popular:

• Lobbying for changes in state tax laws
• Using a variety of corporate organizational structures
• Shifting income to lower-tax states
• Profiting from the increasing array of deductions, exemptions and incentives states offer to attract and retain businesses

The report points out that New Jersey's corporate tax law changes should not be viewed as a finished product. The issue is anything but static; the new law has provisions under which parts of it could expire. It sets up a commission charged with reporting back on results and impacts of the changes, with an eye toward future expansions in the program or rollbacks. To build on the new changes in order to help create a fair, equitable corporate tax structure that would serve as an example of what states can and should do in this complex and crucial arena, the report offers several recommendations.

Mandate combined reporting

The most comprehensive response to aggressive corporate tax avoidance is to require combined reporting, where all the interlocking and subsidiary businesses in a corporate family are treated as a single unit, regardless of where corporate profits are earned. The profits and taxes of this single corporate family are then apportioned to each state where the corporate family does business. New Jersey would join 16 states that now require related companies to file a combined report. Combined reporting would simplify corporate tax administration and eliminate profit-shifting schemes where a corporation transfers profits from New Jersey to a low- or no-tax state.

Though the new law gives the Director of the Division of Taxation authority to compel combined reporting on a case-by-case basis, few companies are likely to be required to do so. Because each individual case will have to be considered separately, it will be time-consuming to make that determination and will further stretch the Division of Taxation's limited resources.

Keep the Alternative Minimum Assessment even if the Corporate Business Tax Study Commission does not produce a report by June 30, 2004

The AMA is a new tax that some companies will pay instead of the computed amount of their Corporate Business Tax. It is to expire in 2006, but under the new law it will be eliminated two years early if the Corporate Business Tax Study Commission created by the law does not produce its report by June 30, 2004. This should not be allowed to happen. The Commission has been asked to assess issues like fairness, predictability and stability-important, complex issues made more difficult by the inaccessibility of corporate tax data to the average citizen and the recent changes made to the corporate tax structure. Producing the required report by June 2004 may be problematic because the state will not know the actual impact of these tax law changes until January 2004 at the earliest. Though businesses were to start paying the AMA in December 2002, they do not have to file tax returns until October 2003. The Division of Taxation will then have to analyze approximately 260,000 corporate tax returns under a new system.

It is possible that the Commission will find the new AMA is a reasonable alternative to the regular corporate business tax and should not sunset even in 2006. This would require legislative action but certainly should be considered.

Eliminate the Corporation Business Tax Excess Revenue Fund and provisions that established it

This fund will be created if the new corporate business tax system generates more tax revenue than the projected $1.823 billion in Fiscal Year 2003. Excess revenues will be placed in this reserve account and the balances will be available to help cover first General Fund then corporate business tax shortfalls in Fiscal Years 2004 and 2005. If a balance exists on December 30, 2005, the law authorizes the Director of the Division of Taxation to reduce corporate business tax rates accordingly.

Although the current fiscal situation in New Jersey makes it difficult to believe this fund could have a balance in three years, stranger things have happened. And, if by some chance a balance exists, it is inappropriate for the Director of the Division of Taxation to be authorized to reduce corporate business tax rates. All such changes should be made only after extensive public debate with input from all interested parties, including the business community and all those who would suffer under a state revenue shortfall.

Require corporations to disclose their tax returns

Though data on federal tax liability is available from documents firms must file with the Securities and Exchange Commission. Using this data, the Institute on Taxation and Economic Policy (ITEP) examined the U.S. profits and federal income taxes of 250 of the country's largest and most profitable corporations from 1996 to 1998. It reported that many of these corporations paid little or no federal income taxes.

Such research is impossible in New Jersey because business tax returns, like those filed by individuals, are confidential. The only reason the public knows that the large A&P supermarket chain paid New Jersey $200 in corporate taxes in 2000 is because a company representative was asked at a public hearing how much tax the company paid.

Since corporations are creations of the law and it is in the public interest for citizens to know whether the standards of law are being met, business returns should be treated differently from individual returns with respect to disclosure. New Jersey should require corporations to provide the public with clear, detailed tax information, including a straightforward statement of what they paid in state taxes and the reasons why those taxes differed from the statutory 9 percent, 7.5 percent or 6.5 percent corporate tax rates now in effect in New Jersey.

Disclose tax revenue lost from providing incentives to businesses; set rigorous criteria for future use

Erosion of corporate business tax receipts in New Jersey is partly due to proliferation of business tax credits. What started as $1.9 million in credits to business in 1989 had grown by more than 4,600 percent to $87.7 million by 1998. New Jersey has no formal, easily accessible mechanism to account for this money the state chooses not to collect because of tax breaks and incentives. New Jersey should compile a tax expenditure report disclosing the value of all business incentives provided to corporations, separately listing each program and the amount provided to each participant. This should be updated monthly and should be available on the Internet as well as included every year in the state budget.

States such as Minnesota, Maine, Texas, Connecticut and West Virginia have enacted disclosure laws that require companies to make public the value of subsidies they receive each year. Maine and Minnesota require that the companies disclose wages and benefits paid. Connecticut, Maine and Minnesota require the companies to disclose actual job creation and/or retention. Some of these states also have started to respond to subsidy abuse through "clawback" laws that reclaim taxes and subsidies if a company does not create all the jobs promised.

Greater state-to-state corporate tax uniformity

Cooperative auditing by states of returns filed by multi-state businesses is desirable in the interests of efficient tax administration. But differences in state laws and tax forms prevent this from happening in many cases. This diversity is rooted in historical, constitutional and policy reasons. Greater uniformity among states with respect to formulas and other key features of their corporate tax laws would make interstate cooperation in this field more feasible and increase the efficiency and effectiveness of state tax administration. At present the level of compliance is poor when departures from the federal base are complex. Conformity means also that a state secures the benefits of federal enforcement with little or no state expense.

By finding more ways to work together states would have a better chance of standing up to corporate attempts to force favorable treatment by threatening to leave a state that does not do what a neighboring state does, or other similar actions. New Jersey officials should take every opportunity to be part of this effort.

Strengthen audit and research capacities of state Division of Taxation

New Jersey's new law contains many provisions aimed at tougher standards and enforcing stricter compliance. But it doesn't improve the Division of Taxation's ability to achieve these ends. Requiring the Division to make determinations about combined reporting, or disallowing certain tax strategies up front, changes the timing but not the amount of work to be done. The reality is still that overworked, relatively low paid state employees battle daily against armies of corporate lawyers and accountants who provide their clients with increasingly sophisticated methods to avoid taxes.

For New Jersey's new law to reach its potential and the expectations that its supporters have created among the public, more staff and money must be provided.

TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective