TRENTON - One day last June a representative from AT&T testified in favor of a major change in the formula New Jersey uses to calculate how much tax corporations should pay. The very same day, an AT&T representative in Oregon released a statement strongly opposing a change being proposed in how that state taxes corporations.

That might not seem unusual except for one thing: the tax law changes proposed in both states were virtually the same. The only difference was that in New Jersey AT&T would get a tax cut under the proposal and in Oregon the company would have to pay more than before. That's because the change would base corporate income tax solely on a business's sales in the state. It would disregard traditional factors such as plant and payroll. The New Jersey measure (A-3420; S-2314) was introduced in April.

A new report from New Jersey Policy Perspective explores the proposal to switch to a single-factor formula and concludes it would be a mistake for New Jersey to go ahead. Single Factor: Double Trouble, by NJPP Senior Policy Analyst Mary E. Forsberg, examined the experience in other states and found:

• More businesses get a tax increase than a tax cut under single-factor.
• The tax cuts go to companies with the largest presence, in terms of plant and payroll, in a state.
• Overall, the state loses money.

According to the report, states that have analyzed the impact of current or proposed single-factor formulas found revenue loss to run from 1.4 percent to 14.8 percent. Massachusetts, for example, estimated that it lost $131 million in 2000 because major companies could apportion their profits based only on sales. The New Jersey Treasury Department has estimated that a switch to single factor and an related measure included in the legislation would cost the state about $250 million a year in lost tax revenue - or 19 percent of corporate income tax receipts.

Around the nation, much of the impetus for single-factor comes from large businesses that seek to lower their taxes in states where they are headquartered or have significant facilities and many employees. Single-factor states currently are: Connecticut, Illinois, Iowa, Maryland, Massachusetts, Maine, Missouri, Nebraska and Texas. Supporters contend that switching to single-factor gives them an incentive to increase their investment in a state - despite the fact that considerable research has found tax rates to be only a minor determinant of location decisions by businesses.

And the corporate effort is highly selective. Businesses want adoption of single-factor in some states but not all. Why? Because if every state switched to the formula, the savings that a multi-state corporation got in one state would be offset by higher taxes in others. Instead, businesses strategize to increase what is known as "nowhere income" - profits that, because of a lack of uniformity in state rules, wind up not being taxed anyplace.

"No credible, persuasive argument has been put forth in defense of changing New Jersey's corporate tax structure to single-factor sales," the report says. In return for vague promises of expanded development, single-factor would bring serious problems.

• If lowering taxes is good for business expansion, single factor is problematic, since it raises the taxes of businesses that mainly sell in a particular state, so its value as an economic development tool is questionable.
• Basing taxes only on sales makes it much more difficult for states to figure a company's tax bill and increases the possibility of manipulation of the system.
• Giving tax breaks to companies with the largest presence in a state means those who make the most use of services provided by government - schools, roads, public safety - pay the least for them.
• Last, but by no means least, the net loss of revenue to states is significant - especially now that the state's fiscal position appears to be declining.

The report concludes that, at minimum, no action should be taken until the state performs, and makes public, research showing who would be the winners and losers under single-factor and what would be the total financial impact of the change. On its face, a measure that lowers taxes for a few businesses, raises taxes for many more - and costs New Jersey a quarter-billion dollars per year in the process - would not seem to be good public policy.

New Jersey Policy Perspective is a nonpartisan, nonprofit organization established in 1997 to conduct research and analysis on state issues. Our goal is a state where everyone can achieve to his or her full potential in an economy that offers a widely shared, rising standard of living.

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