Many Profitable Corporations Pay Little State Income Tax – Here's How New Jersey Can Help Fix That

Many Companies Receiving Lucrative Tax Subsidies from New Jersey are Highly Profitable and Pay Little in State Taxes Overall

Two Policy Recommendations Could Make Tax System More Equitable

As New Jersey struggles with tough budget decisions about essential public services, profitable Fortunate 500 companies continue to game the state tax system here and elsewhere thanks to copious loopholes, lavish subsidies and crafty accounting, according to a new report.

90 Reasons We Need State Corporate Tax Reform, which examined 269 Fortune 500 companies that were profitable every year between 2008 and 2012, found that these companies collectively avoided paying $73.1 billion in state corporate income tax to New Jersey and the rest of the states. The report, released by the Institute on Taxation and Economic Policy and Citizens for Tax Justice, found that many companies based in New Jersey or with a significant presence here are paying lower effective state corporate tax rates than the 50-state average of 6.25 percent and far lower rates than New Jersey’s 9 percent rate.

New Jersey’s policymakers should adopt two simple reforms that would make the corporate tax more sensible, transparent, and productive: first, establish a floor on corporate taxes paid below which a company would be ineligible for state tax incentives; and adopt “combined reporting” to prevent businesses from shifting profits out-of-state in efforts to reduce taxable profits.

In particular, the report found that several companies that have received lucrative tax subsidies from New Jersey – Campbell Soup, Goldman Sachs, Honeywell and Verizon – are both highly profitable and paying very low state taxes.

• Campbell Soup had profits of $4.8 billion and paid an effective state income tax rate of 2.2 percent over the five-year period. The company was awarded a $34.2 million state tax subsidy in 2011 to help renovate its Camden headquarters.

• Goldman Sachs had profits of $35.3 billion and paid an effective state income tax rate of 5 percent over the five-year period. Between 1997 and 2002, the company was awarded $169.1 million in state tax subsidies for moving back-office operations across the Hudson River to a new Jersey City tower.

• Honeywell had profits of $7.1 billion and paid an effective state income tax rate of 1.4 percent over the five-year period. The company was awarded a $40 million state tax subsidy in 2013 to move its headquarters from Morris Township to Morris Plains.

• Verizon had profits of $38.2 billion and paid an effective state income tax rate of 3.3 percent over the five-year period. The company and its subsidiaries have been awarded $91.9 in state tax subsidies.

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“There is no evidence that doling out tax subsidies actually spurs job creation in any substantial way, yet New Jersey policymakers continue to rely on subsidies as the only arrow in the economic-development quiver,” says New Jersey Policy Perspective president Gordon MacInnes. “Given New Jersey’s stagnant economy this approach has clearly failed, but when one considers that many of the companies being given lavish tax breaks are also highly profitable and experts at tax-avoidance, it defies common sense.”

Analilia Mejia, the director of New Jersey Working Families and coordinator of the statewide revenue campaign Better Choices for New Jersey, adds that corporate tax avoidance shouldn’t come at the expense of more important priorities.

“By wasting public dollars on corporate tax cuts at the expense of investments in good schools, safe streets and strong communities, policymakers in Trenton have jeopardized the public structures that make New Jersey attractive to businesses in the first place,” says Mejia. “It’s time to close corporate loopholes and ensure our economic development dollars raise up families and communities, not the profit margins of big business.”

The report also found that Merck, headquartered in New Jersey, reported after-tax profits of $34.5 billion between 2008 and 2012 and paid no state taxes.

The report has two major recommendations that New Jersey policymakers could – and should ­– heed.

Enact “combined reporting”:

Twenty-four states have enacted “combined reporting,” but not New Jersey. On the list are California, New York and Massachusetts, but also deeply “red” states like Texas, Idaho, Utah, Alaska and Arizona. It is the most important corporate tax reform available to state policymakers as it effectively treats a parent company and its subsidiaries as one corporation for state tax purposes.

As a “single reporting” state, New Jersey permits corporations, for example, to reduce the profits of their New Jersey components by transferring “profits” for patent and trademark administration to, say, Delaware. Combined reporting eliminates most of the tax benefits of shifting these profits by adding them back to the profits of the corporation that is taxable in the state and then taxing a share of the combined profit. As the visibility of corporate “income shifting” scams has increased in recent years, support for this reform has grown nationwide: in the past decade, seven states have enacted combined reporting.

The spread of combined reporting has probably helped to keep corporate tax collections from experiencing an even more serious decline. This explains why over half of the states with broad-based corporate income taxes now require combined reporting.

Yet even combined-reporting states leave extra tax revenue on the table when they fail to adopt “worldwide” combined reporting. Combined reporting is usually limited to the “water’s edge” – that is, to U.S. based parents and subsidiaries. About a half-dozen states, most notably California, have adopted worldwide combined reporting, but then allowed companies to continue using water’s edge rules – which any sensible company engaged in international tax avoidance would choose to do. Several states, most recently Maine, have taken a valuable half-step toward worldwide combined reporting by requiring corporations to report on subsidiaries set up in specified, notorious foreign tax havens thereby eliminating the state tax benefits of arbitrarily shifting income to those countries.

Put the brakes on the subsidy surge:

New Jersey policymakers responded to the ravages of the Great Recession by putting the pedal to the floor and sharply increasing the use of business tax subsidies to keep jobs in the state or bring them here from other states. Unfortunately for New Jersey this is the only tactic the state has employed. Last year’s overhaul of the state’s subsidy programs, while including some positive measures, is almost certain to increase the volume of tax breaks given in the name of economic development thanks to the law’s lack of hard caps, sunset provisions and its increase in maximum per-company award amounts. (In fact, during the first five months of the revised programs, the state has already awarded $503.4 million in subsidies ­– a rate of over $100 million per month, far exceeding the rate of awards earlier this decade, which were already far higher than award rates the previous decade.)

New Jersey lawmakers should require more detailed reporting from companies seeking tax subsidies – particularly their profitability and their effective state income tax rate in New Jersey and the entire U.S. At the very least, the state should make this information readily available for the public; it would be more effective, however, if the state created a threshold of taxes paid for profitable companies under which companies are not eligible for subsidies.

Chasing after businesses by fighting over who can give the largest tax concessions is a zero-sum game and it does nothing to help the broader regional economy, which is an essential driver of New Jersey’s prosperity. In a more sensible world, states would agree to stop this futile, destructive competition. They should sunset ineffective tax credits and enter into pacts with each other not to use tax giveaways to compete for jobs.

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