‘Combined Reporting’ is a Pragmatic Corporate Tax Reform That Will Help New Jersey

This written testimony, on S-982, will be delivered to members of the Senate Budget and Appropriations Committee today.

combined reporting mapThis common-sense legislation to implement combined reporting is a matter of tax fairness for New Jersey businesses that don’t have the ability to hide income in out-of-state tax shelters. It is also a matter of collecting New Jersey’s fair share of corporate tax income – up to an additional $290 million, according to OLS – to help invest in the building blocks of a strong, healthy economy.

Now is the time to update our corporate tax code and get in line with the 25 other “combined reporting” states, which include every single state in the Northeast.

When New Jersey’s legislature last addressed business tax reform in 2002, combined reporting was mostly left off the table. And an appointed commission assigned to review the new law essentially tabled the possibility of expanding combined reporting. At that time, only 16 states had fully adopted combined reporting. Since then, 9 more states plus Washington D.C. have passed legislation to require this pragmatic corporate tax policy.

These states recognized that the failure to include combined reporting in their corporate income tax structures gives profitable multistate corporations free rein to artificially shift income out of the state and avoid paying taxes. Combined reporting uniformly stops these corporations from taking advantage of the tax loopholes that have remained in place, and new ones that corporate accountants may come up with in the future.

Claims that this tax policy is too burdensome for these corporations are unfounded. 94 percent of New Jersey’s largest employers already maintain facilities in at least one combined reporting state. The continued willingness of these large corporations to maintain operations and even expand business in combined reporting states speaks volumes about the neutral impact this tax policy has on economic development. For these corporations, combined reporting is nothing out of the ordinary and is accepted as another cost of doing business.

Expanding combined reporting in New Jersey would level the playing field for all businesses in New Jersey while increasing the resources that states need to be able to invest in vital services like higher education, transportation infrastructure and public safety – services that all businesses rely upon and consider when making long-term plans. A diverse group of 37 leading New Jersey organizations – from advocacy to labor to environmental to faith groups – understand this need and have asked the legislature to implement this policy in a letter of support (see attached).

While the benefits of combined reporting for New Jersey are clear, some opponents suggest this reform would have a number of harmful effects. But, on the whole, that’s not the case. Specifically, here is what combined reporting would not do for New Jersey.

It would not harm economic growth.

Combined reporting has become so commonplace that any arguments that it would harm New Jersey’s economy make little sense, and aren’t supported by any evidence. States around the country – with booming and sluggish economies – have combined reporting. In fact, of the 10 states with the fastest post-recession job growth – from North Dakota to California to Texas to Alaska – 9 have this policy. The only one that doesn’t, Washington state, isn’t able to adopt combined reporting because it doesn’t have a corporate income tax. Of the 10 states with the slowest growth over the same time – including New Jersey – only 4 have adopted combined reporting.

It’s no wonder this is the case. State and local taxes paid by corporations average less than three percent of total corporate expenses, with state corporate income taxes representing less than 10 percent of that three percent, on average. So it is highly unlikely that the adoption of combined reporting would have a significant enough impact on most corporations’ bottom lines to affect decisions about whether to invest in New Jersey; those decisions will continue to be driven by the fundamental economics of the investment.

It would not lead to widespread lawsuits.

The US Supreme Court has rejected the claim that combined reporting unfairly taxes corporate income earned outside the taxing state and has twice upheld combined reporting as a fair and legal means of taxation. The proposed bill is modeled after legislation developed by the Multistate Tax Commission and includes court-approved model language. With 25 states now having enacted this common-sense policy, large multistate corporations view it as nothing out of the ordinary and accept it as another cost of doing business.

It would not be an administrative burden for the Treasury Department.

The adoption of comprehensive combined reporting will require some effort to educate state personnel and taxpayers alike, but by no means will it be an enormous administrative burden. Keep in mind: it is not a completely new situation for the Treasury Department because we already require casinos to report income in this matter. What’s more, assistance is available from the Multistate Tax Commission to help state auditors get up to speed.

It is important to remember that multi-entity corporate groups are the only ones affected by combined reporting and the very small increase in complexity is well justified by the need to stop abusive corporate tax sheltering in New Jersey.