Press Release

Closing Corporate Loopholes: A Win-Win

Combined reporting would help New Jersey’s small businesses and provide resources to grow the economy.

Published on Jan 28, 2016 in Tax and Budget

TRENTON, NJ: At a State House press conference today, legislators, policy experts, small business owners and tax fairness advocates unveiled reworked legislation to close corporate tax loopholes in New Jersey by requiring “combined reporting.” Senators Lesniak, Sarlo and Greenstein were joined by Assemblyman Holley, policy experts, small business owners and advocates in kicking off a renewed push to join the 25 states plus the District of Columbia that require this common-sense accounting method that prevents corporations from artificially shifting income, thereby avoiding state taxes.

“Some highly-profitable companies exploit tax laws like a corporate shell game to avoid paying their fair share,” said Sen. Raymond Lesniak, prime sponsor of the legislation. “They create phantom subsidiaries to ‘shift profits’ away from New Jersey. By closing this loophole the state could generate as much as $200 million a year. This will help address the fiscal needs of the state.”

“Every year when we sit down and work out New Jersey’s budget, we have to make hard spending decisions based on available revenues,” added Senate Budget Chairman Paul Sarlo, a co-sponsor of the bill. “Closing tax loopholes would ensure that multistate and multinational corporations doing business in New Jersey are paying their full tax bill, resulting in a modest boost to the budget and a big help to small businesses throughout the state.”

How does combined reporting work? Here’s the quick explanation: It treats the parent company and subsidiaries of multistate corporations as one entity for state corporate income tax purposes. Their nationwide profits are added together and the state then taxes the share of the combined income generated in the state. While this doesn’t prevent profitable corporations from shifting profits to dummy corporations in Delaware and other states, it does eliminate the New Jersey tax break they currently get if they do so.

“We need to close these loopholes, capture this revenue, and hold multistate companies to the same level of accountability as the rest of New Jersey,” said Sen. Linda Greenstein, a co-sponsor of legislation. “This is an issue of fairness and shared responsibility.”

The majority of states that tax corporate income – 25 of 45 – currently mandate combined reporting, as does the District of Columbia. Many of these states have had this policy on the books for decades, but a growing number of states – most recently Connecticut – have joined them in recent years.

“Combined reporting, quite simply, is a policy that works,” said Assemblyman Jamel Holley, who has sponsored the Assembly version of the legislation. “I hope that more of my colleagues in the Assembly will soon join me and Assemblyman Dancer in advocating for this essential step to level the playing field for small businesses and better invest in the assets that are proven to grow the economy.”

The press conference coincided with the release of a new report from New Jersey Policy Perspective (NJPP), which shows that nearly all of New Jersey’s largest employers are already subject to combined reporting in other states.

“Most of New Jersey’s largest employers already operate in combined reporting states and, in some cases, have been doing so for decades. For them, combined reporting is nothing out of the ordinary and is accepted as another cost of doing business,” said Sheila Reynertson, Senior Policy Analyst at NJPP and author of the report. “This is the clearest evidence yet that adopting combined reporting would not harm New Jersey’s business climate. In fact, it would greatly improve the business climate by allowing small and locally owned businesses to better compete with their multistate and multinational counterparts.”

“The money I earn goes back into my community and so do the taxes I pay,” said Erick Cedano, the owner of Graphic Core LLC and Fast Photo Plus in Elizabeth. “Unlike multistate corporations, I don’t hide my earnings in other states. A combined reporting bill would ensure a level playing field for everyone and ensure that communities across the state served by small businesses have the funding they need to prosper, and that we can meet the challenges facing us with success.”

Cedano is a member of the New Jersey Main Street Alliance, a statewide organization representing more than 1,500 independently owned businesses. Closing corporate loopholes is a top priority of the small business community across New Jersey.

“In this day and age small business owners have to work harder than ever to be successful. This is especially true in a time when multistate and multinational corporations have massive advantages, including tax breaks that will never apply to a pizzeria in Newark, a photographer in Elizabeth, or a toy shop in Princeton,” said Main Street Alliance Business Representative Jerome Montes. “Our main streets can’t prosper without healthy small businesses, and our small businesses can’t prosper without a healthy main street. Enacting combined reporting bill would go a long way to ensuring everyone community in New Jersey wins.”

Fourteen years ago, New Jersey took some initial steps towards closing corporate loopholes with the New Jersey Business Tax Reform Act, which banned deductions for royalties paid to related out-of-state companies and required combined reporting by all casinos and any corporation suspected of abuse by the Division of Taxation. Yet lawmakers did not opt to mandate combined reporting for all corporations. As a result, New Jersey has lost out on more than $2 billion in revenue since. It’s beyond time for the state to level the business playing field even more and create an even firmer foundation for the future by closing more corporate loopholes.

“It’s time to close corporate loopholes and ensure our state tax policies raise up families and communities, not the profit margins of big business,” said Analilia Mejia, Executive Director of New Jersey Working Families. “For policymakers to not use combined reporting to collect up to $200 million a year in taxes that large corporations owe, particularly at a time when working folks around the state have grappled with devastating budget cuts, is not only bad policy – it’s immoral.”

“These kinds of corporate loopholes that allow giant corporations to shirk their responsibilities not only put small businesses at a competitive disadvantage, but threaten the very public investments – like public education and reliable infrastructure – that corporations rely on,” added Ann Vardeman, Program Director at New Jersey Citizen Action. “Enacting combined reporting would help level the playing field and ensure continued investments in what makes New Jersey a great place to live and do business.”