Cleanup Bill is a Missed Opportunity to Close Corporate Tax Loopholes

Testimony by NJPP Senior Policy Analyst Sheila Reynertson in support of closing loopholes in the corporate business tax code.

Published on Oct 21, 2020 in Tax and Budget

The following testimony, on A4809, was delivered to the Assembly Commerce and Economic Development Committee on October 21, 2020.

Thank you, Chairman Johnson and members of the committee for this opportunity to speak with you today.

I am testifying in support of A4809 as a technical improvement to the corporate business tax code. This bill should ease the accounting processes for both the state Division of Taxation and tax filers. However, New Jersey Policy Perspective (NJPP) views this legislation as a missed opportunity to close the remaining loopholes in the corporate business tax code. New Jersey successfully enacted combined reporting legislation in 2018, but large corporations continue to utilize tax avoidance schemes, which further erode New Jersey’s corporate business tax revenue and funding for investments that are critically important for the state, especially right now as we chart our recovery from COVID-19.

Given the extraordinary circumstances of a pandemic-induced recession, New Jersey must get a handle on multinational corporations that brazenly exploit tax loopholes. Given New Jersey’s budget restraints, the state is in no position to provide special favors to businesses that need it the least.

Respectfully, I ask members of the committee to consider some major shortcomings of current law that this bill seeks to codify, each a missed opportunity to close tax loopholes, some big enough to drive a truck through.

The “Nexus Isolation” Method

A4809 clarifies that the income from the separate activities of a multi-state corporation will only be taxed if one of a corporation’s members independently has a physical presence in, or nexus with, New Jersey. The “nexus isolation” strategy itself is not consistent with the fundamental conceptual goal of combined reporting, which is to ensure that the tax liability of a corporation to a state is the same regardless of whether it consists of a single member or multiple members. What this bill actually clarifies is how to give those out-of-state corporations an enormous tax loophole worth millions of dollars in foregone revenue. And the bill’s assertion that this method is in line with the United States Supreme Court jurisprudence on the unitary business principle and combined groups implies that another more effective method is unconstitutional. No court has ever found that to be the case.

Deferred Tax Deduction Provision

A4809 also repeals the use of certain credits to reduce deferred tax liability on a corporation’s balance sheet, but does so without a glance at the deferred tax deduction, an accounting adjustment that offsets a “paper” expense like a one-time income tax increase. This little trick protects publicly traded companies from any appearance of depreciation that could impact their stock value, though there is no compelling evidence to support such a claim. It is an unwarranted and unsubstantiated tax giveaway that will eventually cause New Jersey to forgo real revenue needed to fund critical assets and services. In other words, another lost opportunity.

Tax Haven Subsidiaries in Unitary Groups

The combined reporting legislation as proposed in 2018 included the definition of “tax haven” to ensure that a multinational corporation reports subsidiaries that may be used as tax shelters. The final legislation dropped the definition of “tax haven” entirely, which opened up a loophole so large that between $95 million and $233 million flows right through it every year. This bill fails to address that, which is a shame given New Jersey’s precarious fiscal situation.

Small business owners in New Jersey do not have the ability to move taxable income out of the state or country like these large corporations and their well-compensated tax lawyers do. A strong combined reporting statute would level the playing field for all businesses. That can’t happen with a technical clean-up bill. It’s time to make closing loopholes in the existing corporate business tax code a priority.

Thank you.

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