Single Factor: Double Trouble

By Mary E. Forsberg

INTRODUCTION

When states tax corporations the process is not as straightforward as taxing individuals. Unlike most people, many businesses operate in many states, so formulas are needed to figure out how much income should be taxed in which states. The task is to make sure that no income is taxed twice or that, conversely, no income that should be taxed someplace is not taxed anyplace.

Today the formula used in New Jersey takes into consideration a company’s payroll, property and sales to determine how much income tax it owes. However, the Legislature now has before it a proposal that would dramatically alter the formula so that only sales count. According to the New Jersey Business & Industry Association (NJBIA), this change could cut corporate income taxes in New Jersey for certain multi-state corporations – including AT&T, Schering-Plough, Merrill Lynch, Lenox, Inc., Johnson & Johnson and American Home Products.

The most often cited argument in favor of the change is that it will stimulate job creation and investment in New Jersey. But there is little evidence that significant economic development will result from this tax change. More important, there is no doubt that there will be a significant revenue loss to the state. The relatively few companies that would benefit most are some of the largest in the state.

This report will examine the basics of corporate income taxes, analyze the current proposal for change and put the issue in context so that a more informed public debate can occur.

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