Topic Category: Tax and Budget

Modernizing New Jersey’s Sales Tax Will Level the Playing Field and Help the Economy Thrive

Posted on by Sheila Reynertson

To read a PDF version of this report, click here.

Strengthening New Jersey’s ability to compete in the 21st century economy requires updates to a sales tax code that was designed and implemented before the rise of online shopping and a service-oriented economy.

New Jersey can modernize its sales tax and raise revenue required to invest in public services by:

  • Broadening the tax base to include more services
  • Adopting a remote sales tax law
  • Closing the online hotel tax loophole
  • Repealing the yacht sales tax
  • Last but not least, returning the tax rate to 7 percent

 

Like nearly all other states, New Jersey levies a sales tax on consumers purchasing goods and services at the retail level. The sales tax brings in more than $9 billion a year, making up a little over 25 percent of state revenues, making it a critical source for funding higher education, health care, public safety and other important public services required for a thriving state economy. About 20 percent of New Jersey’s sales tax revenue comes from non-residents.

Examples of taxable items in New Jersey include cars, furniture and meals in restaurants. Taxable services include snow removal and lawn maintenance, auto repair and cable and internet services. Exempt from the sales tax are goods and services like groceries, clothing, certain professional services and real estate sales. Although New Jersey does not allow local governments to levy general sales taxes, there are a few exceptions in place to mostly help tourism thrive in a handful of shore towns and support economic development in Atlantic City.

The general sales tax is added as a percentage of the purchase price.[1] Sellers add the tax to the purchase price, collect the tax from the buyer at the time of sale and then periodically submit the revenue to the state treasury. The current rate is 6.625 percent, the fifth highest among states that levy a sales tax (California has the highest state-level rate, at 7.25 percent). But because other states permit municipalities to levy a local sales tax, New Jersey’s rate is actually lower than that of nearby metro areas. New York City’s combined sales tax rate, for example, is 8.875 percent. Philadelphia’s combined rate is 8 percent.

Because so many everyday items are taxed, just about everyone in the state pays the sales tax. But the sales tax is regressive, meaning that low-income shoppers spend a larger share of their income on the sales tax then everyone else. The bottom 20 percent of New Jersey families pay 5.5 percent of their average annual incomes to sales and excise taxes (this includes fuel taxes, which aren’t directly addressed in this report), while middle-income families pay 3.2 percent and the wealthiest 1 percent of families pay just 0.7 percent. However, keeping grocery items and clothing tax-free does help make New Jersey’s sales tax less regressive than other states’ sales taxes. In fact, the gap between the average share of income paid to sales and excise taxes by the bottom 20 percent of families and the top 1 percent in New Jersey is the 10th smallest of all states.

On the whole, the sales tax has been a reliable source of revenue for New Jersey, making up over 25 percent of New Jersey’s revenues in nearly every year since 2000 (with the exception of 2005 and 2006). But the 2016 cut to the sales tax will put a dent in collections. Lawmakers ought to reform New Jersey’s sales tax with three priorities in mind: modernizing it, making it fairer and ensuring it raises adequate revenue to spur public investments.

Broaden the Sales Tax to Include More Services

The nature of New Jersey’s economy has changed dramatically since the sales tax was first introduced in 1966. At that time, industries producing goods accounted for more than a third of the national gross domestic product (GDP). By 2016, the manufacturing sector was down to 18 percent of the economy, according to the federal Bureau of Economic Analysis. Meanwhile, the services industry grew from half of GDP to more than two-thirds during that same 50-year period.

Things like cell phones, internet, cable TV, health clubs, tanning salons and lawn maintenance are common services people pay for today that were not as widespread a few decades ago. As services become an ever-more important fixture of the state economy, policymakers ought to be taxing more of them.

The services subject to New Jersey’s sales tax were last updated in 2006. These changes a dozen years ago led to the taxation of services like computer software, floor covering installation, delivery charges, some landscaping services, storage units, health club memberships, tanning salons, massage services and tattoo parlors. At the time, the state estimated the sales tax reform would generate over $400 million in new annual revenue.[2] In its first year, it did just that, bringing in $427 million, a 5 percent increase in sales receipts.

As services become an even larger part of household spending, New Jersey’s sales tax must adjust and adapt. The taxation of services also allows state policymakers to fold them into the sales tax code with a focus on high-end services to make the tax code fairer. These include professional services like accounting and bookkeeping and those provided by architects, attorneys and engineers as well as services that are predominantly utilized by upper-income households like investment counseling, interior decorating, private club membership fees, chartered flights, horse training and dry-cleaning services. (See Appendix for an expanded list of exempt services.) In addition, policymakers need to reverse course on legislation passed last year that dropped the sales tax on limousine services.

Levying sales taxes on more services would make New Jersey’s tax systems not only fairer but would help to create a more stable tax base over the long term and may help reduce the year-to-year volatility of sales tax collections. Finally, expanding the sales tax to include more services could generate a substantial amount of revenue to help the state maintain funding of important investments like higher education, public safety, mass transit and other vital services.

Adopt a Remote Sales Tax Law

In 2012 New Jersey negotiated an agreement with Amazon to force the online retail giant to collect sales tax from Garden State consumers. It was an important step, but more action on remote sales to New Jersey shoppers is needed.

Federal law prevents states from collecting sales tax from out-of-state retailers that don’t have a physical presence in the state. Nonetheless, online and catalog shoppers that live in states that charge a sales tax are still legally obligated to pay the tax on purchases directly to the state government. Most people, of course, are not aware of this obligation and many of those who are, willfully ignore the law. This lack of compliance, while common, undermines states’ ability to collect sales tax on internet, catalog and other remote sales and puts local businesses owners who must charge sales tax on every purchase at a severe disadvantage. Without the authority to require out-of-state sellers to collect and submit sales taxes, states have lost more than $10 billion in lost annual revenue to online shopping alone.[3]

A federal solution to this problem would be ideal, but without a federal fix there is one avenue that could empower New Jersey to collect sales tax on remote sales and protect local businesses from unfair competition. An innovative disclosure law enacted in Colorado in 2016 requires remote retailers to remind customers that they likely owe sales tax on their purchases.[4] It also requires remote retailers to report some purchaser information to the state which it can use to seek payment of unpaid taxes on “big-ticket” items.[5]

Specifically, the law requires that out-of-state sellers notify their customers on the online “shopping cart” summary page that they may owe sales tax on what they bought. The seller then must mail a statement to their customers each year with a summary of the dollar amounts and nature of their purchases made the previous year and a reminder of their sales tax obligations. Finally, a document listing each customer’s total annual dollar amount of purchases must be provided by the remote seller to the state revenue department. This notification allows the state to selectively collect owed sales tax from customers who made large online purchases.

A more comprehensive and efficient solution to taxing remote purchases would be federal legislation authorizing states to require all remote sellers to charge sales tax in exchange for a simplified sales tax code. But until that happens, New Jersey should do what it can to ensure that its online shoppers are paying their fair share of sales tax, giving small in-state businesses a level playing field and providing the revenue needed to fund vital services and invest in things like education, infrastructure and health care.

Close the Online Travel Loophole and Tax Airbnb Bookings

Right now online travel companies like Expedia, Orbitz and Priceline can avoid collecting all the applicable sales tax on hotel room bookings even though New Jersey collects the tax when travel agents or travelers themselves book the same room. This loophole is not uncommon and costs states between $275 million and $400 million in combined annual revenue.[6]

Here is how the loophole works: online travel companies do collect taxes on applicable sales and lodging taxes but only on the wholesale room rate they pay hotels for the right to rent the rooms, not the higher retail room rate they actually charge renters. They argue that this practice fulfills their tax collecting obligation. However, state routinely tax the full retail price charged to customers for other types of sales found on online travel websites.

To ensure that the full retail room charge is taxed when the room is booked online, New Jersey needs to modernize its law which was written before the advent of the online booking industry. Closing this loophole could generate between $8 million and $12 million more in annual sales tax revenue based on 2010 data.[7]

Similarly, short-term rental marketplaces like Airbnb should also be collecting sales tax. In 2016, over 6,000 New Jersey homeowners rented out rooms or homes on Airbnb to over a quarter of a million people, generating $50 million in income. Last year the legislature passed a bill to include a sales tax plus an occupancy tax to these informal online bookings. Despite support from the business community and Airbnb itself, Gov. Christie vetoed the bill. It was estimated that the bill would generate more than $6 million in sales tax revenue and help to level the playing field for New Jersey’s lodging industry.

Reverse the Tax Break for Yacht and Boat Buyers

In 2016, New Jersey cut the sales tax on boats and other vessels sold in the state in half and capped the sales tax on boats at $20,000 – meaning that buyers of the most expensive boats are receiving even larger tax breaks. For example, an 80-foot yacht in the $5 million range used to be subject to a $350,000 sales tax. That same luxury boat is now subject to just $20,000 in sales tax – a 94 percent tax cut. The special and unnecessary exemption for boaters is estimated to cost the state between $8 million and $15 million in annual revenue.[8]

At a time when the state has not increased funding for TANF for over 30 years, it certainly sends the wrong message to provide such tax breaks for those who need it the least. This 2015 sales tax cut should be reversed.

Return the Sales Tax Rate to 7 Percent

Last but not least, lawmakers need to reverse the gimmicky 2016 reduction in the sales tax rate, which has put very little extra cash in the pockets of most New Jersey working families but has blown a large hole in the state’s budget.

Under the tax cut, which was part of a larger deal to secure long-overdue transportation infrastructure funding, New Jersey’s sales tax dropped from 7 percent to 6.625 percent, where it stands today. The cost of this cut is about $600 million a year and growing (by 2026, for example, it’s expected to be $735 million).[9]

That kind of revenue loss is a huge blow to the state, but because the cost is spread across so many purchases and so many families, it barely registers in the pocketbooks of everyday New Jerseyans. Even the wealthiest 1 percent of families only save an average of $14 a week, while those in the bottom 20 percent earning less than $25,000 will see savings of less than a buck a week. New Jerseyans in the middle 20 percent (household incomes between $49,000 and $79,000) get an average tax cut of $1.65 a week.[10]

Appendix: Services Exempt from New Jersey Sales Tax

Endnotes

[1] New Jersey also levies an excise tax on specific items, including gasoline, alcohol and tobacco.

[2] Center on Budget and Policy Priorities, Expanding Sales Taxation of Services: Options and Issues, July 2009. https://www.cbpp.org/sites/default/files/atoms/files/8-10-09sfp.pdf

[3] Bruce, Fox and Luna in Center on Budget and Policy Priorities, States Should Adopt a Version of Colorado’s Remote Sales Tax Law, August 2017. https://www.cbpp.org/sites/default/files/atoms/files/8-3-17sfp.pdf

[4] Center on Budget and Policy Priorities, States Should Adopt a Version of Colorado’s Remote Sales Tax Law, August 2017. https://www.cbpp.org/sites/default/files/atoms/files/8-3-17sfp.pdf

[5] Only seven states (Alabama, Kentucky, Louisiana, Oklahoma, South Dakota, Vermont and Washington) have enacted some type of sales tax notification and reporting law. However, most are inferior to Colorado’s law and none are as comprehensive as the Multistate Tax Commission’s draft model law.

[6] Center on Budget and Policy Priorities, State and Local Governments Should Close Online Hotel Tax Loophole and Collect Taxes Owed, April 2011. https://www.cbpp.org/sites/default/files/atoms/files/4-12-11sfp.pdf

[7] Ibid at 7.

[8] Legislative Fiscal Note: http://www.njleg.state.nj.us/2014/Bills/S3000/2784_E1.PDF

[9] Legislative Fiscal Note: http://www.njleg.state.nj.us/2016/Bills/A0500/12_E3.PDF

[10] Analysis using Institute on Taxation and Economic Policy microsimulation, using 2016 incomes. The analysis is targeted to tax impacts for New Jersey residents only using an estimate that non-residents pay 20 percent of New Jersey sales taxes.

Op-Ed: How to Counter the GOP Tax Plan with Bold Action

Posted on by Sheila Reynertson

This op-ed appeared in the February 14, 2018 edition of NJ Spotlight.

The new federal tax law has generated a lot of press, sparked a fair amount of outrage and led many elected officials scrambling to respond with sound policies.

Unfortunately, there seems to be widespread confusion about the winners and losers under the new law – confusion that is complicating efforts to clean up New Jersey’s tax code and raise new resources to invest in critical public services.

The facts are well-established about what this tax plan really does. It disproportionately benefits those at the very top, providing a windfall for corporations and the wealthiest households and peanuts for the working people of New Jersey. To wit: New Jersey’s families with annual incomes over $1 million will see an average annual tax cut of $30,440 under the new law, whereas the bottom 60 percent (those with incomes of $80,000 or less) can expect a whopping $520.

In response to the tax law, Senate President Steve Sweeney has called for a top-to-bottom review of New Jersey’s tax structure. This is not a bad idea on its surface, but any such examination needs to include all the relevant facts.

Here are some worth considering.

Under the Christie administration, New Jersey sharply cut taxes for the best -off families, wealthy heirs and businesses, draining billions of dollars a year from the state’s coffers at a time when public services and investments were already suffering from cuts to essential services and neglect of critical asset. It’s no surprise, then, that two-thirds of New Jersey voters say the wealthiest families and large corporations are paying “too little” in taxes.

And despite persistent political promises, prosperity has not trickled down. In fact, the lack of state dollars to fund critical priorities has led to huge backdoor tax hikes that have disproportionately harmed working and middle-class families.

Take public higher education, for example, which helps to ensure an educated workforce and a thriving business climate. State operating support has been slashed by more than 21 percent since 2008 – a big reason why, over the same time, average tuitions have risen by 17.5 percent, leading to an explosion in student loan debt.

Or take public transportation. NJ Transit is one of the state’s most enviable assets and a key to economic vitality. Yet, New Jersey has slashed operating support by 59 percent between 2005 and 2017, forcing the transit system to make up the difference through punishing fare hikes, including the largest (25 percent) in the transit agency’s history in 2010 and another 9 percent hike in 2015. The fare increases between 2009 and 2017 have been about double the rate of inflation, creating a real hardship for many commuting families and depressing overall growth. Public transit is essential for a more sustainable and efficient economy, but not if it becomes plagued by broken-down trains and a shrinking ridership.

The list goes on. Without adequate funding, public services and investments like these have suffered causing the state economy to remain stagnant. And when state finances are depleted like this, it’s the most vulnerable who pay the biggest price. Child poverty remains higher than it was before the Great Recession. Nearly half of young adults are living with their parents, the highest percentage in the country. And, the median household income remains stagnant while income inequality in the state is at its highest level ever.

Meanwhile, the state’s tax code is already upside-down. New Jersey’s bottom 20 percent of families pay an average of 10.7 percent of their annual incomes to state and local taxes, while middle-income families pay 9.1 percent and the wealthiest 1 percent of families pay just 7.1 percent.

There are sensible ways to reverse course. Chief among them:

  • Raise the income tax rate on the state’s wealthiest 5 percent of families to generate over $1 billion in new funding for property tax relief and K-12 education. This policy change – modeled after California’s 2012 tax overhaul and similar to legislation introduced last session by Senator Ray Lesniak – is supported by 3 in 4 New Jerseyans.
  • Enact legislation to close corporate tax loopholes. Following the lead of 25 other states and limiting multi-state corporations’ ability to use accounting tricks to dodge state taxes – as proposed by Senate Budget Chairman Paul Sarlo – would level the playing field for New Jersey’s small and local businesses and raise up to an additional $290 million a year.
  • Reverse the tax cut that no one asked for, and that 60 percent of New Jersey voters say hasn’t helped them or their families, by restoring the sales tax to 7 percent so the state regains about $600 million for critical investments.
  • Restore New Jersey’s estate tax on heirs of fortunes worth $1 million or more – as supported by 62 percent of New Jersey voters – and bring back over $500 million a year in lost revenue.

With enormous federal tax cuts clearly favoring the wealthiest now taking hold, it is time to act – not retreat – by enacting smart tax policy and making long-overdue investments in the building blocks of a strong state economy.

Op-Ed: Why Unauthorized Immigrants Should Be Permitted to Drive Legally

Posted on by Erika J Nava

This op-ed appeared in the February 6, 2018 edition of The Star-Ledger.

Earlier this month, Phil Murphy took the reins of the governor’s office, bringing a long list of priorities to help make New Jersey fairer and stronger for everyone, as well as a strongly stated – and frequently reaffirmed – commitment to protect the state’s half million undocumented residents from a bevy of attacks from the Trump administration.

While the federal attacks on New Jersey’s immigrants are unlikely to stop, the good news is that there are state-level policies Gov. Murphy can advance that will make the Garden State a fairer and more welcoming place for all who choose to live here. At the top of that list is expanding access to state driver’s licenses to all residents who can prove their identity, regardless of their immigration status. This common-sense policy – which is already on the books in 12 other states and D.C. – will make New Jersey’s roads safer and increase the well-being of families – without costing the cash-strapped state anything. (In fact, an expanded license program would raise new revenue for the state.)

Allowing more drivers to access a new, limited license would make New Jersey’s roads safer, in large part because there would be more people who are trained, licensed, insured and accountable for their driving record. Drivers would also be less likely to flee the scene of an accident, since they would be licensed and insured. This is exactly what happened in California after it passed a law similar to the one New Jersey is considering. In addition, towns and cities across the state would be safer as the trust between immigrant communities and law enforcement improves.

There is no other state-level policy that can have a greater impact on the daily lives of mixed-status families. These families are made up of U.S. citizens (often children) and undocumented residents (often parents). These families constantly live with the anxiety of being separated from one another. This increases when they have to make a choice to drive without a license to complete necessary daily tasks such as taking their children to school and doctors’ appointments..

Expanding access to New Jersey driver’s licenses could help the state’s an estimated 466,000 undocumented community members of driving age. Of those nearly half a million eligible new licensees, we estimate that about half – 233,000 – would obtain a license within the first three years.

But this expansion stands to help other vulnerable New Jerseyans as well, including the transgender community, U.S. veterans, homeless people, people who do not have money to renew expensive identifications required under the current system, and others. This limited driver’s license would allow people to drive legally and confirm their identity, but it could not be used to board an airplane, apply for a job or obtain benefits.

Unlike some of the pressing priorities confronting the new governor, expanding driver’s licenses would not only pay for itself, but would also generate new revenues. The state would likely collect nearly $12 million in license fees in the first three years of implementation. But even more important is the fact that New Jersey’s economy works best when everyone can work and provide for themselves and their families. Across the state, having a car with the ability to drive legally and safely is central to achieving that goal. By expanding access to driver’s licenses, Gov. Murphy and the legislature can help more New Jerseyans participate in, and contribute more to, the state’s economy.

Gov. Murphy has promised that New Jersey will now be a state that fights against the federal agenda targeting the most vulnerable by pushing for state policies that work for everyone. For this to happen, lawmakers have to treat immigrants – both documented and undocumented – as the assets they are, and push for common-sense immigration policies that would help the Garden State stand out as a fair and welcoming place for everyone. Gov. Murphy can begin by putting a policy to expand access to driver’s licenses at the top of his legislative agenda.

With the governor’s leadership, New Jersey can become the 13th state to allow all its residents to apply for driver’s licenses regardless of their immigration status and send a clear message across the country that he is serious about putting New Jersey on a more welcoming and fairer path.

A Grain of ‘SALT’: New Jersey Needs More Than Workarounds to Respond to GOP Tax Plan

Posted on by Sheila Reynertson

To read a PDF version of this report, click here.

SALT ‘fixes’ would mostly help the state’s most well-off; plans to make state income tax fairer should move forward

The GOP tax plan is now law, and states are grappling with how the enormous federal tax cuts will play out for their residents. The plan delivers lopsided cuts to the wealthiest Americans and large corporations while teeing up deep and devastating budget cuts that would harm working families across New Jersey. But despite the grave threat to progress and opportunity this tax law presents, New Jersey lawmakers seem most concerned about a relatively narrow provision of the plan: the new federal limit on the deductibility of state and local taxes (SALT). Households that itemize deductions are now only allowed to deduct up to $10,000 in combined SALT when calculating their taxable income for federal taxes.

While “workarounds” are under discussion to evade the cap – including shifting the state income tax to a payroll tax[1] or attempting to treat property tax payments as charitable donations[2] – lawmakers have also voiced concern about advancing long-held plans to make the state’s income tax fairer while raising hundreds of millions of dollars for schools and property tax relief.[3]

There’s no reason not to try to design workarounds that restructure the state tax code to help New Jersey taxpayers avoid the federal cap on SALT deductions, but these workarounds should not be the primary focus of lawmakers concerned about the well-being of the state’s middle-class and working families. That’s because these workarounds would disproportionately benefit the wealthiest households in New Jersey, to make no mention of the fact that the Trump administration is unlikely to allow them to stand.

  • The wealthiest 1 percent of families (those with annual incomes over $1.1 million) would receive 54 percent of the benefit from a SALT workaround. Nearly every family in the top 1 percent – 99.9 percent of them, in fact – would benefit, with an average tax cut of $79,460 a year, or 2.5 percent of their average incomes.
  • The bottom 80 percent of families (those with annual incomes under $142,000) would receive less than 1 percent of the benefit from such a policy. Just 10 percent of these families would benefit at all, and their average tax cut would be $75 a year, or less than 0.1 percent of their average incomes.

To the extent that lawmakers ought to be considering these SALT workarounds, they should be doing so only as part of a comprehensive package responding to the federal tax plan – one that includes proposals to raise revenue from the corporations and wealthy interests who will most benefit from the federal plan. At the very least, shying away from bold tax policy – as suggested by some legislative leaders – should not be part of the equation.

The truth is New Jersey’s highest-income households – those with annual incomes over $1 million – get a windfall from the new tax plan, even with the new limit on SALT deductibility. That’s because for New Jersey’s wealthiest families, the average federal tax cuts from other changes in the law are notably larger than the average size of the impact from the loss of SALT deductibility.

Specifically, the long-term benefit of slashing the corporate rate nearly in half will overwhelmingly go to wealthy stockholders rather than the average worker.[4] Eighty percent of the value of the total stock market is concentrated at the top while fewer than half of all Americans own any stock. Further, the big tax cuts for corporations are permanent, while nearly all the smaller tax cuts and changes for individuals and families are temporary – making the overall impact of the GOP tax plan even more favorable to New Jersey’s wealthiest families than this fact sheet illustrates (since it uses 2019 impact data).

Households with incomes over $1 million – with a projected average income of $2.6 million in 2019 – will receive a combined $1.4 billion tax cut with an average tax cut of $27,300 per household, even with the SALT deduction limits factored in.

Given this windfall for the state’s wealthiest families and the state’s precarious fiscal condition there is no reason for legislative leaders to back off of long-held plans to make New Jersey’s income tax fairer and raise much-needed new revenue to invest in schools and property tax relief.

In fact, under a proposed overhaul of New Jersey’s income tax that would, in all, raise over $1 billion in new revenue while increasing taxes on only the 5 percent of highest-income families,[5] households with $1 million or more in taxable income would be paying an average of $22,000, more a year in New Jersey taxes. And under the decidedly less bold plan to raise the top tax rate to 10.75 percent on incomes over $1 million, households with $1 million or more in taxable income would be paying an average of $17,600 more a year in New Jersey taxes. Either way, these millionaire households would still come out well ahead from the combined effect of the federal tax plan and a state income tax increase.[6]

What’s more, these families at the top of New Jersey’s income brackets are already paying the lowest share of their annual average income to state and local taxes in the state (7.1 percent versus 9.1 percent for middle-income families and 10.7 percent for the lowest income quintile).[7] And they have also enjoyed over $4 billion in cumulative tax cuts since 2010, at a time when these households have reaped the overwhelming majority of any economic gains in the state.

Endnotes

[1] New York State Department of Taxation and Finance, Preliminary Report on the Federal Tax Cuts and Jobs Act, January 2018.

[2] Congressman Josh Gottheimer, Gottheimer, Murphy Offer Tax Cut Plan, January 2018.

[3] See, for example, New York Times, Democrats in High-Tax States Plot to Blunt Impact of New Tax Law, December 2017.

[4] Joint Committee on Taxation (JCT), Modeling the Distribution of Taxes on Business Income, JCX-14-13, October 2013.

[5] New Jersey Policy Perspective, Reforming New Jersey’s Income Tax Would Help Build Shared Prosperity, September 2017.

[6] Federal tax plan changes affecting individuals are modeled using ITEP’s microsimulation tax model, which generates tax estimates for a sample of representative taxpayer records in each state. For more information about the model, visit https://itep.org/itep-tax-model-simple/

[7] Institute on Taxation and Economic Policy, Who Pays: A Distributional Analysis of the Tax Systems in All Fifty States (2015 edition).

Governor Takes Important Step on Tax Subsidy Evaluation

Posted on by Jon Whiten

Gov. Murphy took an important step toward righting New Jersey’s economic-development ship with today’s executive order calling for a robust, independent evaluation of the state’s use and abuse of corporate tax breaks. As we’ve often noted, better evaluation is a critical part of comprehensive comprehensive subsidy reforms that can usher in amore responsible approach to economic development in the Garden State.

Since 2010 – and in particular since 2013 – New Jersey has seen an unprecedented surge in corporate tax subsidies, further cramping New Jersey’s ability to fund schools, transportation and other investments known to be greater drivers of job creation. The state has rapidly increased the amount of special tax breaks approved, more of these subsidies have been used to merely shift jobs around the state, and the breaks to individual corporations have become larger and larger even as the required investments from those corporations have gotten smaller and smaller.

A new direction is urgently needed, because the state can’t afford this subsidy largesse – both in terms of its direct, long-term drain on the state’s coffers and in terms of the opportunity costs created by having such a lopsided and flawed economic-development strategy.

New Jersey can’t afford to ink over $1 billion in subsidy deals every single year, or to continue approving 9-figure tax breaks to help profitable multinational corporations move their offices a few miles down the road with a new building fully paid for by the state’s taxpayers, or to continue expanding these programs without end.

New Jersey’s tax breaks must be smaller, smarter and more targeted to small, growing businesses located in places with access to public transit. We’re glad the governor is taking this essential first step to require rigorous evaluation so early in his tenure. And we look forward to working with him, his administration, members of the legislature and agency officials to retooling these subsidies and making New Jersey truly competitive in a 21st century economy.

NJPP’s reform agenda for corporate tax breaks

Better evaluation of the state’s corporate tax subsidies is one of ten key reforms proposed by NJPP in May 2017 – others include restoring spending caps on these programs, limiting the use of breaks for jobs already in the state, and restricting the ability of corporations to redeem more in tax credits than they owe in taxes. For the full report, click here: https://www.njpp.org/budget/its-time-for-new-jersey-to-rebalance-the-economic-development-scales

New Jersey’s subsidy surge, by the numbers (figures are through the EDA’s January 2018 meeting):

  • ​5: Number of years in a row (2013-2017) that New Jersey has approved more than $1 billion in tax subsidies
  • 0: Number of times an annual report evaluating the efficacy and fiscal impact of these subsidies, mandated under a 2007 law, has been produced
  • $8.4 billion: Total amount of tax breaks approved since January 2010 (a monthly rate of $87 million)
  • $1.2 billion: Total amount of tax breaks approved during the entire previous decade (Jan. 2000-Dec. 2009) (a monthly rate of $10 million)
  • $61,000: Taxpayer cost per subsidized job since January 2010 ($117,000 per “new” job)
  • $16,000: Taxpayer cost per subsidized job in the 2000s ($22,000 per “new” job)

Newark Makes Amazon Shortlist, Rejects Records Request for 'HQ2' Bid

Posted on by Jon Whiten

We’re glad to see Newark on Amazon’s short list for its new headquarters, as we’ve said all along that New Jersey’s largest city would make a prime location for the company’s HQ2 project. But we remain wary of the steep price tag for taxpayers that state and local lawmakers have already put on this project. By putting at least $5 billion, and potentially several billion dollars more, in taxpayer dollars on the table so early in the game, New Jersey has ensured that is returns will be minimized if Amazon were to ultimately choose the state.

For New Jersey’s economy to be truly competitive and strong, the state needs to get back to basics: investing in the assets that give us an edge. Whether that’s ensuring NJ Transit is reliable and affordable, strengthening the state’s public colleges and universities, or fostering smart, dense growth in walkable downtowns with more affordable places to live, these are the policy solutions New Jersey should have prioritized in its efforts to woo Amazon. Merely blowing the lid off already out-of-control corporate tax break policies comes at a hefty price tag for New Jersey’s future.

Meanwhile, the city of Newark on Friday denied a public records request for its bid aimed at luring Amazon’s second headquarters to the city, suggesting that doing so would “provide competing cities with an advantage in the competition” to secure the Amazon project. It inexplicably took the city nearly 11 weeks to reject the records request, which was filed by New Jersey Policy Perspective on October 30 of last year.

This rejection is despite the fact that an estimated $2 billion in Newark city taxpayer dollars, and at least $3 billion in state taxpayer dollars, are being offered as bait to lure Amazon’s “HQ2” in this expensive race to the bottom.

Across the country, cities and states are hiding behind a variety of legal barriers in order to keep their subsidy-fueled bids for Amazon’s new headquarters secret. In New Jersey, with so much taxpayer money at stake, lawmakers and economic-development officials should be erring on the side of transparency and open government, not legal technicalities.

Tired ‘Outmigration’ Claims Rear Their Head In Final Days of Christie Administration

Posted on by Sheila Reynertson

In a final salvo just days before leaving office, the Christie administration last week released a misleading report that cherry-picks data to “warn” the incoming Murphy administration against cleaning up New Jersey’s tax code while raising the resources required to build a stronger state economy.

The report is the latest in a long line of flawed “studies” that purport to show two things: First, that the outflow of people and income from New Jersey is at a crisis level, and, second, that this outflow is due to the state’s relatively progressive tax structure (overall, New Jersey’s state and local tax code is actually regressive, in that the poorest in the state pay the greatest share of their income to taxes, but it is less so than in many other states).

Like similar reports that came before it, this new Treasury report misuses a set of data from the Internal Revenue Services’ Statistics of Income (SOI). The author either did not take the time to read the SOI user guide – which cautions against misinterpreting the data – or deliberately ignored it. The IRS clearly states that the SOI migration data is not an accurate way to measure “migration of money.” There are multiple reasons for this, including the fact that the Adjusted Gross Income data reflects income after the taxpayer moved out of state – not before he/she left the state. Thus AGI data cannot be accurately tied to New Jersey or be considered an outflow of money. Anyone using the data this way is either woefully unaware or willingly deceitful. Either way, the report loses all credibility on this point alone.

This report is a not-so-veiled attempt to delegitimize the importance of fair taxation’s role in helping New Jersey grow and prosper by using revenue to invest in things like mass transit, higher education, clean water and public safety. Presented with the proper context, these facts tell a very different story than the one being peddled by the Office of the Chief Economist.

  • The supposed “loss” of $35 billion described in the report is a big, scary number. But in reality, it is barely a rounding error when put into context of over $6 trillion total household income generated in New Jersey from 1993 to 2016.
  • New Jersey raised an average $1 billion in new annual revenue right out of the gate when it introduced a new top income tax rate of 8.97 percent in 2004. Despite the tax flight fearmongering, no state has ever lost revenue by ensuring that the state’s wealthiest families pay their fair share. And what little revenue is lost due to those taxpayers who chose to move elsewhere is neither statistically, nor socioeconomically, significant.
  • New Jersey should not be in the business of crafting tax policy tailored to benefit the wealthiest given the fact that New Jersey’s state and local tax code is already upside down, favoring those who make over $200,000.
  • The state continues to gain millionaires and has a higher share of them than all but three states – this growth has occurred during a time that state income tax rates on wealthy households were raised twice, and has been healthy despite the Great Recession.

Signing of Amazon Tax Subsidy Bill a Fitting End to the Christie Era

Posted on by Jon Whiten

This afternoon Governor Christie signed A-5340, which clears the way for the state to authorize at least $3 billion in corporate tax breaks for a company that comes to New Jersey with at least 30,000 jobs and meets certain other requirements. The bill, designed with Amazon’s HQ2 in mind, is the latest expansion of these special business tax breaks in New Jersey in recent years.

This is a fitting but unfortunate end to the Christie era, with the governor – and an uncritical Democratic legislature – having overseen a massive and short-sighted expansion of corporate tax subsidies since January 2010. In fact, the governor has now presided over the approval of an astonishing number of 9-figure subsidy deals – 13 to be precise – and with this final legislative act, will clear the way for a colossal 10-figure deal.

Instead of coming up with a sensible plan to reverse billions of dollars of disinvestment in New Jersey’s top economic assets, like public transit or higher education or high-quality preschool, the state’s lawmakers have doubled down on trickle-down economics by clearing the way for a gigantic tax subsidy for Amazon. If New Jersey wants to build a stronger, brighter future, it needs to seriously rethink and reform its use and abuse of these special tax breaks – not just continuously expand them at every turn of the corner.

New Jersey’s subsidy surge, by the numbers (figures are up-to-date through the EDA’s December 2017 meeting – they do not include any of the deals approved this week):

  • $8.3 billion: Total amount of tax breaks approved since January 2010 (a monthly rate of $87 million)
  • $5.7 billion: Of that, the amount that’s come since December 2013, when the “Economic Opportunity Act of 2013” went into effect (a monthly rate of $117 million)

New Jersey’s 13 nine-figure subsidy deals under Christie administration (through Dec. 2017):

Panasonic (Newark): $102,408,062 February 2011

Prudential Financial (Newark): $210,828,357 June 2012

American Dream Mall (East Rutherford): $390,000,000 November 2013

Legislative overhaul goes into effect December 2013

MMC-DB Group LLC (Paterson): $105,559,214 December 2013

JP Morgan Chase (Jersey City): $224,835,000 May 2014

Sayreville Seaport (Sayreville): $223,277,590 May 2014

Holtec International (Camden): $260,000,000 July 2014

Lockheed Martin (Camden): $107,000,000 November 2014

Subaru (Camden): $117,832,868 December 2014

American Water Works (Camden): $164,187,735 June 2015

JP Morgan Chase (Jersey City): $187,781,000 July 2015

EMR Eastern (Camden): $148,589,900 September 2015

Resintech Inc. (Camden): $138,817,600 October 2016

Note #1: This does not include nine-figure deals that were closed and later abandoned before awarding any tax breaks (ie, the $261 million deal to Revel casino)

Note #2: Only one nine-figure deal preceded Christie: $164,336,000 for Goldman Sachs in Jersey City in 2000

Amazon Subsidy Bill a Big Step in the Wrong Direction

Posted on by Jon Whiten

Below is prepared testimony delivered to the Senate Budget & Appropriations Committee and the Assembly Judiciary Committee.

Let’s imagine there was a program administered by the state of New Jersey that helped about the same number of residents each year but whose cost exploded nearly 8-fold over the course of a decade. No doubt there would be outrage from the legislature, who are elected to be – in part – guardians of the state’s finances. There would be grave concern about the state’s return on its investment. There might even be public hearings, a special committee, or some independent investigation about just how this particular program got so incredibly expensive.

The thing is, we don’t have to imagine this scenario – it’s actually happening, and the legislation being considered today will only serve to make it worse.

In 2006, the state of New Jersey was able to either lure or keep about 15,000 jobs through it’s corporate tax subsidy programs – about the same number (actually, a few hundred more) than it did about a decade later, in 2015. But that’s where the similarities between those 2 years ends, and the differences here are as clear an illustration as any that New Jersey has gone way overboard on these special tax breaks.

In 2006, the state “paid” – through future tax credits – $186 million for these 15,167 jobs. In 2015, the state paid 7 and a half times as much – $1.4 billion – for the 14,385 jobs. Put another way, the cost per subsidized job shot up from about $12,000 to nearly $98,000.

As we have rigorously documented at New Jersey Policy Perspective, the state has doubled down on its nearly-exclusive use of subsidies to try to spur economic development. We just wrapped up our 5th year in a row, in fact, of approving more than $1 billion in these breaks – after 17 years of never crossing that line. The amount New Jersey has approved in those most recent 5 years ($6.7 billion) is more than double the amount ($3.0 billion) it approved the entire 17 years before.

This singular approach has ignored the state’s crucial assets that made New Jersey an economic powerhouse: location in the middle of the world’s largest consumer market, one of the nation’s most highly-educated workforces and thriving communities. Instead we have witnessed the deterioration in NJ Transit, disinvestment in higher education and declining support for our excellent public schools.

Clearly, New Jersey has gone off the rails. But it’s not just NJPP that has noticed. In fact, corporate consultants at McKinsey and Company, and national economic-development experts at the Pew Charitable Trusts and elsewhere, have noticed, and – like NJPP – called for a suite of reforms that would make the state’s use of these so-called “incentives” smarter, more responsible and accountable, and less of a long-term drag on the state’s fiscal health.

Unfortunately, this bill takes New Jersey in the exact opposite direction.

Yes, we all want to bring Amazon’s new headquarters to New Jersey. But like with any other development deal, we must ask: at what cost? Is giving one of the world’s largest corporations, with $136 billion in earnings last year, a dollar-for-dollar tax break for its investment in the state of New Jersey a fair deal to all 9 million residents? Is it a good deal?

Quite simply, it is not a good deal.

Amazon does not need $3 to $7 billion in public dollars to spur its own private investment; that much is clear by looking at the company’s earnings, and at its RFP for this project. But let’s assume for a second that it does. Why are all the other critical public investments that Amazon needs to succeed in New Jersey being ignored? Why is there not a bill in this lame duck legislature to invest $2 billion in public transit investments so Amazon’s workers can get in and out of a New Jersey city efficiently, affordably and not in their cars? Why are there not bills moving right now to invest in affordable homes, higher education, workforce development, childcare and education, or any of the other factors and assets that draw leading corporations to New Jersey? Why must we continue to put all of our economic-development eggs in this one inefficient and ineffective basket?

There is a smarter path to take if we want to return New Jersey to its days of being one of the country’s economic powerhouses. But it takes real investment in public assets. Bills like this one not only ignore that crucial part of the economic-development formula, they make it harder in the future to pony up the dollars required to pay for public services and investments. This is a damaging cycle that needs to end – and there’s no better time to start than now, by voting against this legislation.

Will NJ GOP Stand Up Against Spending Cuts?

Posted on by Jon Whiten

This op-ed appeared in the Sunday, December 24, 2017 edition of the Star-Ledger.

Last week the U.S. House of Representatives and the Senate passed a GOP tax bill that rewards profitable corporations and wealthy families while putting middle-class and low-income families across the country at risk.

All but one of New Jersey’s 14 members of Congress – including four of the state’s five Republican House members – voted against the bill. Rep. Tom MacArthur, R-3rd Dist., was the lone “yes” vote.

The fact that nearly all of New Jersey’s members of Congress had the clarity to see this GOP tax bill for what it is – an attack on New Jersey working families – is the tiny silver lining in an incredibly dark cloud for America’s future.

This tax bill is an expensive gift to the wealthy and to corporate America, wrapped up in the guise of “tax reform.” And congressional Republican leaders are already calling for spending cuts next year that will threaten working families – and they’re using high deficits, which their tax bill will make worse, as the rationale.

The GOP tax bill, once fully phased in, will disproportionately harm middle-class and lower-income New Jerseyans while rewarding the state’s wealthiest households.

* New Jersey households with incomes over $1.4 million (the top 1 percent) would receive an average $8,470 tax cut while the bulk of Garden State families (the bottom 60 percent, or those with incomes under $111,000) would see a tax hike averaging $110.

* Those families in the top 1 percent would receive 63 percent of the state’s share of the tax cut — $384.1 million in total — while the bottom 60 percent would, together, receive less than 0 percent of the tax cut, since they’d pay a total of $331 million more in taxes.

* About 1 in 4 New Jersey taxpayers would see a tax hike.

* An estimated 340,000 New Jerseyans would no longer have health insurance.

But sadly, these direct impacts from the bill aren’t even the worst of what President Donald Trump and GOP leaders have planned for us.

In fact, the tax bill is step one of congressional Republicans’ two-step tax and budget agenda that would rip the American social contract to shreds, undo decades of progress for working Americans and send the country hurtling even faster toward a new gilded age.

Here’s how this two-step agenda works: First come the tax cuts – they are tilted to the top, they are expensive and they blow up the deficit. That last point is key. Because the second step is to cut public services, programs and investments – using the deficit pressure these tax cuts cause as the rationale. GOP leaders are already out there promising to slash the already-tattered safety net and rein in so-called “entitlements” – in other words, health care, retirement security and food assistance for millions and millions of Americans.

As House Speaker Paul Ryan, R-Wis., said early this month, “We’re going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit. … Frankly, it’s the health care entitlements that are the big drivers of our debt, so we spend more time on the health care entitlements – because that’s really where the problem lies, fiscally speaking.”

In other words, this tax bill was about much more than taxes. It was – and remains – a statement of about how we shape our society and our future. How we raise money, and what we choose to spend it on, are the truest reflections of our values as a country.

This tax bill and its corresponding budget agenda are a one-two punch for New Jersey’s working families, children, seniors and people with disabilities. Calls for spending cuts to balance the budget are nothing more than thinly veiled efforts to gut programs such as Medicaid, SNAP and disability insurance that help millions of struggling New Jerseyans meet their basic needs.

We all share a responsibility to ensure that struggling families do not go hungry or become homeless. New Jersey’s entire congressional delegation – but particularly MacArthur, who failed struggling working families when he voted for the GOP tax bill – should commit now to standing against budget cuts that would further hurt everyday New Jerseyans by taking away health coverage, food assistance, housing and more from Garden State families.

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