Topic Category: Tax and Budget

Fixing Corporate Tax Code Would Help All Businesses

Posted on by Sheila Reynertson

This op-ed appeared in the December 14, 2017 edition of ROI-NJ.

Soon, a new administration will be taking the helm of the Garden State. And when Gov.-elect Phil Murphy opens the books for the first time, one thing will be crystal clear: New Jersey is in trouble.

New Jersey has taken a slow, uneven path toward economic recovery, putting an enormous strain on a budget with oversized obligations — and on the pocketbooks of New Jersey families. To set New Jersey on a course toward safer waters, swift, bold action is a must.

There is no doubt that most interest groups and communities in New Jersey will be asked to share in the efforts to put New Jersey back on track. The business community is no exception. But the good news is that there are proposals that can reform the tax code for businesses, helping to level the playing field for all New Jersey businesses while raising new revenues — all without a broad-based corporate tax increase.

Since the Great Recession, the share of revenue collected from businesses operating in New Jersey has dropped, with no signs of bouncing back to its previous levels. Without adequate revenue, the state can’t invest in the state’s small, local and homegrown businesses and entrepreneurs.

There are two main reasons for stagnant corporate tax revenue. The first has to do with economic development incentives gone overboard. The unprecedented surge in corporate tax subsidies now costs New Jersey taxpayers a whopping $80,000 per job and will cause a long-term drag on growth as future tax credits are paid out over the next decade. We concur with Ted Zangari’s opinion that “under today’s circumstances,” New Jersey “can’t be as generous” with these tax breaks — and we look forward to charting a sensible course forward, one that rebalances the economic-development scales.

The other reason has to do with profitable, multistate corporations gaming the system to their advantage. Right now, these large businesses can legally avoid paying their fair share of state taxes, thanks to multiple loopholes in the corporate tax code — accounting tricks not available to New Jersey’s small business owners — leaving behind over $400 million a year.

Now more than ever — and particularly in the face of the possibly changes afoot due to the federal tax plans — New Jersey must tighten up its corporate tax code. By adopting policies that remove tax loopholes and reverse tax cuts for large S-corporations, New Jersey could restore equity in the corporate tax code, raise new revenue and invest in the kind of assets and opportunities that actually drive economic growth for all of New Jersey’s businesses.

GOP Tax Plan Shouldn’t Delay Fixes to NJ’s Tax Code

Posted on by Jon Whiten

This op-ed appeared in the December 15, 2017 edition of the Asbury Park Press.

As Congressional Republicans’ disastrous tax plan inches closer to reality, New Jersey’s legislative leaders are getting cold feet about the Garden State’s own tax plans that would boost working families, clean up the tax code and allow policymakers to invest in the assets critical to the state’s future. But the GOP tax plan is no reason for lawmakers to shelve these plans – it actually gives them more reason than ever to move forward.

In particular, these policymakers are suggesting that New Jersey might need to press “pause” on long-held efforts to make New Jersey’s income tax fairer by asking the wealthiest residents to pay a little more so our state can build a brighter and stronger economic future. The reason: Fears about a “double whammy” if the Republicans’ federal tax proposal raises taxes by eliminating state and local tax deductions used heavily by New Jerseyans. Those fears, however, are unfounded.

In fact, the Republican tax proposals in D.C. all favor the wealthy – even if these deductions disappear. Once the bill passed by the Senate is fully phased in, for example, it’s New Jersey families in the bottom 60 percent ­– those earning under $111,000 a year – who will, on average, pay more in net taxes – not the wealthy, according to the Institute on Taxation and Economic Policy. In fact, the top 1 percent of Garden State households – those with annual incomes over $1.4 million – would get an average annual $8,350 tax cut. This narrow slice of wealthy New Jerseyans would reap about two-thirds of the tax cut coming to the state, leaving just one third to divvy up between the rest of us.

The bottom line: New Jersey’s wealthy families are being rewarded by the GOP tax plan – not punished. And a big reason is the enormous and permanent corporate tax cut that is the centerpiece of the proposed changes.

That’s because slashing the top corporate tax rate by nearly half will primarily benefit owners of corporate stocks, according to Congress’ own Joint Committee on Taxation. In fact, despite President Trump’s insistence that average working families will get a “$4,000 pay raise” from this tax plan, just 25 percent of the long-term benefit of a corporate tax cut will go to workers.

And of that already small share, an even smaller piece will go to middle-class or low-income workers, since fewer than half of all Americans own any stock, and overall shareholder wealth is – like most of the rest of the country’s wealth – extremely concentrated at the top (the top 10 percent of Americans own about 80 percent of the value of the total stock market, according to leading economist Ed Wolff).

The bulk of the benefit from the corporate rate cut – three-quarters of it, in fact, – will go to shareholders –and 35 percent of that will flow to foreign investors. In the end, foreign investors will actually see more benefit from this corporate rate cut than working Americans.

Back at home, New Jersey’s own tax code is already upside down, with the lowest-income families in the state paying the highest share of their average annual income to state and local taxes, and the top 1 percent paying the smallest. And recent policy changes have largely made this even worse while making it more difficult for the Garden State to meet the pressing needs of most families by investing in higher education and public transit, or reducing property taxes. New Jersey’s wealthiest families have gotten over $5 billion in tax breaks since 2010 thanks to the expiration of the recession-era income tax surcharge, and a few thousand of the state’s richest heirs are in line to receive a tax cut worth about $500 million a year starting in 2018 thanks to the elimination of the state estate tax.

This is not the time to further delay plans to make the state’s income tax fairer. In fact, New Jersey’s leaders ought to not only move forward with these long-held plans – they should also explore how to recoup at least some of the federal tax cut dollars that will flow to New Jersey’s wealthiest families and largest, most profitable corporations.

This idea goes beyond basic arguments of fairness, because Congressional leaders’ plan consists of two parts: first cut taxes, then cut public services and programs like health care, food assistance, education and housing. The more money New Jersey is able to recoup from the beneficiaries of this disastrous tax plan, the more we’ll be able to guard against the deep and devastating cuts that are sure to threaten the state’s working families down the line while raising costs for state and local governments.

How the GOP Tax Bill Could Undo Decades of Progress

Posted on by Jon Whiten

On Friday, I joined a tele-town hall on the Republican tax plan with Governor-Elect Murphy, Senators Menendez and Booker, and Congressman Pallone. Audio from the call, which was organized and hosted by New Jersey Working Families, can be heard here. Below are my prepared remarks.

There are a lot of ways to think about this Republican tax plan, and a lot of different slices to look at. I like to think of it this way: There are the pocketbook effects of the tax plan – these are the direct impacts on New Jersey families. And then there are the larger, existential threats to the American social contract that this tax bill represents and puts into motion.

On the first, the pocketbook effects, this plan is a raw deal for New Jersey’s middle class, its low-income families and its working class. We’ve been crunching the numbers with every new iteration of this bill, and while minor changes occur from version to version, the big picture remains the same: the wealthiest families and large corporations make out like bandits, and working families get stuck with the bill.

A few quick data points on the bill the Senate passed last weekend:

  • New Jersey’s top 1 percent of households would receive an average $8,350 tax cut each year, while the bottom 60 percent of families see a tax hike averaging $120 a year.
  • Those families in the top 1 percent would receive nearly two-thirds of the state’s total share of the tax cut.
  • In all, we estimate that New Jerseyans would deduct nearly $27 billion less in state and local taxes under the Senate-passed bill than they do now.

As terrible as that all sounds, that is not even the worst part of this bill. In fact, this bill is the first step in a two-step “cut and cut” 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 cut and cut 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 services, 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.

That’s why this tax battle is so critical. This is about so much more than preserving tax deductions that so many New Jerseyans use. It’s about so much more than beating back huge tax cuts for powerful interests who are the only ones thriving in today’s rigged economy. It’s 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. We must do better than this. And we can do better than this – but only if we keep up the fight. Thanks to everyone here on this call for your commitment to doing just that.

A $15 Minimum Wage is an Economic Necessity

Posted on by Brandon McKoy

This op-ed appeared in the December 7, 2017 edition of NJ Spotlight.

While New Jersey has crawled out of the Great Recession, the gap between working people and the wealthiest in the state continues to widen — with damaging effects for a great number of our friends and neighbors. Even though unemployment rates have dropped in recent years, poverty rates continue to be stubbornly high, indicating that while more people are working hard, they aren’t earning enough to make ends meet. It’s a series of problems that has harmed the health of our workforce and economy; swiftly addressing them is essential to improving the long-term strength of our state.

Fortunately, Gov.-elect Murphy and legislative leaders are committed to tackling economic inequality, in part by increasing the minimum wage to $15 per hour. As always, talk of increasing the minimum wage draws opponents out of the woodwork to claim that such a move would destroy our economy. While these Chicken-Little claims have been proven wrong over and over, it’s worth explaining exactly why New Jersey needs a $15 minimum wage and exactly how it will improve the state’s economy — not kill it.

It’s important to understand just how far behind New Jersey’s working families have fallen. While the unemployment rate has dropped from its height of nearly 10 percent in 2010 to about 4.5 percent today, the rate of poverty and number of residents who rely on food stamps and other benefits remain significantly higher than they were prior to the recession. In other words, while people have been able to find work, too few are earning enough to live independently and afford basic needs, showing that wages haven’t grown sufficiently for too many workers.

The minimum wage for 2018 will rise modestly to $8.60 per hour, which translates to just $17,888 assuming a full-time worker who doesn’t take a day off. That’s a poverty wage and less than half of the $39,393 a year it takes for a single worker to just get by in high-cost New Jersey. About one in four New Jersey workers make less than $15 per hour, which equals less than about $31,200 per year assuming full-time work. It’s no wonder that reports show that a third of New Jersey households can’t meet their basic needs of food, shelter and getting to work, forcing them to rely on public programs and private charity to make ends meet.

While low-wage employers oppose efforts to raise the minimum wage, citing big negative consequences for their businesses, the fact that so many of their workers don’t make enough to afford the products and services they’re offering is a more pressing concern. As income inequality grows, fewer and fewer people make enough to afford basic daily needs, which hurts local businesses that are deprived of would-be customers. Increasing the wage to a level that helps workers meet their needs means that they will spend that money immediately and locally, benefiting small businesses across the state.

And taxpayers should realize that increasing the minimum wage will lead to better use of their money. Right now, some large corporations exploit having their low wages subsidized by taxpayers, who must pay for these low-paid workers’ use of public benefits. A report by UC Berkeley shows that New Jersey spends $726 million in taxpayer dollars each year for public benefits for full-time workers who aren’t being paid enough to afford basic necessities. Making sure that corporations pay their workers a fairer wage will reduce the number of workers that rely on public assistance to get by, thereby freeing those tax dollars for other uses.

Finally, we should rely on history and the evidence from other places that have raised the minimum wage. While the business lobby would like for you to believe otherwise, Seattle has benefited significantly from higher wages, with unemployment reaching an all-time low of 2.6 percent in April and economic activity increasing as more people are able to meet basic needs. We’ve also seen the benefits for ourselves right here in New Jersey; the last time we increased the minimum wage through the ballot, opponents claimed we would lose 30,000 jobs; instead, we gained 90,000.

Ultimately, raising the wage is about giving people a chance to provide for themselves and their families. We can’t be surprised when people aren’t involved in their community or aren’t able to spend time with their families when they have to work two or three jobs just to put food on the table and keep a roof over their heads. We all benefit when we have more New Jerseyans who can contribute to their communities and take care of their families. It’s time to move toward a stronger, more prosperous state. It’s time to raise the wage.

Senate-Passed Tax Bill Still a Raw Deal for New Jersey’s Working Families

Posted on by Jon Whiten

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

The federal tax proposal passed by the U.S. Senate on December 2 would raise taxes for the average middle-class and low-income New Jersey family while cutting taxes for wealthier families and for large corporations. At the same time, it would increase the number of New Jerseyans without health insurance by 340,000 by 2027 thanks to the repeal of the Affordable Care Act’s individual mandate.[1] (Unless otherwise noted, all data in this Fast Facts is on the impact in the year 2027, once the plan is fully phased in.)

New Jersey households with incomes over $1.4 million (the top 1 percent) would receive an average $8,350 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 $120.[2] Taken all together, those families in the top 1 percent would receive 64 percent of the state’s share of the tax cut – $378.8 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 $333.7 million more in taxes under the plan. In all, about 1 in 4 New Jersey taxpayers (26 percent) would see a tax hike under the Senate-passed bill.[3]

The plan is a clear example of Robin Hood in Reverse, as it gives the largest average tax hikes to New Jersey’s poorest families while showering the state’s very wealthiest families with the biggest tax cuts. While just 1.6 percent of the state’s wealthiest 5 percent of families would see a tax hike, 3 in 5 families in the bottom 60 percent would.

By just about every measure, the Senate-passed bill is worse for New Jersey’s working-class and middle-class families than the House bill, which was quite damaging for these families already.

The pain for New Jersey’s working families does not end with the direct impact of this tax bill, unfortunately. In fact, the tax bill is step one of Congressional Republicans’ two-step tax and budget agenda[4]: enact costly tax cuts now that are heavily skewed toward wealthy households and profitable corporations, then use the cost of those tax cuts and their negative impact on the federal deficit as a rationale to cut public services, programs and investments on which all Americans – particularly low- and moderate-income residents – rely.[5]

State and Local Tax Deductions Remain On the Chopping Block

The Senate-passed bill – like the House-passed bill – eliminates taxpayers’ ability to deduct state/local income or sales taxes paid while capping the amount of property taxes one could deduct at $10,000. A total of 41 percent of Garden State households currently file using these deductions – the third highest share of all states, after Maryland and Connecticut. Slightly more New Jerseyans claim the income or sales tax deduction (1.8 million) than claim the property tax deduction (1.6 million). Garden State households deduct a total of $32.2 billion in state and local taxes each year, the third highest dollar amount after California and New York.[6]

While the property tax provision has been pitched as a “compromise” to win over reluctant lawmakers from New Jersey and other similar states, an estimated 54 percent of Garden State taxpayers who currently claim the property tax deduction would no longer do so under the Senate-passed bill. And those most likely to lose the deduction are middle-class families – in fact, 60 percent of current middle-income claimants of the property tax deduction would lose it, while just 1 percent of current high-income claimants would.[7]

That’s because even though they’d still technically be able to take the property tax deduction, many would choose not to because the combination of itemized deductions (which would no longer include state income and sales taxes) would be smaller than the standard deduction. This would be a bad deal for many taxpayers because even as the Senate-passed bill increases the standard deduction, it eliminates personal exemptions would be eliminated. Even if the standard deduction were tripled (and it’s not even doubled under the Senate-passed bill), a significant portion of families that now itemize their deductions would still end up with tax increases.[8]

In all, New Jerseyans would likely deduct nearly $27 billion less in state and local taxes under the Senate-passed bill than they do now.[9]

Endnotes

[1] NJPP analysis based on Congressional Budget Office estimates using weighted average for employer-based, marketplace, and Medicaid expansion coverage.

[2] Institute on Taxation and Economic Policy Microsimulation Tax Model, December 2017. Model includes all major components of the tax bill, including personal income tax changes, changes to deductions, corporate tax changes and estate tax changes. Full dataset and methodology available at https://itep.org/housesenatetaxplans-dec17/

[3] This report’s key findings on the distribution of the tax plan focus on average and total tax hikes or cuts by income group. This explains why, for example, the bottom 60 percent would, on average, and, in total, pay more in taxes, even while there are individual taxpayers inside that income group who would pay less – the tax cuts they receive are just overwhelmed by the tax hikes that others in the same income group would see.

[4] Center on Budget and Policy Priorities, Budget Briefs: The Republican Two-Step Fiscal Agenda, November 2017. https://www.cbpp.org/budget-briefs-the-republican-two-step-fiscal-agenda

[5] The Washington Post, GOP eyes post-tax-cut changes to welfare, Medicare and Social Security, December 2017. https://www.washingtonpost.com/news/wonk/wp/2017/12/01/gop-eyes-post-tax-cut-changes-to-welfare-medicare-and-social-security/?utm_term=.7f251e2e56bf

[6] New Jersey Policy Perspective, Fast Facts: Millions of New Jerseyans Deduct Billions in State & Local Taxes Each Year, November 2017. https://www.njpp.org/budget/fast-facts-millions-of-new-jerseyans-deduct-billions-in-state-local-taxes-each-year

[7] Ibid 2

[8] Government Finance Officers Association, Impact of Eliminating the State and Local Tax Deduction (Updated with 2015 IRS Data), 2017. http://www.gfoa.org/sites/default/files/RCC%20Report%20on%20SALT%20Deduction-092017_Final.pdf

[9] NJPP analysis using data and estimates from Ibid 2 and actual dollar amounts currently deducted by New Jersey households from Ibid 6

Fixing New Jersey’s Broken Corporate Tax Code Will Help Small Businesses, Boost the Economy

Posted on by Sheila Reynertson

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

New Jersey’s corporate tax code is littered with loopholes, special breaks and preferential treatment for large and well-connected corporations. This broken system caused the state to lose billions of dollars over the past decade – billions that could be better used to help create a prosperous state with a strong economy and thriving communities in the coming decades.

Four states and the District of Columbia levy higher corporate business tax rates than New Jersey’s 9 percent rate.[1] And with the help of tax loopholes, rebates and subsidies, many larger corporations operating in New Jersey are paying just a fraction of the statutory rate, and some none at all.

Partly as a result of this fact, corporate taxes have been a shrinking share of state revenues even as, on the whole, businesses have fared quite well. This has led New Jersey to rely more on income and sales taxes while putting a strain on the state’s ability to invest in services that all businesses rely upon. Without the necessary reforms, revenue from New Jersey’s corporate business tax will continue to stagnate, forcing the state to either raise other state taxes or diminish vital public services to make ends meet.

For example, there are at least 25 Fortune 500 companies doing business in the Garden State that effectively pay an average 3.5 percent in business taxes in all states where they operate.[2] Eleven of those 25 profitable corporations paid no state income tax at all in at least one year between 2008 and 2015 costing states over $12 billion in total lost revenue in the past decade.

Policymakers ought to level the playing field and allow small businesses a better chance of competing with larger companies while raising the revenue necessary to help the entire economy thrive – not just the shareholder set. And federal proposals to cut corporate taxes may mean that New Jersey needs to do even more to ensure all businesses have a fair shot and larger corporations aren’t gaming the system.

New Jersey lawmakers should:

  • Close corporate tax loopholes by expanding combined reporting
  • Rein in corporate subsidy programs
  • Repeal or reform some recent business tax breaks

Taking these actions could raise over $450 million a year in new revenue, while relieving long-term budget pressures that will plague New Jersey for years to come if not addressed. Without these meaningful reforms, New Jersey will be crippled in its ability to provide public services and make investments that actually help the economy grow.

Close Major Corporate Loopholes

New Jersey’s broken tax code currently allows large multistate corporations to – on paper – shift profits they make here to other states that have lower tax rates, or no corporate taxation at all. Corporations often do this by creating “subsidiaries” that exist only for tax purposes. States are combating this by adopting what is called combined reporting, and New Jersey should join them. Doing so would help level the playing field for the state’s small and local businesses and raise up to $290 million a year in new revenue to invest in resources entrepreneurs and businesses across the state need to thrive.[3]

Combined reporting is a common-sense tax policy that 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 its appropriate share of the combined income. Right now the state’s casinos are the only entities required to follow combined reporting rules. Expanding combined reporting to all multistate corporations would put New Jersey in line with 25 other states that require it.

These states recognize that failing to include combined reporting in their corporate income tax structures gives profitable multistate corporations almost free rein to artificially shift income out of the state and reduce their taxes. Combined reporting stops these corporations from taking advantage of existing tax loopholes and new ones that corporate accountants may come up with in the future.

When New Jersey’s legislature last addressed business tax reform in 2002, combined reporting was mostly left off the table. A commission appointed to review the new law essentially tabled the possibility of expanding combined reporting beyond the casino industry. At that time, only 16 states had fully adopted combined reporting. Since then, nine more states plus Washington D.C. have passed legislation to require this pragmatic corporate tax policy. And policymakers in several other states – including Louisiana, Maryland, Pennsylvania, New Mexico and Alabama – are currently considering mandatory combined reporting legislation.

In fact, combined reporting is so commonplace that nearly all of New Jersey’s largest employers already use it when filing state taxes elsewhere. Of the state’s 98 largest employers, 94 percent already maintain facilities in at least one combined reporting state. And the vast majority of these corporations maintain facilities in multiple combined reporting states. More than 75 percent have facilities in five or more combined reporting states and about half have facilities in 10 or more such states.[4] That 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 just another cost of doing business.

Put the Brakes on Corporate Tax Breaks

Because of legislative changes made in 2013, New Jersey’s surge in corporate tax subsidies has risen to unprecedented levels, further cramping New Jersey’s ability to invest in schools, transportation and other areas known to be the real drivers of job creation.

The “Economic Opportunity Act of 2013” dramatically expanded corporate tax break offerings, making them more generous to corporations and removing key financial safeguards, including most ceilings on how much the state can spend on subsidies. The increasing reliance on big-dollar tax breaks has done little to significantly improve the state’s economy, and will in fact cause a long-term drag on growth as future tax credits are paid out over the next decade. After all, every dollar that the state loses to future tax subsidies is a dollar it can’t invest in the true building blocks of a strong state economy like affordable public colleges and universities, safe and reliable infrastructure and more.

As of November 2017, New Jersey has approved $5.7 billion under the 2013 law, and $8.3 billion total since January 2010. And it’s not just the overall amount of subsidies that has exploded. These tax breaks have become far more expensive to taxpayers ­– with the state giving up more and more tax dollars for each job a subsidy recipient creates or retains. The cost per job is now about $80,000 – twice the amount it cost earlier this decade and more than five times higher than the cost in the 2000s.[5]

And the long-term cost to all of us is enormous, with the official estimate for 2017-2021 alone at $3.3 billion in lost revenue.[6] (It’s worth noting that this is merely the tip of the iceberg in terms of the true long-term fiscal impact. NJPP estimates that once the annual revenue loss tops $1 billion a year – likely to happen in 2022 – New Jersey will lose at least $1 billion a year for at least the next 10 years.)

Ten key reforms could help rebalance the scales and ensure a more responsible approach to economic development in the Garden State:[7]

  • Restore spending caps
  • Mandate better reporting on outcomes and improve evaluation
  • Fix the net benefits test to prevent taxpayer losses after companies exit
  • Eliminate, or develop more stringent standards for, subsidies for existing jobs
  • Put subsidies in the state budget
  • Restrict corporations’ ability to redeem more in credits than they owe in taxes
  • Ensure fair wages
  • Prevent extra rewards for known federal tax dodgers
  • Include automatic sunset provisions
  • Cooperate with, rather than compete against, New Jersey’s neighbors

These reforms would help put New Jersey back on track before more damage is done to the state’s economy and before the bills we’re passing on to future taxpayers become even larger. Reining in the use of tax breaks for large corporations would allow policymakers to focus more on economic-development strategies that offer much better returns, like targeted job training or entrepreneurial assistance, for example.

Repeal or Reform Recent Business Tax Breaks

Rolling back some recent costly tax breaks for businesses and replacing them with viable alternatives could restore equity to the state’s tax code while raising more than $150 million a year that could be used to invest in assets and opportunities that drive economic growth for all the state’s businesses.

Reverse Tax Cut for Large S Corporations and Update Tax on LLCs

When new businesses incorporate in New Jersey, they have a choice between filing taxes as a C-corporation, a S-corporation or a limited liability company (LLC). C-corporations are taxed as a separate entity while S-corporations are taxed the same as a sole proprietor or partnership: the profits and losses are “passed-through” and reported on the owner’s personal tax returns.[8]

Although S-corporations’ profits are taxed on their owner’s personal income tax returns, the businesses themselves are subject to nominal fixed fees that are calculated based on gross receipts. This “minimum tax” ensures that these entities make a modest financial contribution toward state services, like the education system that furnish them with trained workers and a dependable transportation system for moving goods and services. Though some states do impose a separate tax or fee on LLCs for the privilege of doing business in the state, New Jersey does not.

Policymakers in 2011 cut the minimum tax by 25 percent for all but the very largest S-corporations. Reversing course for S-corporations with more than $250,000 in gross receipts would recoup some of the lost $41 million in revenue and restore a meaningful tax on larger businesses that benefit from state services just as businesses that are subject to state corporate income taxes do.[9] To help pay for the reduced minimum tax on smaller S-corporations, lawmakers should consider imposing the same fee structure on LLCs to encourage level treatment of both pass-through entities.

Revise How New Jersey Taxes Multistate Businesses

Until 2012, New Jersey relied on three factors – property, sales and payroll – to determine the share of a multistate corporation’s profits that the state could tax. This “apportionment formula” was scrapped in 2011, and now New Jersey only takes into account one factor: sales. Known as the “single sales factor,” this formula has given many large multistate corporations a significant tax break that now costs New Jersey over $100 million every year.

The single sales factor formula can create perverse incentives that can deter economic growth in the state. If an out-of-state company that only ships products into the state (and thus pays no income tax to New Jersey) decides to put down roots here, even a small investment in employees or property will immediately mean much of its income is apportioned to the state because the sales factor counts so heavily. In fact, the most recent research finds that single sales factor does not achieve its asserted goal of boosting state economic development.[10]

New Jersey can address this problem and regain the revenue lost due to the single sales factor by adopting a measure called a “throwback rule.” The majority of states with corporate taxation have adopted this policy, which recoups taxable income by including so-called “nowhere sales” in the sales factor.[11]

“Nowhere sales” are not assigned to or taxed by any state because they are made by purchasers in states where a company has no physical presence. The throwback rule says that the profits from sales that are not taxable are “thrown back” and taxed in the state where the products are made. This rule then increases the relative weight of in-state sales in the sales factor, thus increasing the income apportioned to the taxing state. The lack of a throwback rule is currently costing New Jersey about $127 million in annual revenue, according to the state.[12]

Adopting a throwback rule in New Jersey would remove accounting features that reduce large corporations’ state tax bills at the expense of small businesses and the state’s ability to finance vitally important long-term public investments that all businesses depend on (like police and fire protection and mass transit). A bill to enact a throwback rule was introduced by Assemblyman Troy Singleton this year but has not moved in the legislature.[13]

Endnotes

[1] The Tax Foundation, State Corporate Income Tax Rates and Brackets for 2016, February 2016.

[2] Institute on Taxation and Economic Policy (ITEP), 3 Percent and Dropping: State Corporate Tax Avoidance in the Fortune 500, 2008-2015, April 2017.

[3] New Jersey Office of Legislative Services, Legislative Fiscal Estimate, Senate Bill No. 982, March 2016.

[4] New Jersey Policy Perspective, Nearly All of New Jersey’s Largest Employers Already Subject to ‘Combined Reporting’ in Other States, January 2016.

[5] NJPP analysis of New Jersey Economic Development Authority’s Public Information – Incentives Activity Reports, up-to-date through the EDA’s November 2017 meeting.

[6] New Jersey Economic Development Authority, Response to Office of Legislative Services Questions in Fiscal Year 2018 Budget Hearings, May 2017.

[7] For more detail, see New Jersey Policy Perspective, It’s Time for New Jersey to Rebalance the Economic-Development Scales, May 2017.

[8] Only those LLCs that elect to be treated as a corporation for tax purposes must pay the state’s corporation business tax.

[9] New Jersey Office of Legislative Services, Fiscal Note Senate, No. 2981, July 2011.

[10] Center on Budget and Policy Priorities, Case for ‘Single Sales Factor’ Tax Cut Now Much Weaker, April 2015.

[11] New Jersey once had what is known as a “throwout rule,” whereby receipts from sales destined to a state where the taxpayer is not subject to an income tax are thrown out of both the numerator and denominator of the sales factor. The rule was subject to multiple constitutional challenges but upheld by the courts. Nonetheless, it was repealed for tax periods starting in fiscal year 2010. Repeal of the throwout rule cost the state $89 million annually [New Jersey Department of Treasury, Division of Taxation, Fiscal Note Senate, No. 3, November 2008. ftp://www.njleg.state.nj.us/20082009/S0500/3_F1.HTM]. Enacting a throwback rule would likely generate more revenue than that, because the throwout rule effectively assigns “nowhere” sales in the same proportion as a corporation’s existing in-state and out-of-state sales, while the throwback rule would assign all the “nowhere” sales to New Jersey.

[12] New Jersey Department of Treasury, Division of Taxation, Tax Expenditure Report, Fiscal Year 2018.

[13] State of New Jersey Legislature, Assembly No. 4668, March 2017.

U.S. Senate Moves Damaging Tax Plan Closer to Reality

Posted on by Jon Whiten

With the U.S. Senate narrowly passing the GOP tax proposal today, Congress has moved one step closer to final approval of a damaging and costly plan that would harm millions of working Americans while rewarding profitable corporations, foreign investors and the country’s wealthiest families and teeing up deep cuts to public services, programs and investments that all New Jerseyans count on.

At its core, this tax proposal is rooted in magical thinking and faulty, reckless mathematics: it’s premise is that borrowing money to pay for huge tax cuts at the top will trickle down to create economic growth for the nation. But this is disputed by nearly every leading economist, and has failed to work in the past.

The plan is especially terrible for New Jersey – even with the so-called ‘compromise’ on deducting up to $10,000 in local property taxes – particularly the state’s low-income, working-class and middle-class families.

In fact, even if New Jerseyans are able to deduct up to $10,000 in property taxes, 60 percent of the Garden State taxpayers who currently take the property tax deduction likely no longer would. 

That’s because even though they’d still technically be able to take the property tax deduction, many would choose not to because the combination of itemized deductions (which would no longer include state income and sales taxes) would be smaller than the standard deduction. This would be a bad deal for many taxpayers even though the proposal makes the standard deduction more generous.

The ball is now back in the court of New Jersey’s House delegation – particularly our Republicans. Reps. Frelinghuysen, Lance, LoBiondo and Smith must stand firm and continue to vote against this plan, while Rep. MacArthur – the lone New Jersey member of Congress to vote “yes” the first time around – needs to change course and put the working people of New Jersey first.

Related resources:

Federal Tax Plan No Reason to Shelve NJ Income Tax Fixes

Posted on by Jon Whiten

This appeared as a Letter to the Editor in the November 28, 2017 edition of The Star-Ledger.

Legislative leaders are now expressing caution about long-held plans to make New Jersey’s income tax fairer by asking the wealthiest residents to pay a little more. The reason: Fears about a “double whammy” if the Republicans’ federal tax proposal eliminates state and local tax deductions used heavily by New Jerseyans. But those fears are unfounded.

In fact, the Republican tax proposals in D.C. all favor the wealthy – even if these deductions disappear. Under the new Senate plan, for example, it’s New Jersey families earning under $111,000 who will, on average, pay more in net taxes – not the wealthy. In fact, Garden State families with incomes over $440,000 would get an average annual $2,826 tax cut. The bottom line: New Jersey’s wealthy families aren’t being punished by the GOP tax plans – they’re being rewarded.

New Jersey’s leaders should absolutely make the state’s income tax fairer – and they should also look into recouping some of the federal tax cut dollars to help protect the state’s working families from the devastating cuts to health care, food assistance, education and housing that the GOP tax plan tees up.

 

Expanding EITC Could Help Over 1 Million New Jersey Families

Posted on by Brandon McKoy

Earlier this fall, U.S. Senator Sherrod Brown and Representative Ro Khanna, joined by 52 House cosponsors, introduced legislation that would expand the earned income tax credit (EITC) and help raise the incomes of 47 million working families and individuals across the country, including over 1 million right here in New Jersey.

Expanding the EITC – a federal tax credit with a long track record of success in helping lift families out of poverty – is the kind of real tax “reform” that could actually boost working-class Americans, unlike the Trump-GOP proposal that delivers the overwhelming majority of its benefits to the top 1 percent. New Jersey’s own Representatives Bonnie Watson Coleman, Donald Norcross, Frank Pallone Jr., and Albio Sires should be applauded for co-sponsoring this proposal, and we urge their colleagues to join them.

The Brown-Khanna proposal would expand the EITC by lowering the qualifying age for workers without children to 21 from 25 and increasing income eligibility levels for all EITC recipients. For families with children, the average federal credit would be more than $5,600, and the maximum federal credit would nearly double from $3,400 to $6,528; the income ceiling to qualify would increase from about $45,000 to about $65,000. For families without children, the average federal credit would be more than $1,800, and the maximum federal credit would increase nearly six-fold from $510 to $3,000; the income ceiling to qualify would increase from about $15,000 to about $37,000.

Expanding the EITC would also significantly reduce the number of working families and individuals in poverty – effectively doubling the poverty-reducing impact of the federal credit. In 2015, the federal EITC lifted 6.5 million people out of poverty, including about 3.3 million children. The Brown-Khana proposal would lift an additional 8.3 million people out of poverty, including 2.9 million children. Additionally, 16.9 million people would be made less poor, including 5.3 million children. With income inequality at alarming levels across the nation, this would be an important step to reversing course and helping low-income families have a better shot at success.

The working families who receive the EITC in New Jersey would be especially helped by this proposal, since the state has its own version of the credit, which is refundable at 35 percent of the federal credit.

The over 1 million New Jersey workers who would be helped by the proposal are a diverse group, including everyone from retail workers to truck drivers to home health aides and teachers.

Latest Senate Tax Proposal Even Worse for New Jersey’s Working Families

Posted on by Jon Whiten

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

The latest Senate tax proposal, with the amendments added last Thursday, November 16, would raise taxes for the average middle-class and low-income New Jersey family while cutting taxes for wealthier families and for large corporations. Worse, it would increase the number of New Jerseyans without health insurance by 340,000 by 2027.[1] (Unless otherwise noted, all data in this Fast Facts is on the impact in the year 2027, once the plan is fully phased in.)

The proposal is noticeably worse than the original, both in its inequitable distribution – in other words, it brings more direct and immediate harm to the bottom 60 percent of families than the original bill – and in its overall impact on New Jersey: at least 29 percent of Garden State households would see a tax hike under the revised bill,[2] versus 22 percent in the original.[3]

Once this plan is fully phased in, New Jersey households with incomes over $1.4 million (the top 1 percent) would receive an average $8,570 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 $120.

The plan is a clear example of Robin Hood in Reverse, as it gives the largest average tax hikes to New Jersey’s poorest families while showering the state’s very wealthiest families with the biggest tax cuts.[4] While just 1.6 percent of the state’s wealthiest 5 percent of families would see a tax hike, 1 in 3 families in the bottom 60 percent would.

The latest Senate proposal:

  • Permanently repeals the Affordable Care Act’s individual mandate – the requirement that people get health insurance or pay a penalty – which would leave 13 million more Americans (and 340,000 New Jerseyans) uninsured, raise premiums for millions more, and create uncertainty across the health insurance market[5]
  • Pairs permanent tax cuts for corporations and permanent tax hikes for many low- and moderate-income families with temporary tax cuts for most working and middle-class families[6]
  • Increases the federal deficit by $1.5 trillion over a decade
  • The growing deficit will be used as the excuse for major cuts in services and programs that working New Jerseyans count on
  • By eliminating state and local tax deductions used by about 4 in 10 New Jersey families, it will make it harder for states to invest in schools, infrastructure, health care and more[7]

Endnotes

[1] NJPP analysis based on Congressional Budget Office estimates (see Endnote 5) using weighted average for employer-based, marketplace, and Medicaid expansion coverage.

[2] This estimate is the likely low, because it does not include the impact of the repeal of the ACA mandate.

[3] New Jersey Policy Perspective, Fast Facts: New Jersey Second Hardest Hit State Under Senate Tax Proposal, November 2017. https://www.njpp.org/budget/fast-facts-new-jersey-second-hardest-hit-state-under-senate-tax-proposal

[4] Institute on Taxation and Economic Policy Microsimulation Tax Model, November 2017. Full dataset available at https://itep.org/senatetaxplan/

[5] Congressional Budget Office, Repealing the Individual Health Insurance Mandate: An Updated Estimate, November 2017. https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53300-individualmandate.pdf

[6] Center on Budget and Policy Priorities, Senate Tax Bill Revisions Make Its Fundamental Tradeoffs – Big Tax Cuts for the Top, Little Gain for Low- and Moderate-Income Families – Even Harsher, November 2017. https://www.cbpp.org/federal-tax/commentary-senate-tax-bill-revisions-make-its-fundamental-tradeoffs-big-tax-cuts-for-the

[7] New Jersey Policy Perspective, Fast Facts: Millions of New Jerseyans Deduct Billions in State & Local Taxes Each Year, November 2017. https://www.njpp.org/budget/fast-facts-millions-of-new-jerseyans-deduct-billions-in-state-local-taxes-each-year

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