Topic Category: Tax and Budget

StayNJ 2.0: Senior Tax Cut Still 2 Regressive and 2 Expensive

Posted on by Peter Chen

The latest draft of StayNJ, a proposal to credit home-owning seniors for up to half of their property tax bills, would still direct the largest benefits to wealthy households while providing much less to lower-income homeowners and renters. Despite amendments that lower the maximum tax credit and add a much-needed income cap on eligibility, the new proposal still ties the total benefit to property taxes paid, resulting in the biggest tax cuts going to people with high incomes who own the most valuable homes.

As written, the proposal would make New Jersey’s tax code more regressive and worsen the racial wealth gap. It would also come at an enormous cost to the state, with a total price tag of $2.2 billion at a time when the state can ill afford it.

1. Still Regressive

The new StayNJ proposal, a compromise between Governor Murphy and legislative leaders, has been modified to include an income cap of $500,000 and a lower maximum benefit of $6,500. These changes fail to address the fundamental flaw at the heart of StayNJ: By tying benefit amounts to total property tax bills, the program directs larger payments to owners of larger, higher-valued homes. Further, an income cap of $500,000 still includes many high-income seniors with substantial wealth and economic advantages. To put this new income cap in perspective, it is double that of the state’s ANCHOR property tax rebate, which phases out at $250,000 in annual income.

The majority of StayNJ benefits would still go to the top 40 percent of households, leaving lower-income seniors with much less. In total, 28 percent of benefits would go to the top 20 percent of households, while those in the bottom 20 percent would receive only 7 percent of the benefits. As long as the program continues to disproportionately benefit homeowners at the expense of renters, and direct bigger benefits to those with more valuable homes, it will continue to reward the rich at the expense of the rest of the population.

Even with an additional $250 payment for seniors who rent included in the proposal, renters would still receive thousands less than their wealthier home-owning peers. The average benefit for seniors in the top 5 percent (with incomes of at least $360,000) would be $4,508, while seniors in the bottom 20 percent (with incomes less than $26,000) would receive an average benefit of $369. Because renters are disproportionately nonwhite and have lower incomes on average, the new StayNJ program would still widen the racial wealth gap.

2. Still Expensive

Based on modeling of income and homeowner data, NJPP estimates the program’s cost at $1.9 billion for the homeowner component alone, with another $300 million in ANCHOR payments for a total cost of $2.2 billion per year. With declining tax collections, federal pandemic aid set to expire, and no revenue source to pay for StayNJ, this proposal will make it extremely difficult for lawmakers to balance the state budget in future years.

Good Intentions, Poor Execution

The new StayNJ proposal remains too regressive and too expensive, directing the biggest benefits to already-wealthy households. Whatever its good intentions, StayNJ will put more in the pockets of those who need it least, while doing little to support the low-income seniors most at risk of losing their homes.

Reel Regret: The High Cost of Expanding Film Tax Credits in New Jersey

Posted on by Peter Chen

New Jersey lawmakers are fast-tracking a major expansion of the state’s film and television tax credit program — a move that would cost the state $200 million annually and erode critical safeguards against abuse.

The proposal, S3748/A5091, has four major drawbacks that will increase costs to the state, erode safeguards against abuse, and make it impossible to project the total costs of approved projects. The bill doubles down on the faulty premise that film and TV tax credits benefit the broader economy when mounting evidence and the experiences of other states suggest otherwise.

Extensive research of similar programs across the country finds that film and TV tax credits do not generate the economic activity and job creation they promise. Because most jobs in the industry are temporary and often filled by specialists from out-of-state, film and TV tax credits only deliver pennies on the dollar for state and local governments. Further, these tax credits often do not reimburse actual production costs, and instead are traded and transferred to other corporations, acting as free money for the film production companies. This is a bad investment for New Jersey, especially when the $200 million in funding could go towards public programs and infrastructure projects that directly support families and small businesses.

Given the substantial evidence that film tax credits do not generate the promised economic benefits, coupled with New Jersey’s own long history of corporate tax credit abuse, lawmakers should pull the plug on this costly proposal.

The Four Major Flaws in the Film and TV Tax Credit Expansion Bill

Increases Annual Spending by $200 million
Despite a negative return on investment, the proposal increases annual spending by $200 million annually. This would pit New Jersey against larger states that have recently expanded their own tax credit programs in a costly race to the bottom that only benefits Hollywood studios. To put the increase in perspective, it is roughly 50 percent larger than the governor’s proposed doubling of the child tax credit, a direct investment to support families in New Jersey. Subsidizing profitable Hollywood studios is the wrong policy choice when the state could be strengthening its infrastructure and human capital instead.

Allows New Jersey to Directly Invest in Movie Studio Facilities
The bill includes $30 million for capital spending, putting New Jersey on the hook as a direct investor in private movie studio facilities. If these ventures are profitable, then they should not need state subsidies. If they are not profitable, the state should not be propping them up and liable for losses if the studios fold.

Weakens Accountability Rules and Opens the Door to Abuse
In current law, if a film project costs less than $50 million in production expenses, the amount of the credit is reduced accordingly to prevent studios from overpromising and under-delivering. The new proposal would repeal this. Strong clawback measures are critical to ensure that tax credits at least yield the economic activity promised by the corporate beneficiary.

Stretches Deferred Compensation Over Two Years, Making Costs Impossible to Project
Film and TV tax credits are normally a percentage of a project’s expenses in any given year. If the expenses reimbursed by tax credits can be deferred into future years, the state will be on the hook for additional payouts with no way to estimate or anticipate those costs. To the extent that tax credits are needed at all, they should be covering costs in the current year, not costs the studio has chosen to defer to the future.

Mounting Research Shows Film and TV Tax Credits Provide Little Payoff

There is a growing consensus among independent economists that film and TV tax credits are a bad investment for state and local governments. These findings are mirrored in studies by non-partisan legislative offices across the country. A recent analysis by Maryland’s non-partisan legislative services found “for every $1 in film tax credits awarded, the State recoups just over 6 cents,” an abysmal 6 percent return on investment. Worse, the report found that the millions in tax credits failed to make sustainable economic development in the short- or long-term.

Below are eight major economic studies showing the high cost and minimal return on investment from film and TV tax credits.

Do Movie Production Incentives Generate Economic Development?
Kennesaw State economist J.C. Bradbury in 2018 noted that “The results indicate that neither [movie production incentives] in general, nor specific types or levels of tax credits, are associated with state economic performance.” The study analyzed tax credits across jurisdictions and time frames and found state film and television tax credits produced a negative return on investment, with the average return totaling just 27 cents per dollar spent.

Evaluation of the Maryland Film Production Activity Tax Credit
A 2015 report on Maryland’s film and television tax credit by the state’s Department of Legislative Services found the credit provided just 10 cents (and only 6 cents in state tax revenue) per dollar spent by the state. Beyond that, the employment effect was minimal: “The state is actually worse off in the later years as there are fewer jobs compared to if there was no credit.”

Lights, Camera, but No Action? Tax and Economic Development Lessons From State Motion Picture Incentive Programs
University of Southern California professor Michael Thom’s 2016 paper found minimal to no impact on employment from film and television tax credits. “We looked at job growth, wage growth, states’ share of the motion picture industry, and the industry’s output in each state. On average, the only benefits were short-term wage gains, mostly to people who already work in the industry. Job growth was almost non-existent. Market share and industry output didn’t budge.”

Do State Corporate Tax Incentives Create Jobs? Quasi-experimental Evidence from the Entertainment Industry
In a 2019 study, Thom followed up his 2016 paper to analyze the employment effects of film and television tax credits. He concluded: “Results mostly show no statistically significant effects.” Thom’s results aligned with the consensus view among economists that “as an economic development strategy, targeted incentive programs that carry large tax expenditures fail to encourage meaningful job creation.”

Do Tax Incentives Affect Business Location and Economic Development? Evidence From State Film Incentives
A National Bureau of Economic Research working paper in 2019 found that filming locations do change based on financial incentives, but that “there is no meaningful effect on feature films, and employment, wages, and establishments in the film industry and in related industries.”

State Film Subsidies: Not Much Bang For Too Many Bucks
The Center for Budget and Policy Priorities’ Robert Tannenwald found in 2010 that “[s]tate film subsidies are a wasteful, ineffective, and unfair instrument of economic development. While they appear to be a ‘quick fix’ that provides jobs and business to state residents with only a short lag, in reality, they benefit mostly non-residents, especially well-paid non-resident film and TV professionals.”

Motion picture production incentives and filming location decisions: a discrete choice approach
In the Journal of Economic Geography in 2018, Mark Owens and Adam Rennhoff write: “We fail to find strong evidence that incentives create a more permanent movie industry in a state.”

Policy Convergence, State Film-Production Incentives, and Employment: A Brief Case Study
Richard Adkisson in the Journal of Economic Issues in 2014 found that “Ultimately, the evidence suggests that state efforts to attract film-production employment were largely ineffective.”

Film Tax Credit Expansion is a Bad Investment for New Jersey

Posted on by Peter Chen

On Tuesday, the Senate Budget and Appropriations Committee advanced an overhaul of New Jersey’s film and television corporate subsidy program (S3748), increasing the annual maximum tax credits by at least $200 million and watering down the existing program’s accountability provisions. The bill was voted out of committee despite the lack of fiscal note or any indication of the overall cost of the program. In response to the bill advancing through committee and the bill text finally available to the public, New Jersey Policy Perspective (NJPP) releases the following statement.

Peter Chen, Senior Policy Analyst, NJPP:

“Handing union-busting Hollywood studios hundreds of millions of dollars in subsidies is a bad investment for New Jersey. Study after study shows that the cost of film tax credits overwhelmingly exceeds the benefits, as the jobs created are temporary and often go to specialists from out-of-state. At a time when New Jersey is facing upcoming budget shortfalls, cutting a check to movie and television companies will enrich high paid executives and corporate shareholders at everyone else’s expense. And by watering down accountability measures, lawmakers risk turning a bad investment into an even worse one if the proposed jobs and spending never materialize.

“New Jersey’s budget should prioritize public investments that we all rely on and benefit from, rather than lining the pockets of big businesses.”

Stay Away from StayNJ: Proposal Cuts Taxes for the Rich, Leaves Low-Income Seniors Behind

Posted on by Peter Chen

Housing affordability is one of the most pressing challenges facing New Jersey, but not all policies aimed at making the state affordable are equally effective, efficient, or equitable. When evaluating new proposals and changes to the tax code, it’s critical to consider who stands to benefit, by how much, and who is left behind. In other words, “Affordable for who?”

The newly proposed property tax cut for seniors, StayNJ, has a laudable goal of helping seniors who are struggling with high costs stay in their homes. However, by the program’s very design, StayNJ would accomplish the exact opposite by providing huge tax cuts to the wealthiest homeowners in the largest homes, while providing little-to-no benefit to the lowest income homeowners and renters.

With no income cap on eligibility, higher tax cuts for more expensive homes, and no credit for renters, the StayNJ proposal represents a massive transfer of wealth and state resources to those who already have the most. As currently written, the proposal diverts billions of dollars away from much-needed investments in schools, transit, health care, and infrastructure we all rely on just as federal pandemic aid expires and state revenue collections decline.

Despite its name, A1 is decidedly second-rate when it comes to helping make New Jersey affordable for all.

1. StayNJ is Robin Hood in Reverse: Wealthy Residents Would Benefit the Most

The proposed tax cuts from StayNJ would benefit the wealthiest New Jersey residents the most and the lowest-income residents the least. According to an NJPP analysis of modeling from the Institute on Taxation and Economic Policy (ITEP), the top 1 percent of New Jersey residents would receive the an average tax cut of $2,688, while the lowest-income 20 percent would receive a mere $103, largely due to the high percentage of low-income residents who rent.[1] Among those who would receive a tax cut from StayNJ, the average cut for those in the top 1 percent is roughly three times the average tax cut for those in the bottom 40 percent.

When looking at the total cost of the proposal — $2.2 billion, according to ITEP’s modeling — roughly 40 percent would go to the wealthiest 20 percent of residents, while only 5 percent would go to the lowest-income 20 percent of residents. The top 1 percent of residents alone would get a bigger share of the benefits than the entire lowest-income 20 percent.

Considering the structure of StayNJ, it’s not surprising that the proposal disproportionately benefits those with the highest incomes.

In order to get the maximum tax cut of $10,000, a homeowner must pay $20,000 in property taxes, a rare occurrence reserved for the highest-valued homes. For reference, the average property tax bill in New Jersey is less than half that amount.[2]

As a result, the average homeowner in Alpine (average home value of $2.8 million) would receive $10,000. Meanwhile, the average homeowner in Trenton (average home value of $62,863) would receive $1,700.[3]

It’s worth noting that this analysis does not account for the residents who already receive property tax credits through ANCHOR and the Senior Freeze — which each have income limits on eligibility — meaning fewer low- and middle-income seniors would receive benefits under StayNJ. As written, the StayNJ benefit is half off a senior’s property tax bill, or their Senior Freeze and ANCHOR benefits combined, whichever is more.[4]

Add it all up and the lion’s share of the StayNJ benefit would go to the wealthy, with bigger benefits the wealthier the taxpayer. This undermines the state’s progressive tax code and the principle that government benefits should flow towards those with the least, not those with the most.

2. StayNJ Fails to Accomplish Its Stated Goal by Leaving Renters and Low-Income Seniors Behind

Seniors on fixed incomes often have a difficult time keeping up with rising costs, and there is evidence that New Jersey’s low-income seniors need additional financial help. The poverty rate for seniors in New Jersey (9.2 percent) is actually higher than the poverty rate for other adults (9.1 percent).[5]

The StayNJ proposal leaves many of these low-income seniors behind, however, as the program excludes renters entirely. Renters have significantly less wealth and lower incomes than their home-owning peers. Renters also make up a substantial percentage of New Jersey’s senior population: Roughly one in five New Jersey seniors rent their homes, including more than half of Hispanic/Latinx and Black seniors.[6] Given the disparities in homeownership, this proposal will widen the racial wealth gap instead of helping close it. As noted in the appendix, senior renters number in the thousands in each legislative district.

With lower incomes, less wealth, and no equity in their home, seniors who rent are at high risk of being priced out and evicted.[7] This is illustrated by recent Census survey data showing that one in five New Jersey senior renters reported missing the last month’s rental payment.[8]

The concentration of homeownership in wealthier income brackets is clear when looking at how many people in each income range would qualify for StayNJ. Of those in the top one percent of earners in New Jersey, 40 percent would receive a tax cut from StayNJ, while a mere 5 percent of those in the lowest-income quintile would receive anything.

Beyond the exclusion of renters, this program may actually make senior housing affordability more challenging. Research shows property tax cuts for wealthy homeowners can stifle housing development and growth, stagnating the housing market and decreasing affordability, as Proposition 13 did in California.[9]

Instead of a tax cut targeted to wealthy homeowners, state lawmakers have other avenues to help reduce senior poverty: expanding outreach for enrollment in food assistance programs like SNAP, reducing health care and prescription drug costs, and increased funding for rent assistance,[10] foreclosure assistance, and housing counseling.

Using the tax code to assist seniors with high costs can only be successful if the changes are targeted to help those who need it most. StayNJ fails to do so.

3. StayNJ Threatens New Jersey’s Fiscal Health

During the Murphy administration, state lawmakers have made great progress towards fixing New Jersey’s financial health after years of mismanagement and not paying the bills. Thanks to a series of full pension payments, increased taxes for millionaires and the most profitable corporations, and strong investments in key factors that promote economic growth like public schools and infrastructure, the state finds itself on solid fiscal footing for the first time in decades.[11]

But StayNJ would jeopardize this progress by pouring billions of dollars into the hands of those who need it least, all without a revenue source to pay for it. To put the sheer size of StayNJ in perspective, its $1.2 billion sticker price is roughly equivalent to the entire budget for the state Department of Health.[12] The bill also lacks funding for administrative costs associated with the new program at the local or state level, which could balloon the cost even further. The $1.2 billion fiscal note for StayNJ may also be an undercount: The Murphy administration estimates that the annual cost is closer to $2 billion, and NJPP’s analysis indicates a cost of $2.2 billion for the state, though we were unable to model the impact of ANCHOR given the lack of public data on who has received tax credits through the new program thus far.

This expensive proposal takes place against a backdrop of reduced revenues and tax cuts for billion-dollar corporations. The Treasury forecast already anticipates $2 billion less in revenue collections over Fiscal Years 2023 and 2024.[13] And those forecasts do not include $1 billion in annual revenue that will be lost if lawmakers cut the corporate tax rate at the end of the calendar year, as they are poised to do.[14] Even a small economic downturn could wipe out the already-tenuous state surplus and make it difficult for lawmakers to balance future budgets without severe cuts to other programs and services.

There are More Efficient and Effective Ways to Help Seniors Stay in New Jersey

When designing policies to make the state more affordable for seniors, lawmakers should target support to the residents who need the most help. Instead, StayNJ would do the opposite by targeting benefits to New Jersey’s wealthiest households while leaving many low-income seniors behind entirely. The program’s poor design, coupled with its billion-dollar price tag and lack of a funding source, should have lawmakers looking for other ways to help seniors stay in New Jersey.

Appendix: Senior Renters by Legislative District

Source: U.S. Census Bureau, 2020 Demographic and Housing Characteristics Table H13

End Notes

[1] NJPP analysis of Institute on Taxation and Economic Policy modeling. Data on file with author.

[2] NJ Dep’t of Community Affairs, 2022 Property Tax Information (2023), https://www.nj.gov/dca/divisions/dlgs/resources/property_docs/22_data/22taxes.xls

[3] NJ Dep’t of Community Affairs, 2022 Property Tax Information (2023), https://www.nj.gov/dca/divisions/dlgs/resources/property_docs/22_data/22taxes.xls

[4] Derek Hall, N.J. senior tax relief bill fueling sudden drama and talk of state shutdown. Here’s what’s in it., NJ.com, May 28, 2023, https://www.nj.com/politics/2023/05/nj-senior-tax-relief-bill-fueling-sudden-drama-and-talk-of-state-shutdown-heres-whats-in-it.html

[5] Kaiser Family Foundation, Poverty Rate by Age, 2021, https://www.kff.org/other/state-indicator/poverty-rate-by-age/?currentTimeframe=0&sortModel=%7B%22colId%22:%2265%2B%22,%22sort%22:%22desc%22%7D.

[6] U.S. Census Bureau, 2020 Demographic and Housing Characteristics: H13B (Black), H13D (Asian), H13H (White Non-Hispanic), H13I (Hispanic/Latino).

[7] Annie Nova, He’s 75 and facing eviction. Many other older renters are, too. CNBC.com, June 22, 2021, https://www.cnbc.com/2021/06/22/millions-of-renters-may-soon-be-evicted-heres-one-familys-story-.html

[8] U.S. Census Bureau, Household Pulse Survey Week 57 (April 26 – May 8, 2023), Housing Table 1b, https://www2.census.gov/programs-surveys/demo/tables/hhp/2023/wk57/housing1b_week57.xlsx

[9] İmrohoroğlu, Ayşe, Kyle Matoba, and Şelale Tüzel. 2018. “Proposition 13: An Equilibrium Analysis.” American Economic Journal: Macroeconomics, 10 (2): 24-51. https://www.aeaweb.org/articles?id=10.1257/mac.20160327

[10] Will Fischer, Douglas Rice & Alicia Mazzara, Center on Budget and Policy Priorities, Research Shows Rental Assistance Reduces Hardship and Provides Platform to Expand Opportunity for Low-Income Families, Dec. 5, 2019, https://www.cbpp.org/research/housing/research-shows-rental-assistance-reduces-hardship-and-provides-platform-to-expand.

[11] Christian Wade, New Jersey receives ratings upgrade over ‘solid’ recovery, The Center Square, Apr. 7, 2023,  https://www.thecentersquare.com/new_jersey/article_8f8ef360-d550-11ed-b2e5-4b80b8a6a8b7.html

[12] State of New Jersey, Budget in Brief: Summary of Budget Recommendations, Fiscal Year 2024, https://www.state.nj.us/treasury/omb/publications/24bib/BIB.pdf at p. 70.

[13] Derek Hall, N.J. tax revenues plummet billions below Murphy budget estimate. Are the good times over?, NJ.com, May. 18, 2023, https://www.nj.com/politics/2023/05/nj-tax-revenues-plummet-billions-below-murphy-budget-estimate-are-the-good-times-over.html

[14] State of New Jersey, Budget in Brief: Summary of Budget Recommendations, Fiscal Year 2024, https://www.state.nj.us/treasury/omb/publications/24bib/BIB.pdf at p. 65.

Senior Tax Credit Proposal Falls Short of Helping Seniors With the Lowest Incomes

Posted on by Peter Chen

On Friday, new details of Assembly Speaker Craig Coughlin’s senior tax credit program were released to the public. The proposal would create a new program, StayNJ, that would provide a tax credit worth 50 percent of a senior’s property tax bill, with credits capped at $10,000. Because the proposal would provide maximum benefits to those with property tax bills of $20,000 and up, and does not include an income limit on eligibility, the program would disproportionately benefit the wealthiest seniors in the state who own the highest-valued homes. In response to the newly released bill text, New Jersey Policy Perspective (NJPP) released the following statement.

Peter Chen, Senior Policy Analyst, NJPP:

“Lawmakers should be doing everything they can to help seniors keep up with rising costs, but this proposal would fall short by directing the biggest tax cuts to the wealthiest households while many low-income seniors would get nothing. With no income cap on eligibility, higher tax credits for more expensive homes, and no assistance for renters, it’s clear who this program would benefit and who it would leave behind. The program also comes at an enormous cost to the state, just as revenue collections are coming in lower than expected, putting funding for existing public programs and services that seniors rely on at risk.

“Making New Jersey more affordable for seniors is a noble goal, but we’re not going to get there by giving the likes of Bruce Springsteen and Phil Murphy a $10,000 check. There are more effective and efficient ways to target relief to the seniors who are struggling the most with high housing costs, grocery bills, and prescription drug prices.”

The StayNJ proposal would benefit wealthy homeowners the most, leave renters behind, and widen the racial wealth gap:

  • Homeowners with property tax bills in excess of $20,000 would receive the maximum StayNJ credit while lower-income residents would receive less due to their smaller homes and lower property tax bills.
  • Only thirteen municipalities in New Jersey — including Alpine, Millburn, Rumson, and Princeton — have an average property tax bill that would qualify for the full StayNJ credit. These towns have average property values of over $1 million and are home to celebrities, professional athletes, and business and finance executives.
  • One in four seniors aged 65 and over — roughly 230,000 New Jersey residents — rent their homes and would be left out of the proposal, including more than half of Black and Hispanic/Latinx seniors in the state.
  • Homeowners over age 65 in New Jersey are disproportionately white. More than 80 percent of white seniors are homeowners, compared to 41 percent of Hispanic/Latinx seniors and 49 percent of Black seniors.
# # #

Corporate Tax Reform Bill Opens Loopholes, Makes it Easier to Hide Profits Overseas

Posted on by Peter Chen

The Corporation Business Tax changes being proposed in A-5323/S-3737 are extremely complicated. Many of them are positive, but the removal of key anti-abuse provisions leaves gaping holes in preventing corporate tax avoidance through offshore subsidiaries, specifically the decoupling of GILTI conformity from federal rules, and the reopening of the related-entity royalty/interest payment loophole.

Although NJPP supports many provisions in this bill, including the important switch to the Finnigan method of counting corporate profits, the organization cannot support the bill in its current form.

The bill opens and re-opens far too many tax loopholes, which allow corporations to supercharge their tax avoidance schemes and reward them for foreign offshoring of profits and phantom transactions to artificially reduce their corporate incomes.[i] With more than one trillion dollars in corporate profits now flowing offshore to tax havens, New Jersey must do all that it can to ensure that the corporations who earn profits off of in-state consumers and workers cannot shirk their duty to pay taxes through elaborate financial trickery.

Because this is a highly complex bill with many moving parts, I have attempted to organize the sections the legislature should remove, amend, or protect, as well as a few suggestions for provisions to add.

As an aside, I urge the legislature and Treasury Department to add section numbers and descriptive headings to help the public understand what is contained in the bill.

The Problem: Foreign Tax Avoidance 

  • Companies want to shift their profits overseas to avoid taxation
  • Mobile capital makes it easy for corporations to avoid paying their fair share of tax liability by artificially lowering their profits here
  • New Jersey tax law can’t “see” these corporate entities, because our CBT only looks at US-based subsidiaries
  • Foreign tax avoidance cost New Jersey roughly $714 million in lost tax revenue in 2018, with corporate profits (and tax avoidance in foreign subsidiaries) rising substantially since then.[ii] In 2018 that would have amounted to nearly 25 percent of all CBT revenue.
  • As a result, any tax code change that creates incentives to move profits abroad runs the risk of eroding profits stateside and eroding the revenues that should accompany them.

 

Two Key Loopholes for Abuse That Must Be Removed

Removing interest/royalty anti-abuse provisions (S-3737, p. 6, lines 6-48, p. 7, lines 1-5).

  • What it does: Currently the law only allows corporations to claim a deduction for royalty or interest payments to a related member if they can demonstrate that the purpose of the payments was not to avoid taxes.
  • The abuse potential: Corporations can create third-party foreign shell corporations, transfer intellectual property and license it back to their US subsidiaries and/or borrow money from these shells, then claim the interest or royalty payments as a loss, artificially lowering their US profits.
  • Why it must be removed: Because New Jersey can’t see foreign subsidiaries, the profits shifted abroad would avoid taxation, leaving Treasury to chase after the money after-the-fact through auditing, rather than preventing the offshoring abuse from happening in the first place.
  • Note: This provision is NOT included in the Treasury score sheet, but could have serious long-term potential for exploitation and revenue reduction.

 

Eliminating GILTI deduction and treating GILTI as dividend (S-3737, p.10, lines 18-22).

  • What it does: Currently the law treats foreign global intangible low-taxed income (GILTI) in conformity with the federal internal revenue code, roughly taxing it at 50 percent of the CBT rate. This provision would instead treat GILTI as dividend income, effectively taxing it at 5 percent.
  • The abuse potential: Despite the name, GILTI includes a wide range of profits earned by overseas corporations and slashing the amount of GILTI in state corporate taxation will further induce corporations to shift profit-generating assets to foreign subsidiaries.
  • Why it must be removed: Given that corporate taxpayers already need to report this income at the federal level, treating it in conformity with the federal government ensures that New Jersey revenue collection is protected against additional erosion through offshoring. Companies declared nearly $350 billion in GILTI in 2018. Conforming with federal law will ensure that New Jersey can keep its revenues robust in the face of additional profit offshoring.
  • Note: NJPP believes an estimate of ~$50M in revenue loss to be overly optimistic. Recent research has shown that foreign profit shifting behavior by corporations remained unchanged after the Trump Tax Cuts and Jobs Act (2017), with a stable 50 percent of US multinational profits claimed abroad.

 

Provisions to Protect

Reorganization discretion by the Director to force worldwide combined reporting (S-3737, pp.41-42, lines 20-48, 1-31).

  • What it does: Expands the power of the Director of the Division of Taxation to explicitly require a corporate filer to file a world-wide combined filing.
  • How it reduces abuse: Without the “stick” to force corporations to disclose their global holdings in order to unveil any tax avoidance schemes, there is nothing to stop corporations from testing the limits of tax law and hope to tie up disputes in litigation. Any weakening of the anti-abuse provisions as detailed above will require a backstop to ensure that companies cannot abuse tax law and the discretion in the Director is critical to deter companies from tax avoidance schemes. Note that worldwide combined reporting (see below) would help solve many of these problems of foreign offshoring by forcing companies to report all their profits and losses from all foreign subsidiaries as one combined return.
  • Note: The section uses “taxpayers” instead of “affiliates” or other terms. Yet this may limit the scope of this section only to organizations that have enough connection to New Jersey to trigger taxation, rather than affiliates who would not ordinarily be subject to New Jersey tax.

 

Close the captive Real Estate Investment Trust (REIT) loophole (S-3737, pp.25-27).

  • What it does: Includes REIT and Regulated Investment Companies (RICs) in the combined group and does not give them the deduction on dividends-paid. This (mostly) closes the loophole on the captive REIT tax avoidance strategy, which worked as follows:
    • Corporation owns lots of branches/locations, then transfers ownership to the REIT that it controls 90% of.
    • The REIT charges rent to the corporation, which the corporation can take as a deduction.
    • The REIT then pays out dividends to its shareholders (90% of whom are the corporation). The REIT then takes a deduction for dividends paid.
    • The corporation ALSO takes a dividends received deduction for the dividend payments from the REIT.
  • How it reduces abuse: By treating REITs and RICs as part of the corporate group, these payments cancel out, and the dividends-paid deduction is eliminated. In doing so, the tax code reduces the opportunity to abuse these schemes by eliminating much of the financial incentive for setting up these in the first place.
  • Caveat: The REITs and RICs can still be hidden through ownership by other types of corporate entities, such as life insurance company segregated asset accounts or Australian Property Trusts. The exclusion of these types of avoidance schemes (detailed on lines 40-42 on p. 25) suggests that this may simply move these schemes to more exotic foreign-controlled corporate entities. This loophole should be closed quickly and simply, so all REITs no matter how owned are included in the taxable group.

 

Formalize switch to Finnigan rule for taxable groups.

  • What it does: The Finnigan rule, named for a California court case, treats a corporation as taxable as long as any member of its unitary group is taxable. That means that corporate subsidiaries and related groups that do not claim nexus in New Jersey are taxable as part of one taxable group.
  • How it reduces abuse: Various tax schemes rely on related corporations that are outside the scope of New Jersey’s corporate tax system. New Jersey has moved towards combined reporting and has recognized that including all subsidiaries and related corporations is necessary to collapse some of these avoidance schemes.

 

Broader Solutions: Provisions to Add

Tax haven list (not currently included in the bill).

  • What it does: Requires that corporations report subsidiary and associated corporations as part of their combined reporting if they are incorporated in specific tax haven jurisdictions. For example, Montana requires that corporations in a unitary relationship with the taxpayer incorporated in countries like the British Virgin Islands, the Isle of Man, and Luxembourg must be included in a combined return. See Code 15-31-322(f).[iii]
  • How it reduces abuse: Nearly $1 trillion in global profits was collected in tax havens in 2019. Requiring corporations to report the profits generated by the worst-offender tax havens allows New Jersey to recoup some the income being lost to this tax avoidance, as well as protect legitimate offshore income generated by businesses abroad that do not have a connection with New Jersey.

 

Mandatory worldwide combined reporting (not currently included in the bill).

  • What it does: Requires that corporations report income on all their worldwide subsidiaries and controlled corporations as one unit. Subsequently, New Jersey can apply its apportionment formula to ensure only the profits attributable to the state are counted.
  • How it reduces abuse: Allowing corporations to simply elect whether to report their foreign subsidiaries allows corporations to hide their profits abroad and fail to report their income stateside. It also makes the tax avoidance schemes described above much easier to undertake (such as the royalty/interest deduction loophole or the REIT “rent” deduction) because the profit half of the ledger can be hidden in another country. Inevitably, the only way to stave off foreign profit offshoring to avoid taxation is to require true world-wide unitary combination. Although this will have additional administrative challenges, such as the fair allocation of foreign profits to New Jersey, shifting to mandatory world-wide reporting largely ends the game of whack-a-mole to chase down foreign profit-shifting tax avoidance schemes.

 

Final Note: More Auditors Needed

Treasury needs a ramp-up in the number of auditors to combat corporate tax flight.

  • What it does: Annual US corporate profits have more than tripled since 2003 (from $811 billion to $2.9 trillion), but the number of auditors projected for FY2023 is actually lower than the state had in 2003 (a decrease from 428 to 365). The increasing complexity of corporate tax structures and the sophistication of tax avoidance schemes requires sufficient staffing.
  • How it reduces abuse: With much of the enforcement power of the tax agency dependent on the audit power (and the reorganization discretion of the Director), the need for a strong auditor workforce is critical to ensure that the state can enforce its tax laws against the world’s largest and wealthiest corporations, who have substantial interest in lowering their tax liability. The federal IRS recently saw an increase in its workforce as part of the Inflation Reduction Act.

 

NJPP cannot support the bill in its current form, though with amendments, it could be a robust force against tax avoidance schemes.

End Notes

[i] Ludvig Wier and Gabriel Zucman, Global Profit Shifting, 1975-2019, United Nations University-WIDER Working Paper 2022:121, https://www.wider.unu.edu/sites/default/files/Publications/Working-paper/PDF/wp2022-121-global-profit-shifting-1975-2019.pdf

[ii] Ricahrd Philips, Institute on Taxation and Economic Policy, A Simple Fix for a $17 Billion Loophole: How States Can Reclaim Revenue Lost to Tax Havens (Jan. 17, 2019), https://itep.org/a-simple-fix-for-a-17-billion-loophole/.

[iii] See also Jane G. Gravelle, Congressional Research Service, Report R40623, Tax Havens: International Tax Avoidance and Evasion (Jan.  6, 2022) p. 4, https://sgp.fas.org/crs/misc/R40623.pdf.

Labor Unions, Policy Experts, and Racial Justice Organizations Oppose Corporate Tax Loophole Bill

Posted on by NJPP Staff

On Wednesday, members of For The Many NJ and other supporting groups sent an open letter to members of the Senate and Assembly Budget Committees urging them to amend a proposal (S3737/A5323) that would open major loopholes in the corporate tax code and make it easier for multinational corporations to hide their profits in tax havens overseas.

The letter was signed by labor unions, small businesses, essential workers, faith leaders, and advocates for immigrants’ rights, the environment, affordable housing, and racial justice.

“Corporations doing business in New Jersey should pay their fair share of what they owe to the state to support our communities, schools, infrastructure, and social safety net. Yet corporations are poised to get more opportunities to avoid paying their taxes with this bill, on top of an anticipated $1 billion tax cut at the end of the year,” the letter states.

The letter highlighted two key provisions of the bill that must be removed to avoid opening tax loopholes for multinational corporations to exploit:

  1. Reopening a loophole for phantom interest and royalty payments, allowing corporations to artificially reduce their profits for tax purposes
  2. Reducing the tax rate on foreign income in low-tax nations to merely 5 percent, rather than the 50 percent under current law.

The recommendations in the letter mirror those outlined in an analysis of the bill by New Jersey Policy Perspective (NJPP).

“New Jersey loses roughly $700 million to corporations shifting their profits to foreign low-tax jurisdictions,” the letter continues. “Eroding the corporate tax base to assist the world’s largest corporations in tax avoidance schemes hurts the state and its residents, while handing ever more money to corporate shareholders already experiencing record profits.”

The letter was signed by 27 organizations and labor unions, including: New Jersey Policy Perspective, Make the Road New Jersey, New Jersey Institute for Social Justice, ACLU of New Jersey, Latino Action Network, CWA, New Jersey Education Association, 32BJ SEIU, New Jersey Sustainable Business Council, Main Street Alliance, New Jersey Alliance for Immigrant Justice, and New Jersey Working Families Party.

Read the open letter here.

# # #

For The Many is a statewide coalition of more than 30 organizations working to expand funding for essential services and improve budget practices to meet current and future needs, especially for communities that have been historically left behind.

GILTI as Charged: New Corporate Tax Proposal Would Accelerate Tax Avoidance

Posted on by Peter Chen

At a time of record corporate profits and continued economic uncertainty for everyday New Jerseyans, a new corporate tax proposal would re-open loopholes in the tax code that state lawmakers wisely closed years ago, allowing multinational corporations to avoid paying what they owe to the state. The legislation, A5323/S3737, is nothing less than an open invitation for wealthy multinational corporations to shift profits they earn in New Jersey to subsidiaries in foreign tax havens.

NJPP recommends that two provisions be removed, and the entire bill closely studied, to preserve tax fairness and revenue stability for the state:

  1. The bill must preserve existing protections from deducting interest and royalty payments to related subsidiary corporations.
  2. The bill must preserve New Jersey’s existing conformity with federal rules on the treatment of global intangible low-tax income (GILTI).

 

Major Changes Deserve Major Debate and Rigorous Analysis

The proposed legislation, which was negotiated behind closed doors by lawmakers and representatives of big multistate and multinational corporations over many months, contains more than a dozen separate provisions modifying New Jersey’s Corporation Business Tax (CBT).

When dealing with any legislation of this scope, extensive analysis is needed to evaluate the effects of these changes on the state budget in the short- and long term. Despite this complexity, the business lobby is urging swift passage of the bill.

Unfortunately, the proposal creates two enormous loopholes that could strip the state of hundreds of millions of dollars of revenue. This is on top of the revenue that the state will lose if lawmakers move forward with a plan to cut the corporate tax rate for businesses with more than $1 million in annual profit.

Loophole 1: Phantom Interest and Royalty Payments That Reduce Tax Liabilities

First, the bill repeals longstanding provisions in the tax code that prevent corporations from artificially reducing their tax liability by making phantom royalty and interest payments to shell companies based in foreign tax havens.[i]

This is a bit abstract, so an example is helpful here. Say Megacorp earns $1 million in net New Jersey income. Megacorp creates a foreign subsidiary, Mascot LLC, which owns the rights to Megacorp’s mascot. Megacorp pays its subsidiary $900,000 a year for the rights to use its own mascot. They then get to reduce their taxable income (to $100,000) and their corporate tax bill as a result. (A similar scheme actually happened with Toys ‘R’ Us using a Delaware subsidiary for Geoffrey the Giraffe.)

State lawmakers largely closed this loophole for U.S.-based subsidiaries through mandatory “combined reporting,” which treats all parent and subsidiary income as a single corporation for tax purposes, so the hypothetical $900,000 would still count as taxable income.

But for foreign subsidiaries, combined reporting does not apply (i.e., it stops at the “water’s edge”), meaning that the current law prohibiting the deduction of interest and royalty payments is still necessary to prevent the scheme described above and other variants.

Despite this provision’s potentially significant impact on tax avoidance, there is no indication of any revenue loss from the Treasury Department in their analysis of the bill. But it gets worse.

Loophole 2: GILTI Repeal That Allows More Foreign Profit-Shifting

Given the proliferation of corporations shifting their profits into foreign tax havens — a practice made much easier thanks to the 2017 Trump tax cuts — New Jersey wisely linked its corporate tax code to a federal anti-abuse provision that created a new category of taxable income called GILTI: global intangible low-taxed income.

The GILTI provision effectively creates a minimum tax for income from foreign subsidiaries, limiting corporate tax avoidance schemes by including 50 percent of this foreign GILTI income as taxable income.

Many states have followed suit by adopting similar GILTI provisions, and New Jersey is one of roughly a dozen other states that fully conform with the federal government by counting 50 percent of GILTI as taxable income. But A5323/S3737 would repeal this inclusion, guaranteeing that once New Jersey profits are shifted abroad, they’re gone from New Jersey’s tax base for good.

Corporate lobbyists claim that repealing GILTI is needed to make New Jersey more competitive, but there is no evidence that corporations have chosen to move business in or out of states due to their inclusion or exclusion of GILTI. And as a matter of sound tax policy and fairness, the state tax code should discourage corporations from shifting their profits abroad.

Although GILTI is a complex concept, state conformity with the federal rule is easy to implement because corporations already have to abide by federal GILTI rules. And for corporations that think they’re being taxed unfairly due to GILTI, there is already an alternate option: Any multinational corporation can avoid GILTI when filing their taxes by including its foreign subsidiaries in its combined reporting calculation as stateside subsidiaries. This sounds complicated, but the point is that corporations already have options on how they file their state taxes that do require repealing the state’s GILTI provision.

As large multinational corporations continue to become more sophisticated in their tax avoidance and income-shifting schemes, it’s necessary for states like New Jersey to tax them fairly and on a level playing field with corporations and small businesses without a foreign presence.

Corporate Tax Schemes Help Their Shareholders, Not New Jersey 

Allowing corporations to shift their profits to foreign tax havens will only benefit large multinational corporations that can afford to play these games at the expense of everyone else. New Jersey should be strengthening its corporate tax laws to go after deep-pocketed tax dodgers, rather than watering them down. And any argument that strong corporate tax law hurts the business climate must run into the reality that New Jersey corporate profits, employment, and business starts continue to rise.

Repealing the related-party interest deduction rules and GILTI conformity open up the corporate tax system to the abuses of the past, depriving the state of much-needed revenue while opening the door to additional tax avoidance schemes.

End Note

[i] Assembly Bill No. 5323, p. 6, lines 6-48 (Mar. 20, 2023, as introduced). https://pub.njleg.state.nj.us/Bills/2022/A5500/5323_I1.PDF

New Jersey’s FY 2024 Budget Should Prioritize Working Families Over Corporate Interests

Posted on by Alex Ambrose

Good morning, Chairman Sarlo and members of the committee. My name is Alex Ambrose and I am a policy analyst at New Jersey Policy Perspective, a nonpartisan think tank focused on advancing economic, social, and racial justice. Our organization is also a member of the For The Many budget coalition.

Thank you for this opportunity to present testimony.

New Jersey’s state budget should prioritize the needs of working-class families who are struggling to make ends meet over corporate special interests – people over profits. That’s why we urge you: do not give corporations a one billion dollar tax cut by removing the corporate business tax surcharge. Not only would a tax cut be a gift to some of the biggest and most profitable corporations in the world like Amazon and Walmart, it will cost the state revenue sorely needed to continue funding education, infrastructure, health care, and so much more.

These funds are essential to balancing the state’s budget, building a healthy surplus, and reducing the racial and economic disparities that were not just exposed but worsened over the last few years. The pandemic taught us that government support helps ease the harm of economic downturns, while cutbacks and austerity only deepen the pain for hard-working families.

This budget needs to advance changes to make the tax code more equitable and make the state more affordable for low- and moderate-income households. A tax cut for wealthy corporations will do the exact opposite.

Revenue collections were strong in the last few budgets, but economists are forecasting an imminent drop in revenue collections, if not a recession. Last year, the Office of Legislative Services testified that the record-high revenues are only temporary and collections will begin dropping, as we have already seen in the latest revenue snapshot.

What we need is reliable growth and predictability through a fair tax code that prioritizes public services and programs that directly benefit everyday New Jerseyans.

Some of those programs are included in our recommendations for this year’s budget, including the Earned Income Tax Credit, the Child Tax Credit, Temporary Assistance for Needy Families, the Clean Energy Fund, NJ Transit, and Public Defender Fees.

First, we urge you to expand the Earned Income Tax Credit for ITIN holders. Despite being taxpayers themselves, ITIN holders are often excluded from accessing government programs. Expansion would help ensure all people in New Jersey have access to financial security.

Second, we urge you to expand the Child Tax Credit, a policy proven to reduce child poverty. This credit is critical for low-income families, and expanding it will give families additional necessary assistance. Specifically, we recommend doubling the existing credit, as the governor proposed in his budget, as well as expanding eligibility to children up to 11-years-old, as proposed by Assemblywoman Verlina Reynolds-Jackson.

Third, we ask for increased monthly grants for families participating in Temporary Assistance for Needy Families. TANF provides critical support to families experiencing economic hardship, and increasing grants to at least 50% of the federal poverty level and adjusting for inflation would better provide our state’s families with the means to get back on their feet.

Fourth, we urge you to end the diversions of the Clean Energy Fund, a fund that makes new, safer technologies more affordable for the state and for working class families. Should the diversions continue, New Jersey will have diverted over $2 billion dollars away from clean energy, and every dollar diverted undermines the clean energy laws we already have in place.

Fifth, we ask that you prioritize funding NJ Transit’s capital needs. NJ Transit has a backlog of projects necessary to keep service reliable and to improve infrastructure to avoid another year of record-high service breakdowns. The agency has many required capital improvements with no identified funding source.

Finally, we urge you to end public defender fees, which are a regressive tax on low-income defendants. The right to an attorney is a fundamental right in our justice system and should not be predicated on the ability to afford adequate legal representation. Eliminating these fees is a critical step in ensuring all residents have access to justice regardless of their financial circumstances.

The state has a robust set of achievements over the last few years including a full pension payment, pre-school expansion, working family tax credits, affordable housing, and more. To think the same economic benefits will come to our state if we give wealthy corporations a tax cut is trickle-down economics at its worst.

New Jersey Policy Perspective asks that while you are evaluating the budget, you keep everyday working New Jersey families in the front of your mind, not corporate CEOs.

The New Jersey state budget must help the grocery worker with no car trying to get to work on unreliable public transportation. It must help the parent working three jobs to pay for child care. It must help the front line worker who has to leave their job to attend to their child having an asthma attack.

Cutting corporate taxes will weaken our state’s fiscal health while doing nothing to strengthen our communities. State lawmakers should prioritize making New Jersey affordable for those who need the most help — not the wealthy and well-connected.

Thank you for your time.

Governor’s Budget Proposal Rests on Shaky Foundation With Corporate Tax Cuts

Posted on by Nicole Rodriguez

Earlier today, Governor Murphy unveiled his FY 2024 state budget, proposing new investments in pre-K-12 education, property tax relief, tax credits for working families, and more. The budget also proposes eliminating the Corporate Business Tax surcharge, which would cost the state $1 billion per year. In response to the budget address, New Jersey Policy Perspective (NJPP) released the following statement.

Nicole Rodriguez, President, NJPP:

“The governor’s budget proposal wisely invests in the building blocks of a strong economy, from public schools to public health, but these investments rest on a shaky foundation. By giving a massive tax cut to the most profitable corporations in the world, there’s no promise that the state will be able to fund these public needs in the future.

“The long-term success of New Jersey requires reliable and sustainable sources of revenue to keep state government running and to fund the vital public services and infrastructure we all rely on. By eliminating the Corporate Business Tax surcharge, lawmakers will blow an even bigger hole in the state budget than previously thought. Buried in the governor’s budget proposal is a new estimate for how much this corporate tax cut will cost the state, coming in at a whopping $1 billion next year.

“We should know by now that trickle-down tax cuts do not work. We learned this lesson the hard way during the Christie administration, where big tax cuts for the wealthy and well-connected led to the hollowing out of public services and exacerbated income and wealth inequality.

“State leaders can’t have it both ways. A promise to deliver the supports and services our communities need requires a smart tax code that not only responds to current economic conditions but works in our collective favor. The “next New Jersey” doesn’t have a chance without tackling our rigged tax code head-on. That’s the hard work we expect from elected officials, and it only pays off if they prioritize the needs of the many over those of a chosen few.”

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