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| For Release November 6, 2008 |
Contact Jon Shure 609-393-1145 |
Need More Deliberation
TRENTON--Changes to New Jersey's business tax system being hurried through the Legislature have two big problems, according to a new NJPP report.
- They would further reduce already weak state revenues.
- And there's little reason to think the state's economy will be helped.
The report, What's the Rush? Costly Tax Changes Need More Deliberation, was written by NJPP Research Director Mary E. Forsberg, who spent 14 years analyzing the state budget for the Office of Legislative Services before joining NJPP in 2001. She estimates that, when fully implemented, proposed business tax changes could cost the state $400 million a year in lost revenues. That's on top of current projections that the economic crisis will bring down state sales and personal income tax revenues.
The report focuses on several proposed measures, the most expensive of which is a change in the formula used to calculate what businesses owe the state in taxes. By emphasizing only what a business sells in New Jersey instead of also considering its in-state facilities and payroll, many New Jersey-based firms would get tax cuts. While out-of state firms selling in New Jersey would see higher taxes, the overall impact would be a yearly revenue loss that could reach $250 million.
This change has been selectively pushed in New Jersey by many businesses for years, some at the same time they opposed it in other states where it would mean their taxes went up. The report cites experts who believe changing to single-factor use of sales in calculating taxes has shown no success in attracting businesses to the states that have done it.
"Anyone arguing their taxes should be cut to help the economy should have a lot more evidence than supporters of these business tax cuts are being asked to show," said NJPP President Jon Shure.
The report recommends one proposal made recently by Gov. Jon Corzine: requiring companies with numerous subsidiaries or affiliates to file a single tax return that aggregates all of the entities' operations in the state. Such combined reporting makes it harder for multi-state corporations to shift income from place to place in ways that reduce tax liability. Today, 20 states require combined reporting.
But other legislation dealing with seemingly arcane issues like loss carry forward and "throwout" rules offers little prospect for meaningfully improving New Jersey's economy. "Changes that are hard for lay persons to understand can mean huge adjustments to what businesses pay to support the government services and programs on which everyone relies." The report says. "So it seems reasonable to ask, 'what's the rush?' The claims that these changes will strengthen New Jersey's economy, make the state more competitive and attract new jobs are backed by far more emotion than research."
Unfortunately, discussion of these bills so far has not focused on the revenue losses they will bring; how the opposite effect from what's intended will occur, resulting in the state having less money and, because of that, being able to do less of what it really takes to build an economy. Repairs to roads and other key transportation infrastructure; help for families to pay for college; investment in schools; urban revitalization: all of these activities are on the verge of being diminished by the precipitous actions of those who appear to put more value on the ephemeral "business climate" than on what has been shown over the years to bring growth and prosperity.
The report concludes, "This time of economic turmoil is no time to push through a series of legislative blank checks in the name of improving the business climate or saving the state's economy, in the absence of hard evidence that tax cuts are the magic bullet for accomplishing either aim. It would be sensible for legislators to demand expert analysis about the potential impact in terms of job-creation and whether businesses are likely to move to or stay in New Jersey, rather than base their votes on perception and politics. Before any action takes place which would cut business taxes, a comprehensive assessment of the impact on both large and small, in-state and multi-state businesses should take place."
There is no question that New Jersey's economy is hurting. Job losses have been high. Attention must be paid to how the state can return to growth levels of the past.
But numbers are easier to find than reasons. A major part of the argument by supporters of the tax changes is that New Jersey is a poor place to do business. This stems in large measure from various analyses that suggest high tax rates lead to low growth -- without establishing an actual cause-and-effect relationship. In reality, it must be pointed out, there is no shortage of research saying that the current fixation on business tax levels as indicators of a state's economic condition is misplaced.
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