Because New Jersey was one of the last states to enact state-wide sales (1966) and income (1976) taxes, corporate taxes have provided important support for public services for a long time. Among the first chartered businesses in New Jersey were commercial banks, insurance companies, canals and railroad corporations and a few telegraph companies. By the mid 19th century, most of New Jersey’s state revenue came from corporate taxes on a handful of railroad companies and, when the state needed money in 1884, it extended the railroad tax to other corporations. By 1900, New Jersey was known for its willingness to grant charters to monopolies when other states would not – and companies weren’t even required to be physically located in the state or to contribute to the state in any way other than to pay its tax. This happy relationship between the state and corporations ended when Delaware decided to offer the same deal but with a lower tax rate.
As the state income tax and sales tax have grown, the corporate business tax (CBT) has shrunk as a share of total state revenues – from 13 percent of the total in 1980 to 10 percent in 1990, to seven percent in 2000 and eight percent in 2005. Little is known in New Jersey about who pays these taxes. The last time such information was available was in March 2002. Times were bad then as they are now. Governor McGreevey had promised not to raise sales or income taxes but had made no such promises about the CBT to the business community. In his FY 2003 budget speech, he said, “Of the 50 companies with the largest payrolls in New Jersey, 30 of them paid only the minimum corporate tax: $200 dollars per year. That’s less tax than would be paid in income taxes by a single parent with a child, earning $25,000 dollars a year.”
That has changed – to a degree. New Jersey has replaced its $200 minimum tax with payments between $500 and $2,000 based on the corporation’s income. Stated tax rates for a corporation that does not pay the minimum tax also are based on income and range from 6.5 percent on net income of $50,000 or less, to 9 percent on income greater than $250,000.
The tax rate structure is the easy part to understand; the devil is in the details of the reporting structure and the increasing number of business tax credits that make it difficult to know whether New Jersey’s corporate business tax is working for everyone.
In 2008, corporations in New Jersey paid just over $3 billion in corporate business taxes, making it the state’s third largest state-level tax. Although the corporate business tax has long been the state’s third largest state source of revenue, its relative share of total taxes collected is small (9 percent) compared to the state sales (27 percent) and income (38 percent) tax collections.
Today, 47 states – all but Nevada, Washington and Wyoming – levy what could be considered a corporate income tax. Such taxes take various forms, making comparisons across state lines difficult. Some states like New Jersey tax net income; others tax gross profits and even the definitions of those terms vary from state to state. In addition, every state allows its own set of deductions, exemptions and tax credits. Although corporations must disclose their federal taxes paid in Securities and Exchange Commission reports, individual state tax information is not required. This makes analyzing proposals for changing state tax rules nearly impossible for anyone who does not work for the Internal Revenue Service or a state tax department.
FUTURE – BETTER REPORTING
New Jersey is not known for its reporting or its transparency. Reporting is especially important with respect to the corporate business tax because so often lobbyists and politicians claim tax changes will improve the state’s economy, job creation or improve the elusive business climate.
Three reports would help interested parties understand more – a unified development budget, a tax expenditure report and a corporate statistics of income report. So far, New Jersey has produced none of these reports.
Unified Development Budget
A 2007 state law required the state to produce an annual Unified Development Budget to assess the use of state resources (business tax credits and other such programs) for economic development purposes. In one place, it would list all relevant data on state spending – through appropriations and tax credits – for economic-development activities.
States such as Minnesota, Maine, Texas, Connecticut and West Virginia have enacted disclosure laws that require companies to make public the value of subsidies they receive each year. Maine and Minnesota require that companies disclose wages and benefits paid. Connecticut, Maine and Minnesota require the companies to disclose actual job creation and/or retention.
Although the appropriate use of scarce public resources is critical, this report has never been done.
Tax Expenditure and Fiscal Analysis
While the state budget lists all direct spending, understanding the state’s complete financial picture is impossible without knowing how much is lost through the tax code. This March, New Jersey will produce its first tax expenditure report which will show the value of all subsidies provided to business and individuals through the tax code. In FY 2008, the Office of Revenue and Economic Analysis in the Division of Taxation identified 28 exclusions from the corporate business tax; since that time the number has grown.
The tax expenditure report will help analyze claims that tax credits and cutting corporate taxes strengthen New Jersey’s economy, make the state more competitive and attract new jobs. In 1989, $1.9 million in tax credits were provided to businesses from a small number of programs. Ten years later those credits had increased to $88 million. Today, 18 credits exist and lobbyists bring more to the legislature every day. As offsets to income, no appropriation exists and the cost of these credits is largely unknown. The only thing known for sure is that their existence erodes corporate tax collections.
Corporate Statistics of Income Report
Little is publicly known about who pays business taxes in New Jersey although information of this nature is available for personal income taxes paid by New Jersey households. Each year the Division of Taxation publishes the Statistics of Income (SOI) report that provides data for discussion and debate. Because of this document, for tax year 2007, we know the following:
- The effective personal income tax rate (taxable income/tax paid) in New Jersey was 3.4 percent;
- 1.7 percent of personal income tax returns with nearly 26 percent of all taxable income paid nearly 46 percent of the state personal income taxes;
- The number of tax returns with incomes $500,000 and above has increased from 37,600 in 2005 to 43,200 in 2006 to 48,500 in 2007 (the most recent year aailable).
- It is not possible to do similar analysis of corporate tax returns in New Jersey. But that is not true in all states. Eighteen states – including Connecticut, New York, Pennsylvania, Maryland, California and Virginia – annually make available extensive information about corporate taxes, including how many corporations are taxed; their net incomes and at what rate they are taxed; and which sectors pay the most taxes.
When NJPP requested similar information in February, we were answered quickly and courteously but were told this information would cost $910.08 because it required 16 hours of programming to retrieve the data. We ultimately agreed to pay about a third of that amount and now know that 251,839 corporate tax returns are filed in New Jersey.
WHAT’S NEEDED – BETTER RESEARCH
There are those who would suggest that a state’s tax structure is the leading cause of the current recession and that the only way out is to lower corporate taxes. One frequently used example is the Tax Foundation’s annual State Business Climate Index. Its ranking of New Jersey as 50th in the nation is often cited by business lobbyists as why changes are needed. But even the Tax Foundation’s own report makes a case for why the rankings have little meaning: “Clearly, there are many other non-tax factors that affect a state’s overall business climate: its proximity to raw materials or transportation centers, the quality of its education system and the skill of its workforce…” In each of these areas New Jersey would score well but none of these factors is captured in its index.
There is much to say about corporate taxes in New Jersey. For further reading on corporate taxes and business incentive programs, see A Question of Balance: Taxing Business in the 21st Century (2003), Taking Care of Business – Does it Cost Too Much? (2003), Big Firms Get Big Breaks (2007), Funding for Business Tax Breaks Shows Skewed Priorities (2008) and What’s the Rush? Costly Tax Changes Need More Deliberation (2008) on NJPP’s website.