Tax rewrite gives N.J, businesses big break

In the hope of improving New Jersey's business climate, lawmakers have rewritten the state's corporate-tax code in ways that could save Garden State businesses hundreds of millions of dollars each year.

While businesses and their supporters say the changes will help stimulate the economy, some policy analysts have long questioned the effectiveness of corporate-tax breaks for that purpose. And eventually, the lost revenue must be made up by other sources, such as higher taxes for everybody else or spending cuts.

Spurred in part by the global recession, legislators have unanimously approved two tax breaks since November, and they are considering a third. The decisions came with rousing rhetoric in the name of helping businesses but, critics say, with few hard numbers on which companies would benefit and how the tax breaks would affect state revenue.

"I think that everybody is afraid to basically say, 'We don't know what the effect of this is going to be, and we're not going to take a chance that we appear to be antibusiness,' " said Mary Forsberg, research director of New Jersey Policy Perspective, who wrote a report questioning the speed with which lawmakers adopted the changes.

Robert Corrales, a spokesman for Gov. Corzine, said the governor "has been making tough financial choices since well before the national economic crisis."

"Since taking office, the governor reduced business taxes by nearly $500 million and infused $260 million to the UI [Unemployment Insurance] Trust Fund to avert triggering an employer tax increase," Corrales said.

In November, Corzine signed into law a bill to reduce corporate taxes by allowing businesses to offset gains by carrying forward losses for 20 years instead of seven years. The bill brings New Jersey into line with tax codes for the federal government and some other states.

The law will not affect state revenue until fiscal 2018. The nonpartisan Office of Legislative Services, which performs fiscal analyses of any legislation that may affect state revenue, said it could not quantify the potential loss because it lacked basic data.

In December, Corzine signed into law a bill ending the "throwout rule," which was intended to raise income taxes from New Jersey companies that sell products in states that do not charge sales tax. The elimination of the provision is expected to cost the state $149 million a year starting in 2011, according to OLS.

"During a time of national recession and economic uncertainty, this overhaul should be a welcome relief to businesses, particularly those that are struggling," said Senate President Richard J. Codey (D., Essex), a prime sponsor of the bill. "The elimination of the throwout rule will also create a more business-friendly environment for New Jersey to compete with the majority of other states."

A third measure would determine taxable income for a manufacturer based only on where its sales are made, instead of factoring in how much property it has in a state and total payroll for employees working in a state. The state treasurer's office estimates the bill, which has cleared an Assembly committee, could cost the state $77.5 million a year, although OLS could not vouch for that figure.

The two new laws undo provisions that were among a slew of changes made to the state tax code in 2002 to try to force businesses to pay their fair share of taxes. Then-Gov. Jim McGreevey said the corporate business tax was "neither fair nor equitable."

"It's broken, and we're going to fix it," he declared.

At the time, McGreevey said 30 of the state's 50 largest companies paid only $200 in corporate taxes - the state minimum - per year. Supporters of the changes characterized them as closing loopholes. The changes raised corporate revenue to the state by about $1 billion.

The highest-profile change then was the addition of the alternative minimum assessment, which some companies paid in lieu of corporate taxes. The assessment was allowed to sunset under Corzine in 2006.

In 2007, the governor allowed a state tax on so-called S corporations - typically small-business owners - to expire, translating into about $40 million less in annual state revenue. Later this year, a surcharge on the corporate business tax also is due to expire.

Business interests have not praised every move by the Corzine administration. Many were up in arms when New Jersey adopted paid family leave, which will go into effect July 1, for example. Although employers will not pay directly for the benefit, many said it would force them to hire replacements for workers who took advantage of it.

Still, the economic crisis has apparently given businesses any extra ammunition they may have needed to reverse the McGreevey-era amendments to corporate taxes.

"Both the governor and the Legislature deserve credit for their swift response to the financial crisis that has gripped New Jersey and the nation," Philip Kirschner, president of the New Jersey Business and Industry Association, said at the bill signing for the expansion of the carry-forward law. "Not only have they moved swiftly, but they have gotten the policies right as well."

Some argue the changes are overdue. For the last two years, the nonprofit Tax Foundation of Washington has ranked New Jersey the worst state for business-tax climate.

Josh Barro, a staff economist for Tax Foundation, applauded the latest changes to New Jersey's corporate-tax rules. He said taxes mattered, particularly in a down economy.

"The Legislature in New Jersey has been very astute to recognize that this is a good time to make some business-friendly changes to the state tax code," Barro said. But he said the state should not expect an immediate response.

"Generally, these are things that have effects over the long term," Barro said. "It's not something that just has effects tomorrow. It's something that will pay dividends for years to come."

But others argue that while businesses obviously welcome tax breaks, they do little to stimulate spending, encourage employment, or attract or retain businesses.

Henry Coleman, a professor of public policy at Rutgers University who served as executive director of the New Jersey State and Local Expenditure and Revenue Policy Commission, said most academic studies on the issue showed corporate tax breaks did not stimulate spending very well. Other factors, such as access to a good workforce and availability of good infrastructure, are much more important to businesses, Coleman said.

He suggested that lawmakers had not done their homework on the recent corporate-tax changes.

"What's the evidence to suggest those reforms were necessary or even remotely likely to be successful?" he asked.