Business Tax, Governor Murphy
Business surcharge at center of tax fight
John Reitmeyer | March 20, 2023 | As Seen In NJ Spotlight News
A tax with roots going back over a century in New Jersey is a key flashpoint this year as lawmakers begin to consider Gov. Phil Murphy’s budget proposal of more than $53 billion.
Within just the last few weeks, New Jersey’s long-standing corporation business tax has been dissected in lengthy policy reports published by some of the state’s leading think tanks and highlighted by Murphy in his annual budget message to lawmakers.
In all, the corporation business tax — often referred to in Trenton shorthand as the “CBT” — is projected to generate more than $5 billion during the fiscal year that begins July 1, making it one of the state’s largest single sources of revenue.
But the fate of a special surcharge that accounts for just a slice of the overall tax haul is dominating the tax-policy discussions unfolding around Murphy’s budget plan for the 2024 fiscal year.
Put in place in 2018 and set to expire at the end of 2023, the 2.5% surcharge only impacts companies with net incomes of over $1 million.
When the surcharge goes away, the initial loss of revenue — an estimated $322.5 million during the 2024 fiscal year, according to Department of Treasury estimates — appears to be modest for a state that generates more than $50 billion in annual tax revenues.
Political divide
Yet the pending expiration is fueling big advocacy campaigns this year on both sides of the political divide amid a broader policy debate about taxes, affordability and the size of the annual budget itself.
Business groups and many Republicans are rallying behind Murphy, a second-term Democrat, after he announced earlier this year that his proposed budget would allow the surcharge to sunset on schedule at the end of the current calendar year.
‘New Jersey has tried to tax its way to prosperity, and that clearly hasn’t worked.’ — Garden State Initiative
They’ve long viewed the surcharge as part of what they consider to be an inhospitable state business climate. They note the surcharge has helped push the top marginal rate for the CBT to the highest among U.S. among states, at least for businesses whose revenues hit the $1 million threshold.
However, progressives have also focused intensely on the fate of the surcharge as they’ve made a case for maintaining it beyond its current scheduled end date.
From their vantage point, allowing the surcharge to sunset will deliver major tax breaks primarily to big corporations like Amazon and Walmart, while shifting more of the burden of funding the state’s ever-growing budget onto other taxpayers, including those without such deep pockets.
When the surcharge was put in place in 2018, Murphy and fellow Democrats who control both houses of the Legislature were at odds over his proposal to hike income taxes on millionaires, a policy they would eventually agree to enact after the onset of the COVID-19 pandemic.
But the state’s corporation business tax itself has a much longer heritage, according to Treasury records. New Jersey first imposed a “franchise tax” on domestic corporations in 1884, initially using capital stock as a basis for the tax.
Explaining the rate structure
Today, the business tax is levied in a far more complicated manner. It includes a rate structure that sees businesses with up to $50,000 in net income taxed at a 6.5% rate; those with net income above $50,000 and up to $100,000 taxed at a 7.5% rate; those with net income above $100,000 and up to $1 million taxed at a 9% rate; and those with net income above $1 million taxed at a 11.5% rate.
‘Ending this temporary surcharge is simply one way we compete for the world’s leading companies and make New Jersey the place where entrepreneurs will want to come to start new ones.’ — Gov. Phil Murphy
That rate structure, as well as the top marginal rate itself, are among several ways New Jersey’s CBT has become a national outlier, according to a recent report published by Garden State Initiative, a conservative-leaning think tank based in Morristown.
The same report faults New Jersey for not linking its CBT brackets to inflation and concludes the state should lower — and potentially eliminate — its business tax to encourage more economic growth and prevent outmigration of high-income residents to other states.
“New Jersey has tried to tax its way to prosperity, and that clearly hasn’t worked,” the GSI report said.
But the liberal-leaning think tank New Jersey Policy Perspective has been delivering a far different message in recent weeks. It has issued a report that calls on lawmakers to maintain the surcharge beyond the current calendar year.
Citing Treasury research, the Policy Perspective report notes only about 2% of the thousands of companies doing business in New Jersey have been paying the surcharge. At the same time, the ending of the surcharge is on track to cost the state roughly $1 billion in lost income annually once its impact is felt across a full fiscal year.
“Allowing the CBT surcharge to sunset at a time of unprecedented corporate profit margins would come at a significant cost while primarily benefiting a select few, ultra-profitable businesses,” according to the NJPP report.
Murphy’s view
For his part, Murphy has portrayed the expiration of the surcharge as simply living up to the terms of a deal reached with lawmakers when the tax policy was put in place as a temporary measure that would, by law, eventually expire.
At the time of that deal, New Jersey was starved for revenue and shorting many of its financial obligations. But in more recent years, the state’s revenue outlook has improved dramatically, and the state now has the means to fully fund its annual contribution to the public-worker pension fund and restock budget reserves that were drained in the wake of the 2007-2009 Great Recession.
In his budget message to lawmakers in Trenton in late February, Murphy suggested the rollback of the surcharge would also better position New Jersey to retain and attract businesses, including startups that have the potential to grow into profitable companies and major corporate taxpayers.
“Ending this temporary surcharge is simply one way we compete for the world’s leading companies and make New Jersey the place where entrepreneurs will want to come to start new ones,” Murphy said.
But the governor also issued a challenge to the companies that stand to benefit from the surcharge’s expiration, saying he will be watching to see if they live up to prior claims that letting the surcharge lapse would lead to everything from more hiring to lower costs for consumers.
“Just as they’ve trusted us to keep our word in letting this temporary surcharge expire, I’m expecting them to keep theirs with this revenue,” Murphy said.