Business Tax, Governor Murphy, TRANSFORMING OUR BUSINESS CLIMATE
Phil Murphy finds unlikely allies over corporate taxes. But they say he needs to do more now
Facing pushback from progressive supporters over corporate tax rates, Democratic Gov. Phil Murphy has found unlikely allies in the conservative and business community.
But now that the self-described “proud progressive” and “coldblooded capitalist” governor has agreed to let the corporate business tax surcharge expire, they say he should cut rates even further or even do away with them to make New Jersey more competitive.
At 11.5 percent, New Jersey’s corporate business tax (CBT) is almost double the national average, according to a new report from the right-leaning think tank Garden State Initiative. The think tank’s president, Regina Egea, was a former aide to Republican former Gov. Chris Christie.
Murphy confirmed in his budget proposal his plan to let a 2.5% CBT surcharge on net profits above $1 million expire at the end of 2023. The surcharge’s expiration will bring the state’s tax rate down to 9%, making it the fourth highest in the country behind Alaska, Illinois and Minnesota.
“We hear from the business community that allowing this surcharge to lapse will mean more money for them to create jobs, to invest in new and more efficient equipment, to lower costs to consumers, and to be able to stay here,” Murphy said in his budget address last month.
The sunset of the surcharge faces little opposition in the power circles of Trenton even though Treasury officials said it is expected to cost the state $322.5 million in the fiscal year that begins July 1 and up to $1 billion in fiscal year 2025.
New Jersey Policy Perspective, a left-leaning think tank against the sunset, estimates it will cost the state at least $664 million in annual revenue.
“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,” the think tank said in a report.
“This change would only benefit a select few highly profitable corporations, providing an average tax cut of $5 million to companies with more than $100 million in annual profits,” the report said.
The surcharge was initially planned to be lowered by 1.5% in 2020 and sunset in 2021, but Murphy and lawmakers extended it through 2023 largely due to economic strains of the pandemic.
“I’ve maintained from the beginning that when we did that there was a sunset provision and that sunset provision should occur,” said Sen. Paul Sarlo (D-Bergen) in an interview. “Nobody has contacted me as budget chair that they’re opposed to it.”
While New Jersey Policy Perspective and other progressive groups, including the American Civil Liberties Union of New Jersey and Environment New Jersey, say sunsetting the surcharge will lose the state money and give an unfair break to New Jersey’s largest corporations, the Garden State Initiative and the New Jersey Business and Industry Association disagree.
Those groups have often been critical of Murphy and his financial and business policies, but in this case, they agree with the governor’s decision to not renew the corporate surcharge. But they say he should do more.
The NJBIA recommended New Jersey’s corporate business tax be ratcheted down over a two- to five-year period until it matches national averages of five to six percent. And Garden State Initiative suggests a more drastic long-term solution.
“Ultimately the best course for New Jersey is elimination of the CBT,” the report said.
New Jersey’s current corporate business tax makes it stand apart from other states regionally and nationally. New York has a 7.25 percent CBT, and Pennsylvania’s tax rate sits at 8.99 percent.
“We’re such an outlier at 11.5 percent that we’re literally inviting these companies to take their business elsewhere,” Michele Siekerka, president and CEO of NJBIA, said in an interview. “To be an outlier and to continue to remain an outlier kills your competitiveness.”
GSI’s report on the impact of New Jersey’s CBT drew similar conclusions.
“Unless a corporation absolutely needs to be in New Jersey, there is currently no economic incentive to locate there as opposed to anywhere else in the region,” the report said.
The report also found that “ there is very little evidence that New Jersey’s higher taxes lead to better public services than in many lower tax states.”
Experts from GSI and NJBIA said that lowering the corporate business tax will not lose the state money in the long term. Instead, they said, a lower tax rate will mean more economic growth and overall revenue for the state — similar to the argument Murphy made in his budget speech.
“That revenue is going to be made up,” Siekerka said. “By not having that revenue come from corporate business tax, that revenue is going to find its way into our economy in more sustainable ways. It’ll find its way into our economy by growing jobs, by creating more opportunities, and raising our GDP.”
GSI’s report found that revenue from the CBT makes up four to seven percent of the state’s total revenue, depending on the year. Lowering and ultimately eliminating the tax would earn the state more revenue in the future, according to the report.
“This study finds that over a short period of time any revenue loss from the reduction in the tax on New Jersey businesses would be in part or nearly fully offset by the improvement in economic conditions,” the report said, based on an analysis of other states.
The analysis compared the economic performance over the past decade of the eight states with the highest corporate business taxes with the eight states with the lowest rates. It found that the eight hight-tax states had population and job growth rates half as large as the eight lowest rate states.
Audrey Lane, policy director for GSI, said it’s inaccurate to call the expiration of the surcharge a tax cut, as progressive groups have. The surcharge, created in 2018 to increase state revenue, was always meant to be temporary, she said.
Lane also noted that a high CBT, instead of eating into a corporation’s profits, often raises costs for customers and lowers wages for employees.
“This isn’t about the rich getting richer,” Lane said in an interview. “It’s more about pumping money back into the economy for economic growth down the road.”