A Simple Plan to Get New Jersey Back on Track for Growth

How do you turn one of the most prosperous places in the world into an economic and fiscal basket case? Look at New Jersey over the past several decades.

As recently as the early 1970s, New Jersey was an economic powerhouse with rising incomes, low unemployment, and fountains of tax revenues that kept the budget in balance every year. A state that, for more than 150 years, prospered without an income or sales tax started implementing ever-more progressive taxes on businesses and individuals (from zero to more than 10%). This “soak the rich” philosophy triggered a severe out-migration of businesses and people that has lasted four decades and punctured revenue holes in the state budget.

How bad has it been? Internal Revenue Service data confirm that since 1992, there has not been one year in which adjusted gross income flowed on balance into New Jersey, a stark contrast with the Garden State’s prosperous past. The state is being bled to death as some $47 billion of adjusted gross income has fled over the last three decades.

Many bad policies caused this stampede, and the problems won’t be fixed overnight, but a good place to start would be to slash the business taxes charged for operating in the state. At the current corporate tax rate of 11.5%, New Jersey is an outlier with the most punitive tax on its home-based corporations. This tax rate is roughly twice as high as the 50-state average; yet only contributes 4% to 7% of total state and local revenues per year.

This tax burden is an anchor around the neck of the state. It’s become nearly impossible for Garden State businesses to compete with states that have low, or no, corporate taxes. New Jersey was once home to 22 Fortune 500 company headquarters. It’s now down to 15.

New Jersey has clear competitive advantages – including an educated workforce, world class universities, extensive transportation networks, and proximity to both New York City and Philadelphia. But too often the state’s combination of high personal income taxes and corporate taxes measurably reduces or completely cancels out these advantages.

It is time for New Jersey to stop complaining about taxes and start devising real solutions. First, the “temporary” 2.5% corporate tax “surcharge” must be entirely and immediately eliminated. This surtax on corporate income greater than $1 million was adopted in 2018 and was scheduled to decrease to 1.5% in 2020, and sunset following tax year 2021. The surtax was retroactively kept at 2.5% and extended through 2023.

The effect of this tax cut would reach the bottom lines of families across the state almost immediately. There is an adage that “businesses don’t pay taxes, they collect them.” Businesses acquire the funds to pay taxes on the backs of three sectors: (1) customers, via higher prices, (2) employees, via lower wages, and (3) shareholders – often including pension funds – via decreased profits. Corporations are the mechanisms by which taxes are collected, but the burden is distributed to customers, employees, and shareholders. With this one tax change, New Jersey would take a giant step toward economic growth.

But why not go bigger? For maximum economic benefit to the state, lawmakers in New Jersey should step down the corporate business tax rate with the goal of eliminating it altogether. The tax reduces state gross domestic product by almost $8 billion. Eliminating the tax entirely would grow personal income by roughly 30%, so the additional business activity and income gains would make up for most of any lost revenue to the state.

A tax that raises only 4% to 7% of state and local revenue but does so much demonstrable harm to new Jersey’s economy is hardly a smart way to fund the government. No place in America has proven the wreckage of progressive tax-the-rich schemes more vividly than the Garden State. While one tax change isn’t a panacea for the economic problems facing New Jersey, it is an effective first step to tax reform, simplification of the tax code, and an audit of existing tax incentives and credits.

Mr. Laffer is chairman of Laffer Associates. Ms. Egea is the president of The Garden State Initiative.