GSI Analysis: State Revenue Surges on Higher Corporate Tax Rates But There's Uncertainty Ahead

On a quarterly basis, Garden State Initiative offers independent analysis on the monthly revenue report offered by the New Jersey Department of the Treasury.

  • Nation’s soon to be highest business taxes drive revenue growth, while NJ’s competitiveness falls

  • Gasoline tax revenue continues to fall with 4% decline

  • Retroactive tax increases breed uncertainty as payers catch-up with higher rates

This week, the New Jersey Department of the Treasury released the September tax revenue report for the state. The September report marks the close of Fiscal Year 2019’s first quarter and shows the differing results from some of the Garden State’s recent big tax changes.

 “Strong revenue growth through September is a good sign for our state’s finances, but much of that growth is likely tied to the Corporate Business Tax (CBT) and Gross Income Taxes (GIT) increases being retroactive to January 1st,” said Garden State Initiative President Regina M. Egea. “That is going to lead to additional forecast uncertainty all the way through the final data in April, as individuals and companies are strategizing and timing catching up on those payments since they spent half the year assuming a different, lower tax rate.”

 Short term revenue up

Compared to tax receipts from the same month last year, September’s major tax revenue was up 13.6 percent and the state touted how the revenue from all state taxes (adjusted for non-recurring payments) was above target revenue growth.

So far for the first quarter of Fiscal Year 2019 (July-September), total major tax revenues equal $5.72 billion, which is up $591 million from the same three months last year.

The FY 2019 first quarter sales tax revenue was 1.7 percent higher than the first quarter sales tax revenues from last year. 

While New Jersey’s tax revenues were largely up during the first major reporting period following the 2019 state budget, industry and budget experts from some sectors have voiced concerns for what tax revenues will be moving forward as the Garden State loses its competitive advantage in multiple categories.

 Corporate tax hikes & New Jersey’s economy

New Jersey’s 2019 budget raised corporate taxes for businesses with income more than $1 million and gives New Jersey the second highest corporate tax rate in the country. Only Iowa currently has higher corporate tax rates, but they recently voted to reduce those tax rates in  coming years.

New Jersey’s corporate tax hike was retroactive to January 1, 2018 and represents a significant portion of New Jersey’s tax revenue growth in the first quarter of FY 2019. The state’s corporate tax revenue is more than 80 percent higher compared to the same time last year. However even before the recent tax hikes, GSI’s independent research found that New Jersey’s business climate was among the most uncompetitive in the nation and the new tax hikes have only hurt that outlook for businesses in the state. In late September, the non-partisan Tax Foundation cited the recent tax increase among the factors that led to New Jersey being ranked 50th, dead last, in their 2019 State Business Tax Climate Index.

With New Jersey again ranking among the worst states in terms of fiscal health, the corporate tax hike will bring in much-needed short term revenue for the state. But with New Jersey continually raising the costs of operating businesses—and living—in the state, it is unclear how sustainable the increased corporate tax revenue will be with the state’s outmigration problems and sluggish economy.

 Gas tax competitive advantage, and revenue, being eliminated

On October 1, New Jersey’s motor fuels tax on gasoline and diesel jumped by 4.3 cents per gallon. This increase was on top of the 22.6 cents per gallon gas tax hike in 2016. These rate hikes took the state from having the second lowest gas tax in the country to ranking among the top-10 highest gas tax rates.

These tax hikes have also cost New Jersey tax revenue as many drivers no longer fill their tanks in the Garden State compared to neighboring states. In September, New Jersey’s motor fuels tax revenue was up 19 percent compared to September last year, but year-to-date gas tax revenue for FY 2019 is down 4 percent.

Unlike corporate or income taxes which can sometimes take taxpayers months or years to fully react and adjust to, motor fuels taxes can have a much more immediate effect on tax revenues. According to reports from AAA, New Jersey’s gas tax revenue has fallen in recent years compared to Delaware and Pennsylvania as the Garden State has lost its competitive advantage for gas tax rates compared to neighboring states.

 Tax revenue and New Jersey’s economy

The 2019 state budget that the state legislature and Gov. Murphy passed this summer contained some bright spots such as the continued phase-out of the estate tax and the partial sunset of the sales tax hike. But the recent hikes in the state’s motor fuels tax,  new super-millionaires tax, sales taxes on e-cigs, ridesharing and short-term accommodations combined with the corporate tax increases continue many of the uncompetitive policies that have cost the state taxpayers and tax revenue over the long term.