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Corporate tax revenue is galvanizing New Jersey’s fiscal coffers. And with it comes a misplaced sense among some policymakers that corporations can afford it, so why change anything?

But with the Garden State as the leading national outlier on corporate taxes, the dismissal of impacts on large companies may be short-sighted.

“To just look at overall corporate profits and determine that we can tax all corporations whatever we want is not a smart approach or the next-level thinking we need,” said NJBIA Vice President of Government Affairs Christopher Emigholz. “For starters, many corporations have struggled just like small and mid-size businesses over the past couple of years.

“But even for those who have fared better, our policymakers should recognize that corporations will think twice about expanding and creating jobs in New Jersey given the current tax climate. We’re in a position now to provide at least some corporate tax relief, just as neighboring states have. We should be reducing our very clear competitive disadvantages to other states while we have the chance and allow our corporations a better chance to grow here.”

At issue are two impactful taxes – each of which are being reduced by regional states, exacerbating New Jersey’s competitive disadvantage.

CBT TO THE M-A-X

As presented in NJBIA’s 2022 Regional Business Climate Analysis, New Jersey’s top corporate tax rate of 11.5% is actually the highest rate in the nation.

In 2018, New Jersey’s corporate tax rate went from 9% to 11.5% in what was termed a “temporary increase.” It was originally scheduled to phase down to 10.5% in 2020 and back to 9% in 2021.

Instead, the 2.5 percentage point surcharge was extended by the Legislature in 2020 until the end of 2023.

Meanwhile, in Pennsylvania, Gov. Tom Wolf has proposed a reduction in its current corporate tax rate of 9.99% to 7.99% on January 1, 2023, with a reduction to 6.99 percent in FY2026 on a path to 4.99%.

“That CBT reduction rate to our next-door neighbors in Pennsylvania should definitely serve as a wake-up call to Governor Murphy and our policymakers,” Emigholz said. “That’s a big advantage for any corporation looking to land or expand in this immediate area.”

“We should also recognize that if the CBT surcharge does not sunset as it should at the end of 2023, then that’s a tax increase which goes against the governor’s pledge of no new taxes in his second term.”

FEELING GILTI

New Jersey is also an outlier on the way it taxes income earned abroad by U.S.-controlled foreign corporations – a category of taxes called global intangible low-taxed income, or GILTI.

In fact, New Jersey is just one of a minority of states to tax GILTI at all and has the highest rate of those states that do.

In 2019, neighboring New York improved its tax treatment of GILTI, providing a 95% exclusion from its corporate income tax base for any GILTI amounts recognized for federal tax purposes, while New Jersey continues to only exclude 50% of GILTI.

“At the very least, we should be following New York’s lead on GILTI,” Emigholz said. “When we’re such an outlier on this type of income, it makes it much less affordable for a multi-national corporation to expand their business in New Jersey – and that’s what we don’t want. Again, it hurts our competitiveness.”

Overall, Emigholz said New Jersey’s corporate tax revenue points to over-taxation, and the state should look at the situation with that lens, rather than the myopic view of “they can afford it.”

“Corporate tax revenue had hovered in the $2 to $3 billion range for years, being around $2.5 billion just five years ago,” Emigholz said. “Since then, corporate tax revenues have doubled to their current projection of $5 billion.

“It was not too long ago that the Office of Legislative Services and the Treasury stated their concerns in budget hearings about the erosion of corporate taxes due to the possible over-use of tax incentives, and yet they have been growing at a significantly faster rate than the state’s other major tax revenues.

“With the rapid growth of corporate tax revenues due to a combination of the higher rate, recent federal changes that impacted state taxes, GILTI, the move to combined reporting and others, corporate revenues are strong enough that we can afford corporate tax relief to spur job growth,” Emigholz said.