After Gov. Phil Murphy doubled down on the millionaire’s tax Monday morning, state Senate President Stephen Sweeney and Assembly Speaker Craig Coughlin doubled down on a corporate business tax hike — suggesting an increase that would give New Jersey the highest corporate tax rate in the country.
Sweeney (D-West Deptford) and Coughlin (D-Woodbridge) revealed at an afternoon news conference Monday that the Legislature is pursuing a corporate business tax on C-corps to the tune of 11.5 percent for companies with revenues from $1 million to $25 million, and to 13 percent for companies earning more than $25 million.
Both rates currently sit at 9 percent.
New Jersey currently ranks as having the sixth-highest corporate tax rate in the country. The jumps to 11.5 percent for smaller companies would only be exceeded by Iowa, which stands at 12 percent. Iowa, however, is in the process of lowering its rate to 9.8 percent. The 13 percent rate on larger companies would be the nation’s highest.
The Office of Legislative Services said the state would earn $805 million in revenue from this tax hike, according to Sweeney.
And Sweeney and Coughlin said the increase would sunset after two years — and that it’s justified, considering the recent tax reform by President Donald Trump.
“The Trump tax cut gave a windfall to corporations … we’re only talking about C-corporations, (which) received $2.9 billion of money just falling out of the sky from the federal government,” Sweeney said. “Stores didn’t sell any more bread, they didn’t sell any more milk, there weren’t any more insurance policies. It just fell in their lap.
“So, if we’re going to go somewhere, go where the money is at.”
But that view is flawed, according to both Michele Siekerka, CEO and president of the New Jersey Business & Industry Association, and Tom Bracken, CEO and president of the New Jersey Chamber of Commerce.
“I don’t know of a single company with $1 million in total revenue that’s making $1 million in profit,” Bracken said. “I don’t get the math on that.
“The revenue coming out of that segment is minimal — and, if they’re trying to use that as the balance to justify the (11.5) percent, that’s a myth.”
Siekerka said changing the percentages doesn’t change the fact that it is bad policy.
“We have more than 2,000 companies that will be impacted by this, to the tune of $20 billion net income,” she said. “These companies tell us that they will not invest any further in the state of New Jersey.”
Siekerka predicted this will increase the outmigration trend, which has been putting strains on property taxes and the residents of the state.
The most likely to leave are professional services companies, she said. Manufacturers, meanwhile, are the most likely to freeze spending or expansion in the state, she said.
Siekerka said one Mercer County-based manufacturing company, which is worried about the taxes and not eager to move because of the investment in a physical plant and equipment, has said its accountant advised it move across the river into Bucks County, Pennsylvania.
“(The) accountant said, ‘Move across to Bucks County. You’ll get your return on investment three to five years on your equipment. And you’ll be better off in the long-term.’” Siekerka said.
But Murphy’s millionaire’s tax, despite its popular support, isn’t that much better of an option.
“It’s not a matter of picking which one is better or which one is worse,” Bracken said.
Especially since the millionaire’s tax also hits sub-S corporations.
“I haven’t heard a lot of positives from the sub-S group, and that (group) is going to be impacted pretty severely,” he said. “There’s a whole lot more in this than has been communicated.
“The bottom line is both are bad for the state. If this revenue is needed … it has to lead to some plan. It has to be part of a plan that gets us back to prosperity. If this is just ‘Plug the hole this year and let’s move on,’ then we are doing the state a disservice.”
Siekerka said 5,000 businesses, which account for more than $1 billion in adjusted gross income, and 20,000 individuals, who account for $54 billion in adjusted gross income, will be affected.
To Bracken’s point, Murphy has said that the goal is to see a return on investment that results in prosperity for the state.
Murphy — who has a business background thanks to his time at Goldman Sachs — understands what it takes to attract businesses, according to a government official who requested anonymity because they are not authorized to speak publicly for the governor.
“He does understand business and attracting businesses, and one way to attract businesses is through quality mass transportation, through quality education; he also understands credit rating agencies,” the source said. “Credit rating agencies have given us 11 straight downgrades because of the way the state has done business. That includes one-shots, non-recurring revenues, kicking the can down the road. I think all this very much comes from his business background.”
Regarding attracting businesses, Bracken said those things are being worked on without the budget increases.
“You can’t be assured that that’s going to happen,” he said. “So, unless they tell you how much they are going to allocate and it’s locked in and concrete and they tell you how much better that is going to make the state and make it attractive to business — unless that is firmly in place, you can’t rely on that.
“All you can rely on is that, on Day One, there is going to be a greater tax paid by someone in this state — either the millionaire’s or the corporate business community.”
Bracken said there has to be a give-back to the business community.
“A lot of those corporations have already allocated what they have ‘gotten’ from the federal government,” he said. “They’re going to reinvest in their company, they are going to give back to their employees, they are going to give back to charitable organizations — there’s a lot of things these companies are going to do with that money.
“Some have some free cash, but a lot of them don’t. So now you’re hitting muscle rather than fat.”
Siekerka added that many companies also are trying to figure out how the federal tax reform affects them in future years.
“When we continue to increase taxes here, we continue to make ourselves less competitive,” she said. “Pennsylvania is not talking about increasing and getting their ‘fair share.’
“That’s going to make us an outlier. We need at least a full year to understand the impact of the federal tax reform. The base was widened, some companies are still trying to figure out what they are paying taxes on that they didn’t pay on before — they don’t know what the net impact of that is.”
And acknowledging that companies have been given incentives to move or grow in the state, which has been a sore point in the property tax debate, Siekerka said the companies also are facing pressure from other directions that nullifies the benefit of the incentive.
That includes legislation that expanded paid sick leave, the proposed expansion of paid family leave, a $15 minimum wage and increased energy costs.
The burden of those is heavier for small businesses to shoulder, she said.
Millionaires are a fast-growing category. According to the IRS, the number of households with an adjusted gross income greater than $1 million more than doubled between 2001 and 2014.
No group has grown faster than the super-rich; the number of households earning more than $10 million grew by 144 percent, according to an article in The Atlantic.
But the NJBIA released a report analyzing the state’s share of millionaires, and it shows that New Jersey already is missing out on capturing the fast growth shown by the IRS numbers.
New Jersey ranked third in the region in number of millionaires, but fifth out of seven in percentage change.
In other words, New Jersey’s millionaire’s pool is growing slower than other states.
One of New Jersey’s biggest competitors, Massachusetts, tried to put the millionaire’s tax on the 2018 ballot. It was shot down by the state Supreme Court Monday.
Massachusetts surpassed the Garden State in total AGI from individual millionaires in 2014 and 2015, despite having nearly 3,500 fewer filings of $1 million and more.
But the battle between the corporate and individual taxes hinges on a broader problem in the budget negotiation: There isn’t one, Sweeney and Coughlin said.
Legislators from both parties shared similar sentiments Monday. Republicans said Murphy has not engaged them, while Sweeney said Murphy has not truly negotiated.
“I was told, ‘This is my budget. I like my budget. The things I cut, I already cut. The things on the cutting room floor are already on the cutting room floor. Pass my budget,’ and that’s almost verbatim,” Sweeney said.
Assembly Minority Leader Jon Bramnick (R-Westfield) said the state was headed toward a shutdown over an in-party fight.
“They are not shutting down government because the Democrats want to lower taxes and cut spending, they are shutting down because this governor is not communicating with the Democratic or Republican leadership,” he said. “He’s not negotiating with the Democratic leadership, he’s not talking to the Republican leadership. This is not a dictatorship.
“With all due respect to the governor, his inexperience is showing in this budget fight.”
Both Sweeney and Coughlin said that they both hope to avoid a shutdown.
Siekerka said the state needs to reconsider its options.
“As much as we all know what we need,” she said. “We’ve got to get our house in order first.”
Read more from ROI-NJ:
- Murphy vs. Legislature: Upcoming budget battle may be as much about party as state (Editor’s Desk)
- Murphy still all-in on millionaire’s tax and raising state sales tax
- Republican leaders fight back against Murphy: ‘This is not a dictatorship’