When the budget deal was finally completed last weekend, many legislative and business leaders complained that changing the corporate business tax is so complicated it needed more than just a last-minute push to get it done.
What many don’t know is that the fight is more than a decade old.
Does this sound familiar?
“We’re going to make sure that all companies are paying their fair share,” the governor said. “We’re going to restore the integrity of the corporate income tax by eliminating the loopholes and gimmicks that have allowed companies to shirk their responsibilities.
“Last year’s budget anticipated $1.8 billion in revenues from the corporate business tax — and we didn’t get there. This year, we’re going to restructure the tax to provide for greater equity and fairness to achieve the $1.8 billion in revenues that the Legislature intended a year ago.
“We’re going to do this fairly, so that companies that have already been paying their fair share are not affected. And we’re going to take steps to protect small businesses, so that they are not adversely affected by the changes.”
Those words may sound like Gov. Phil Murphy. They were actually said by then-Gov. Jim McGreevey during his budget address on March 26, 2002.
The fight then — when the state was facing a $5.3 billion deficit — may have been more caustic than it is now.
Back in 2002, the last time changing the corporate business tax was open for discussion, “Save Sally’s Job” was the argument opponents used, saying raising the CBT would force companies to lay off workers.
The campaign led to a nasty fight between McGreevey and the business community, which ultimately saw the passage of the tax hike.
And James Zimmerman, CEO of Macy’s parent company, penned a letter to the governor saying the company could not absorb the doubling of its tax obligation, and it would lay off workers.
McGreevey didn’t back down.
Instead, he criticized the company for already having laid off its workers in recent years, and said the companies could handle the hike. (It eventually did.)
The memory of the fight apparently is still fresh in the minds of business leaders. It’s the reason there has been little public outcry against the raise in the CBT that was approved in the budget earlier this week.
But don’t be fooled: the business community is watching.
Having learned its lesson, the community worked behind the scenes this year with legislators to help craft the bill — rather than attacking the governor or the Legislature publicly.
As it stands now, a week after the budget has been passed, the impact of the corporate business tax increase — especially as it pertains to combined reporting — remains unknown.
Business community leaders have said they were surprised to hear combined reporting was part of the budget deal between Senate President Steve Sweeney (D-West Deptford) and Murphy, because, although they knew the Legislature wanted to address it — to close a loophole companies can use to shift income to other states — it was supposed to be pushed to when the Legislature comes back in the fall.
The state has been after combined reporting for a few years — first with a bill by former Sen. Ray Lesniak, and in the current legislative session from both Assemblywoman Eliana Pintor Marin (D-Newark) and Sen. Paul Sarlo (D-Wood-Ridge).
But the last-minute add in the budget deal, in order to keep the sales tax hike off the table, sent everyone scrambling.
Overnight Saturday and during the day Sunday, tax experts sat and worked on technical language with legislative leaders
The same day the language was finalized, legislators voted and passed it within hours — many without having read the full text — and the business community stood on the side watching in dismay.
They have been promised a second chance to fix any issues, as businesses digest the bill and analyze its impact on them.
But whether that will happen legislatively or through regulations remains to be seen.
New Jersey historically has a problem with accurately estimating the corporate business tax revenue, and the worry from the business community is that it will continue even in the upcoming fiscal year.
According to New Jersey Department of the Treasury data from Fiscal Year 2005 to present, there were only five years in which the corporate business tax revenue grew. Otherwise, New Jersey has seen a very volatile landscape when it comes to the business tax.
Most years, the revenue falls short of estimates, and decreased in varying amounts from 0.1 percent to as much as 23 percent from the previous year.
Some have attributed this to overzealous estimation, others say it has to do with the way the tax laws are structured.
But the overhaul to the corporate business tax, specifically the combined reporting provision, is likely to net the state more than it anticipates.
In the end, the 11.5 percent tax for next year on companies earning more than $1 million, along with the combined reporting, dividends tax and market-based sourcing provisions, will net the state $861 million more in fiscal year 2019, resulting in a total collection of more than $3 billion — in a $37.4 billion budget plan.
“This is complicated stuff,” one insider told ROI-NJ. “You shouldn’t have done it in three weeks, let alone a few days.”
The taxes are likely to affect of number of industries, possibly the most impacted is the pharmaceutical and life sciences.
BioNJ president and CEO Debbie Hart told ROI-NJ the effects remain to be seen.
“We are still parsing our way through the budget and determining where the challenges and opportunities lie for the industry for our members both large and small. Certainly one of the greatest opportunities for our economy is the biotechnology and life sciences industry and we look forward to working with the governor and his administration and the legislature to make the New Jersey life sciences industry as well as New Jersey’s economy the strongest it can be,” she said.
Read more from ROI-NJ:
- When a gut check became a number check: How legislative leaders felt they won the battle
- A look at the state’s tax revenues in FY2019
- NJ Society of CPAs: State could learn from errors of others when it comes to combined reporting
- After another day of negotiations, Legislature formally passes modified budget and Murphy signs it