Governor Jon Corzine recently revealed his economic stimulus plan, saying that the crisis on Wall Street will uniquely impact his state. "Economists predict New Jersey could lose tens of thousands of Wall Street jobs," he said, adding "our casino revenues are in decline, thousands of construction and manufacturing jobs have already been lost, auto and retail sales are down while inventories climb."
The Governor's proposal includes both short- and long-term strategies. The short term strategies include ensuring more seniors have access to property tax cuts, investing in public infrastructure, and expanding heating assistance.
The Governor's long-term strategies are more suspect. Among them is a proposal to change the state's formula for calculating business taxes to consider only sales made in the state (in other words, moving towards a single sales factor (SSF) approach). Unfortunately, the SSF is a huge revenue-loser in states that have already adopted it and results in a corporate tax structure that is less fair, as explained in ITEP's policy brief.
The Governor also proposes to "remove certain tax provisions that penalize New Jersey companies" including the "throw out rule." As another ITEP policy brief explains, many states have a "throwback rule" or, in the case of New Jersey, a "throw out rule" that prevents companies from shifting portions of their taxable income out of state. Every state that levies a corporate income tax must determine, for each corporation doing business within its borders, how much of the company's profit they can tax. Whether sales are in-state or out-of-state is one factor used to make this determination (and it's the only factor used in single sales factor states). In the absence of a throwback/throw out rule, some corporate sales fall between the cracks, and cannot be taxed by any state. (This can happen because, for example, a company stretches its operations so that its sales are recorded in a state that does not have a corporate tax or a state where it doesn't meet the requirements to be subject to the corporate tax).
This phenomenon is called "nowhere income." The "throwback/throw out" rule simply says that state of origin (the state that is the home of the company making those sales) can tax this income.
Mary Forsberg at New Jersey Policy Perspective wisely cautions policymakers to get the facts and not act hastily to adopt tax changes that could have long-lasting ramifications.
Why would the state even consider changes that would mainly help corporations avoid paying state taxes? It's true that New Jersey has more corporate CEOs, stockbrokers and hedge fund managers who are affected by the stock crash than most other states, but the state government seems to think this means all New Jersey residents belong to this wealthy elite. A surprising amount of attention has been given to how members of this elite are "feeling the pinch" as one recent article put it. A paper actually sent a reporter to Moorland Farms for the 88th annual Far Hills Race last Saturday to find wealthy attendees complaining that they have to cut back on dining at expensive restaurants and traveling over the holidays. Hopefully, tax policy changes will not be geared solely towards benefiting this group.
Ironically, in the Governor's address to a joint session of the Legislature he said, "It's our time to be courageous. Let's do what is right for the people and prosperity of New Jersey." Let's hope the Governor takes a step back and has the courage to do less for corporations and more for those hardest hit by his state's fiscal woes.