Competing visions for the future of New Jersey’s corporate tax system emerged in the wake of changes proposed by Gov. Phil Murphy.
As part ofa $53.1 billion fiscal year 2024 budget proposed in late February, Murphy said he intended to let a corporate business tax surcharge instituted in 2020 in response to COVID-related budget gaps, which has been extended annually since, sunset at the year’s end.
The 2.5% surcharge levied on corporate profits of over $1 million was a necessary measure when “the state’s financial future was uncertain,” the governor’s office said. Allowing it to expire now, however, was the “fiscally responsible” move, the office said.
“Ending this temporary surcharge is simply one way we compete for the world’s leading companies and make New Jersey the place where entrepreneurs will want to come to start new ones,” the governor said in his February budget address.
While the surcharge brought billions of extra revenue to plug emergency budgetary gaps, it also brought New Jersey’s effective corporate business tax rate to 11.5%, the highest in the nation.
Along with allowing the surcharge to expire and drop back to 9%, still one of the highest rates nationwide, Murphy also expressed support for several other reforms, including further permanent reductions to the CBT rate and global intangible low tax income rate, referring to a method of calculating a U.S. multinational company’s foreign earnings, according to the Tax Foundation.
Letting the CBT surcharge expire would cost the state roughly $1 billion in revenue in fiscal 2025, according to a report by State Treasurer Elizabeth Maher Muoio’s office.
The proposal kicked off a pitched debate among lawmakers, putting Murphy in an uncomfortable position with some of his fellow Democrats who have called instead for a permanent increase to the CBT rate.
It’s also made strange bedfellows of the governor and conservative political and business leaders who support his proposal.
Michele Siekerka, president of the New Jersey Business & Industry Association, said the governor’s proposal would keep the state competitive. She said she also supports “comprehensive long-term reforms” to the state’s corporate tax structure.
“We would take a complete elimination of the tax tomorrow but practically the first place prize is ensuring that we get through this budget process without discussion of a new bill to continue that surcharge,” Siekerka said.
The state’s highest-in-the-nation rate was costing New Jersey more in jobs and tax revenue than it was pulling in, Siekerka said, by encouraging an exodus of companies seeking more “predictable” business environments.
She said the NJBIA currently supports a gradual reduction of the rate to 5% or 6%, in line with recommendations made by the Garden State Initiative, a conservative-leaning think tank.
The institute issued a report saying New Jersey has lost between $350 billion and $400 billion in personal income since 1990 because of outmigration.
“Outmigration is real here in the state of New Jersey,” Siekerka said. “The biggest piece of this is the downstream effect because when we lose a larger company the trickle-down effect is felt by vendors and suppliers that lose jobs but other companies down the supply chain are impacted too.”
Siekerka said the NJBIA would also support proposals going a step further, including a bill currently under committee review in the state Assembly introduced by Republican Assemblymember Christopher DePhillips to gradually reduce the CBT rate to 2.5%.
Murphy’s fellow Democrats control the state legislature.
Peter Chen, an analyst at the left-leaning think tank New Jersey Policy Perspective, said the loss experienced by the state should reforms occur wouldn’t be measured in terms of dollars, but budgetary stability.
“There are lots of good things that are happening in the budget and knocking out a giant chunk of revenue is a bad idea,” Chen said. “When thinking about wanting to finance the government at its current level, you’re gonna have to find sustainable revenue somewhere.”
Like many other states, New Jersey leveraged revenues from federal pandemic aid and “a remarkable” economic bounce back to pad reserves, pay down pension and bond debt, meet school funding quotas, and launch new infrastructure initiatives, funds they “can’t count on in the near future,” Chen said.
The CBT is the state’s third largest source of income according to the NJPP, and the sunset of the surcharge would “blow a billion-dollar hole in the budget” when the state should be thinking about “how to make a sustainable revenue base for the long term,” Chen said.
“Any downturn isn’t just going to hit one revenue source,” he said. “Even a small recession is going to hit the income tax, and it’s going to hit sales tax, and it’s going to hit corporate tax and on top of all of that, you’re going to see people who need to use unemployment, and that’s going to hit the budget on both ends.”
Chen also said cuts to the rate wouldn’t be felt by the average citizen but would rather help line the pockets of large companies already seeing record profits.
According to an NJPP report, around 70% of the corporate tax cut would go to businesses with more than $10 million in annual profits and “corporations with more than $100 million in profits would receive the largest tax cut, averaging $4,952,000.
“When thinking about how to make a sustainable revenue base for the long term, these are exactly the corporations who should be paying more rather than getting a tax cut,” Chen said.
Fitch Ratings senior analyst Douglas Offerman said New Jersey had taken a cautious approach to debt and other lingering long-term issues and was now seizing on some “remarkable momentum” to create a more favorable environment for businesses in the state.
“We have the state at an A rating, positive outlook, and that speaks to very solid trends that it has been on as it as it addresses multiple challenges simultaneously,” he said. “We see it as very well positioned in this environment and to continue covering all of these bases.”
However, “there are economic risks on the horizon,” Offerman added. “Obviously see how all of this plays out over the coming years.”
Moody’s Investors Service rates New Jersey A2, and S&P Global Ratings assigns its A-minus rating. All three agencies assign positive outlooks.