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on A3124
New Jersey Assembly Budget Committee
Good morning. My name is Mary Forsberg. I'm the research director at New Jersey Policy Perspective; a member of the New Jersey Tax and Fiscal Policy Study Commission and a former fiscal analyst in OLS's Revenue Section. I'm here not so much to speak against this particular bill but to urge you not to act on it until you know what impact it will have on New Jersey's tax revenues. It is always important to know how much a spending or tax cut proposal will cost New Jersey taxpayers, but in today's fiscal environment it is especially vital.
A3124 extends from 7 to 20 the number of tax years in which corporation business taxpayers can deduct from their taxable income the net operating losses they sustained in previous tax years. The bill statement is correct in saying the extension mirrors provisions in the federal tax code and the majority of other states, including New York, Pennsylvania, Connecticut and Delaware.
It is difficult to argue against what seems to be common practice. It may be that New Jersey should conform to federal and neighboring state standards in this respect, but this may not be the time to do it.
The question that needs to be asked is: Can New Jersey afford to lose this revenue at a time when:
- State departments are being told to plan for potentially hundreds of millions of dollars in additional cuts to their current operating budgets;
- As of March 2008, our state's debt was $3,478 per person, the highest of any state in the nation;
- Our state pension system's liabilities exceed the value of its assets by nearly $30 billion;
- Without the will to raise taxes, our transportation system is crumbling; and
- Our state support for public higher education is lower than it has been in decades.
Is this really the time to be cutting taxes?
Beyond this question, I am concerned that some might use this time of economic turmoil to push through a series of legislative blank checks in the name of improving the business climate or saving the state's economy, in the absence of hard evidence that tax cuts would help a weakening economy.
For example, on September 15 the Assembly Budget Committee held a hearing on a bill (A2626) which would reduce the variables included in determining a manufacturer's New Jersey tax from property, payroll and sales to sales only. As with the bill you are considering today, the bill included no estimate of tax loss. NJBIA has said the net revenue loss was $65 billion, but that was based on an estimate from the Division of Taxation using 1999 data. A report that I wrote on this topic seven years ago noted that the state Department of the Treasury testified in 2001 that implementation of the single-factor legislation would result in a revenue loss to the state that could be as much as $250 million annually.
Some companies would pay more tax and some would pay less but without a doubt the state will collect less revenue.
New Jersey has the dubious distinction of being a state that makes public far too little information about corporate tax liabilities. We know the total amount collected in each fiscal year because that number is published in the budget. But even though the corporate business tax is the state's third largest revenue source (after the gross income tax and the sales tax), we know almost nothing else. In 2003, we were told that nearly 77 percent of all companies paid only the statutory minimum tax at that time of $200....and that included 30 of the 50 companies with the largest payrolls in New Jersey.
It is important that we know more -- that we understand who pays this tax; how much they pay; and who wins and who loses when any tax change is made.
For that reason, every proposed tax change should be accompanied by an analysis of its impact on our tax revenues. And, if there is a claim that the proposed legislative action will enhance job creation and retention efforts, there should be an analysis of how many jobs it will create and how many businesses will move to or stay in New Jersey.
Instead of making corporate business tax law changes in a piecemeal way one bill at a time, why not conduct a comprehensive analysis of who pays? The New Jersey Corporate Business Tax Study Commission's June 2004 report suggested many areas in need of additional study. One issue mentioned is combined reporting, considered by many to be a critical state-level reform.
This is a dangerous time for New Jersey and the nation -- not only because of what's happening to the economy but also because of what's happening in response to the economy. We have to be on guard against proposals that use the economy as an excuse to do things that couldn't -- and shouldn't -- otherwise be done.
A3124 might not fall into that category, but in general we must act with prudence, not panic.
If New Jersey is going to make a change like this, a better idea might be to phase it in over a period of time. Even better would be to take no action until a reasonable estimate has been made of how much this will cost the state treasury.
For these reasons, New Jersey Policy Perspective urges that you make no recommendation on this bill until an appropriate financial impact statement has been prepared. This will also allow you time to act in a more comprehensive manner that is fair to both business and all New Jersey residents.
Thank you.
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