N.J. ranks ‘a worse 50th’ for businesses because of taxes

New Jersey still has the worst business-tax climate in the country, says the Tax Foundation in a new report.

It has ranked at the bottom in the annual report by the group’s Center for State Tax Policy for a decade, though five years ago it did move to 49th place for one blip in what was described as a virtual tie for last place.

“Just over and over again, you find anomalies in the New Jersey tax code that make it more expensive and a little more arbitrary,” said Jared Walczak, a senior policy analyst at the Tax Foundation. “Because you want a neutral tax code that’s not picking winners and losers, and often New Jersey is doing that.”

Year-to-year index scores declined in 27 of 50 states. New Jersey registered the biggest drop in the country, driven by a temporary surcharge on corporate business taxes and a hike in the income tax that applies to income over $5 million.

“The reality, though, is that New Jersey ranked 50th before this, continues to rank 50th – maybe it’s a worse 50th,” Walczak said. “But the state has been unfortunately headed in the wrong direction on tax policy for quite some time, despite a couple of positive reforms in recent years.”

The report bases the rank on 118 variables in five major areas of taxes. On only one of those is New Jersey ranked last, though it’s ranked in the bottom half on all five.

• Individual income tax, ranks 50th
• Property tax, ranks 48th (Vermont and Connecticut are ranked worse. New Jersey got credit in this area of taxation for eliminating its estate tax.)
• Corporate tax, ranks 47th
• Sales tax, ranks 45th
• Unemployment insurance tax, ranks 32nd

Senate Minority Leader Tom Kean Jr., R-Union, said “nobody should be shocked” that more than $1 billion on tax increases would hurt New Jersey’s competitiveness. He said additional changes to the corporate business tax scheduled for a vote Thursday, mostly though not entirely to correct technical issues from the law enacted in July, would exacerbate the problem.

“Even after this last-place ranking, New Jersey Democrats are continuing their efforts to cement the Garden State’s reputation as a bad place to do business,” Kean said.

July’s change in the corporate tax applies a surcharge to businesses with profits of $1 million or more, 2.5 percent in 2018 and 2019 and 1.5 percent in 2020 and 2021. Walczak said that would affect a lot of businesses.

Walczak said the general mantra that New Jersey needs to take seriously – for all taxes – is having a broad base and lower rates. The Tax Foundation, for instance, awarded points in its analysis to states that apply sales taxes on gasoline and groceries and deducted ones that exempt types of business activity or offer significant tax breaks to land businesses.

“A lot of those targeted incentives, they’re putting a thumb on the scale. They’re having politicians decide which industries and which activities are going to be the future for the state, and there’s no reason to believe that they would be the ones to get that right,” Walczak said.

Income taxes are important to businesses because a significant number of them, including sole proprietorships, partnerships, and S corporations, report their income through the individual income tax code. The number of individuals filing federal tax returns with business income has more than doubled over the past 30 years.

The new 10.75 percent tax rate on income over $5 million is the highest bracket ever set up by a state, said Walczak, who said $1 million had been the highest threshold previously.

“We don’t think that’s good tax policy to be stratifying quite that much. Again, the state ranked 50th before this, continues to rank 50th after,” he said. “It’s a complex tax code with high rates and a lot of provisions that are getting away from a neutral treatment of income and economic activity.”

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Michael Symons is State House bureau chief for New Jersey 101.5 and the editor of New Jersey: Decoded. Follow @NJDecoded on Twitter and Facebook. Contact him at michael.symons@townsquaremedia.com

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