After weeks of tense budget confrontations threatening a government shutdown, New Jersey lawmakers passed a last-minute $37.4 billion state budget (H. 4202) last weekend that included taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. hikes on individual and corporate income.
As part of the agreement, the top income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. has been increased from 8.97 percent to 10.75 percent on income above $5 million. Businesses earning more than $1 million will also now pay a higher corporate tax rate for the next four years. For the first two years (starting retroactive to January 1, 2018) they will be taxed at 11.5 percent, and at 10.5 percent for the remaining two years, up from the 9 percent current rate.
The deal represents a compromise between rival plans by Governor Phil Murphy (D) and Senate President Stephen Sweeney (D). Earlier this year, Sweeney had supported increasing the corporate tax rate from 9 percent to 12 percent for businesses with income above $1 million, while Murphy proposed raising the state’s sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. and taxes on income above $1 million from 8.97 percent to 10.75 percent.
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The state will now tax businesses at the second highest corporate tax rate in the country. Only Iowa businesses will pay a higher rate (12 percent), though the state allows them to deduct federal taxes, creating a comparable statutory tax rate around 9.8 percent. (Iowa will also lower its rate beginning in 2021)
New Jersey also ranks last overall in our State Business Tax Climate Index, and New Jersey businesses will now pay a higher rate than both Pennsylvania’s 9.99 percent and neighboring New York’s 6.5 percent corporate tax rates.
Make no mistake, New Jersey is likely digging itself into a deeper fiscal hole with these tax increases. Further, the temporary nature of the corporate tax hikes will invite a budget crunch as they expire in four years. What the state truly needs is lasting tax reform to broaden bases and bring tax rates in line with competitor states. As it is, New Jersey can’t even compete with New York on corporate taxes at the moment.