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New Jersey Takes One Step to Improve Its Business Tax Climate

3 min readBy: Josh Barro

Kudos to New Jersey Governor Jon Corzine and state legislators from both parties. Yesterday, Gov. Corzine signed into law a bill that will make a positive change to the state’s corporate income 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. , by extending the period for which a corporation may carry forward a net operating loss from 7 years to 20. This move brings New Jersey into line with the federal corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. on loss carry-forwards.

Last month, some of my colleagues and I traveled to New Jersey to announce that the state had placed last on our annual State Business Tax Climate Index, which ranks the 50 states on the business-friendliness of their tax codes. We highlighted this reform (then pending before the state legislature) as one of several avenues for improving New Jersey’s business tax climate.

The Bloomberg News report on the new law cites our Index ranking, and also quotes Gov. Corzine underscoring the importance of improving business’ perceptions of New Jersey’s tax climate:

Last month, the nonpartisan Washington-based Tax Foundation ranked New Jersey the worst in the nation for a second year in a row in terms of whether its tax system encourages investment. The state has the third-worst individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , the 10th-worst 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 the worst property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. , and its tax code reads like a What Not to Do for legislators, the group said in a report.
“This measure is important for building a change in psychology with regards to New Jersey’s business environment,” Corzine said of the bill he signed today.

Of course, improving New Jersey’s tax climate involves substantive as well as psychological changes. The source of negative perceptions of the Garden State tax climate is a set of real problems, including the highest per-capita property taxes in the country. Fortunately, this new law is a substantive improvement to the state’s tax code. Extending the net operating loss carry-forward improves the tax code’s simplicity and its neutrality between sectors, for reasons I discussed here.

The Bloomberg report also notes that other positive tax reforms supported by Gov. Corzine remain before the legislature. These would repeal two rules (“throwout” and the “Regular Place of Business” rule) that allow New Jersey to tax income of multistate corporations that is not earned in New Jersey. Plus, the state’s corporate income tax rate is already set to fall from 9.36% to 9% on July 1, 2009. Put together, these changes would mark a significant improvement in the state’s tax climate for 2010.

That said, New Jersey can do more to improve its business tax climate. One key opportunity is on the sales tax. At 7%, New Jersey ties for the second-highest sales tax rate in the northeast, and has one of the highest rates nationally among states that do not have local sales taxes. Meanwhile, it also has the third-narrowest sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in the country. Expanding the sales tax to more consumer goods and services while reducing the tax rate is a revenue-neutral reform that legislators could pursue now, even while state coffers are not flush.

Listen to our recent podcast on New Jersey taxes here. Read recent posts on New Jersey tax issues here, here and here.