New Jersey Takes One Step to Improve Its Business Tax Climate

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 tax, 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 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 tax, the 10th-worst sales tax and the worst property tax, 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 base 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.