Tax Foundation State Tax Team Travels to New Jersey

September 13, 2006

The Tax Foundation state tax team has been traveling in recent months—to Kansas, Michigan, Washington, and Ohio—to deliver talks about state tax policy. In addition, we’ve also released several state-level reports—on tax systems in Ohio, Connecticut and soon Kansas—in order to further our mission of educating lawmakers and the public about improved state tax policy around the country.

The following are a few bullet points from a presentation I delivered yesterday (Sepember 12, 2006) to a group of political and business leaders in the State of New Jersey:

– There is little doubt that New Jersey has one of the worst business tax climates in the country. In fact, in the 2006 version of the Tax Foundation’s State Business Tax Climate New Jersey ranked 49th, ahead of only New York.

– The State Business Tax Climate Index (SBTCI) measures how a state collects its tax burden because how a state raises revenue is as important as how much it raises.

– The more complex a state’s tax system is the more it changes economic behavior and in the long run this will deter economic growth.

– The recently passed budget bill in New Jersey, passed in early July to close a budget gap, had three provisions that will serve to further weaken an already badly damaged business tax climate.

– The 1% sales tax increase from 6% to 7%, the 4% corporate income surtax and the cigarette tax increase will all further erode the business tax climate in New Jersey. The sales tax increase is made doubly harmful when considering that New Jersey shares a border with Delaware, a state with no state sales tax. As several studies have shown, people will cross the border to make purchases in the low tax state, further hurting New Jersey businesses.

– New Jersey has the worst Corporate Tax system in the 2006 SBTCI, which is significantly damaging the state’s ability to compete in the global market place with countries like Ireland and Estonia that are enacting broad based- low rate corporate income taxes.

– Although New Jersey, and all states, needs to be aware of companies moving abroad, they need to be more concerned with companies moving from one state to another as the Department of Labor reports most job relocations are from one to state to another rather than to foreign countries.

– There are persistent claims that taxes do not matter to businesses and that government expenditures on services matter more.

– While we do not claim that taxes are the sole determinant of business location, it is self-evident that they are a major factor.

– Besides, increasing spending on things such as education and infrastructure may take years to pay dividends as it takes years to educate children and build roads, but a legislature can go to its statehouse today, improve the tax system and immediately help businesses in its state and attract new companies.

– Furthermore, if expenditures on highways were truly the silver bullet for economic development, West Virginia would lead the world in growth. And as the recent explosion of spending on education has shown, increased government spending on programs does not guarantee improved results.

– One needs to look no further than a few basic statistics to reinforce the fact that taxes matter to businesses.

– Nevada ranks 5th in the 2006 SBTCI and from 2000 through 2005 income and output growth in the state were 1st and 2nd fastest in the country respectively.

– New Jersey ranks 49th in the 2006 SBTCI and from 2000 to 2005 income and output grew the 45th and 38th fastest respectively.

– Certainly New Jersey has a more developed economy and higher levels of these two measures than Nevada, and New Jersey is starting with higher levels of both income and output making it harder for them to grow as rapidly. However, New Jersey is definitely growing slower than the rest of the country and although business tax climate might not totally explain why this is, it is undoubtedly a major factor.

– Furthermore, even though New Jersey will always benefit from its proximity to New York City and educated work force among other assets, it could certainly do better at spurring growth and helping its businesses.

– In recent years New Jersey has taken the backwards approach to economic development of offering targeted tax incentives to politically favored companies. The Goldman Sachs Tower in Jersey City is a prime example. Tax incentives are not an economic development tool. They are a tacit admission that the state’s tax system is so onerous that new businesses will not locate there without a special incentive.

– New Jersey’s surprisingly low state and local tax burden, as calculated by the Tax Foundation, is a powerful signal that the state’s tax system is riddled with credits, deductions and exemptions. With corporate and individual tax rates at 9 percent (without the surtax) and 8.97 percent respectively, New Jersey should be on the top of the tax burden ranks. It is not because its tax systems are riddled with holes.

– Tax incentives do not spur economic development in the long run. They only serve to temporarily create new jobs while at the same time narrowing the tax base and foisting the tax burden on businesses already located in the state. The narrower base keeps the rates high and places the burden on those businesses not receiving special treatment.

– This is essentially an economic slap in the face to businesses already located in New Jersey. Of course it is inevitable that every other business within the industry will line up at the statehouse for their break, only serving to narrow the base more.

– The government should never be in the position of picking winners and losers in the market because this alters economic decisions and in the long run negatively impacts economic growth. When it offers targeted tax incentives this is exactly what its doing.

– Now that the additional damage is done, what must New Jersey do fix its business tax climate? The answer is simple: make your business tax climate competitive with other states and competing foreign countries by broadening your bases and lowering your rates. Stop handing out politically determined tax gifts to the lucky few and improve taxes economy wide to spur growth in your state.

For more on our state-level tax policy work, check out our “State Taxes & Spending” section.

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