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‘Combined Reporting’ Corporate-Tax Policy Could Add $500M to NJ's Coffers

Changes to tax structure could put small businesses and large corporations on same footing, according to just-released report

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New Jersey could collect millions more in revenue from multistate corporations while being fairer to in-state small businesses by changing the way it levies corporate taxes, according to a new report due to be released this morning by a liberal think tank. The change could bring in between $235 million and $470 million more in annual tax revenue, according to an embargoed copy of the report that was released to NJ Spotlight.

Due to be released at 11 a.m., from Trenton-based New Jersey Policy Perspective, the report promotes the benefits of a tax policy known as “combined reporting,” which prevents large companies from lowering their overall tax burden by shifting profits to subsidiaries in other states. Instead, each corporation no matter its size is treated as a single entity for state tax purposes.

Right now, 24 of the 45 states that levy a corporate tax of some form require combined reporting, according to the NJPP assessment. They include neighboring New York and nearby Massachusetts.

The report is coming out just as lawmakers in Trenton are in the final weeks of evaluating the $33.8 billion budget that Gov. Chris Christie has proposed for the fiscal year that begins July 1.

Opponents of combined reporting say estimates of increased revenue are questionable and that it can distort income gains and losses. But proponents have billed the policy as a fairness measure because it puts large corporations that have the ability to shift profits to other states on the same footing as small businesses that generally cannot.

Even the low end of the potential revenue boost may be too tempting for state lawmakers to ignore, given that they’re facing severe budget pressure right now. A looming gap in transportation spending means there’s only enough money to pay for road, bridge and, rail improvements through June 30, 2016. And a much-anticipated ruling from the state Supreme Court in a major pension-funding case could come at any time.

The state constitution requires a balanced budget to be in place on July 1. But if the Christie administration loses the pension case, the state could be forced to come up with another $3 billion over two fiscal years to live up to a pension-funding law enacted in 2011 by Christie and Democrats who control the Legislature.

This year is also an election year for the 80-seat state Assembly, and so far there has been little appetite to raise taxes to bring in more revenue for transportation and other priorities. But corporate rates would remain the same even if New Jersey took in more tax dollars by shifting to combined reporting.

Sheila Reynertson, a senior policy analyst at the think tank who wrote the report stressed that the policy change would be more fair to small businesses in New Jersey.

One example cited in the report is a major retail corporation that created a separate subsidiary that in turn owns many of its stores. The corporation pays rent to the subsidiary, which is based in Delaware, where there’s no corporate-income tax.

“Combined reporting helps foster a more level playing field for all businesses -- a factor that may explain why states that have this policy in place tend to have higher entrepreneurship rates,” the report says.

Christie, a Republican exploring a run for president, has tried to make the state more hospitable to employers since taking office in early 2010. He’s enacted a series of [http://www.njspotlight.com/stories/15/03/03/christie-pushes-ahead-with-business-tax-cuts-racking-up-660m-in-lost-revenue/|business-tax cuts] and signed legislation in 2013 that significantly revamped the state’s corporate-tax incentive programs.

Still, New Jersey’s economy has grown only sluggishly since the recent recession, recovering about 70 percent of the jobs lost to the downturn. The state’s unemployment rate was 6.5 percent in May, higher than the federal jobless rate of 5.4 percent.

And Christie’s administration has had to make several midyear spending adjustments in recent years to offset missed revenue projections, including delaying property-tax relief and reducing state pension contributions, the issue that’s now before the Supreme Court.

New Jersey closed a series of corporate loopholes in 2002, but stopped short of requiring combined reporting. Had the shift to combined reporting been made in 2002 along with the other changes, New Jersey could have collected an additional $2.9 billion to $5.9 billion in revenue by now, according to the report.

That’s money that “could have been reinvested in key areas like pre-K expansion, road and bridge repair, and job training programs to help strengthen the economy,” the report says.

Taking on expected criticism, the report says concerns that corporations will avoid states where combined reporting is mandatory are unfounded because issues like workforce and infrastructure play larger roles when corporate leaders are deciding where they want to do business.

“It is highly unlikely that combined reporting would have enough impact on corporate bottom lines to affect decisions about whether to invest in New Jersey,” the report says. “Time and again, large corporations have chosen to locate or expand in states with combined reporting.”

And Reynertson said the U.S. Supreme Court has twice upheld the legality of combined reporting as a state tax policy.

“It’s a feasible way to go after income that we’re legally entitled to,” she said.

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