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Democrats Look to Close Corporate-Tax Loophole Used to Shield Profits

Combined reporting requirement would prevent big firms from shifting income to states with lower tax rates

Sens. Ray Lesniak and Paul Sarlo
Sen. Raymond Lesniak and Sen. Paul Sarlo at a news conference in the State House discussing legislation that would close a corporate tax loophole.

New Jersey’s budget could definitely use some more cash, with money for state transportation projects running dry and the public-employee pension system’s funding deficit growing wider.

With those fiscal problems and others in mind, a group of lawmakers say their colleagues should take a new look at legislation that would raise more revenue by closing a corporate-tax loophole.

A bill that’s been reintroduced for the new state legislative session that started earlier this month would generate an estimated $200 million by preventing multistate corporations from shifting profits earned in New Jersey to other states that have lower corporate tax rates or no corporate tax at all.

Bill sponsors and supporters of what’s known as a “combined-reporting” corporate-tax policy say the change would bring in more cash at a time when the state is underfunding a number of important programs and make the state’s corporate-tax policy fairer for small businesses and other companies that don’t employ clever accounting.

The legislation would, in effect, treat large multistate corporations and their subsidiaries as one entity for tax purposes.

“What they do, through these deft accounting maneuvers, is transfer income that’s earned in New Jersey offshore or to Delaware, where there is no corporate-income tax,” said state Sen. Ray Lesniak (D-Union), the primary sponsor of the legislation, during a news conference in the State House yesterday.

For example, he said, ExxonMobil, which New Jersey took to court to resolve pollution-cleanup concerns, has been averaging an effective tax rate of a little over 2 percent over the last five years. That’s well below the state’s 9 percent corporate tax rate.

Twenty-five other states already require combined reporting when companies file their state corporate-income taxes. That’s more than half of the 45 states that have some form of a corporate tax on their books.

It’s unclear exactly how much more revenue New Jersey could collect by establishing combined reporting.

A study released last year by the liberal think tank New Jersey Policy Perspective estimated the switch could generate between $235 million and $470 million in new revenue.

But Lesniak and the other sponsors say they’re using more conservative estimates of around $200 million. That’s less than 10 percent of the total revenue expected to come in this year from the state’s corporate tax.

They also note the revenue would help pad corporate-business tax collections that are projected to be the third-largest source of revenue for the current fiscal year budget, which totals $33.8 billion.

But corporate-business tax collections through the first six months of the state’s fiscal year, according to the state Department of Treasury, were running far behind the 3.4 percent growth rate that has been established for the tax for the full fiscal year.

Tax breaks and tax cuts for businesses

The lawmakers said New Jersey’s corporate-tax revenues are also beginning to be affected by lucrative corporate-tax incentives awarded by Gov. Chris Christie’s administration in recent years. And Christie has also enacted more than $2 billion worth of business tax cuts since taking office in early 2010.

Opponents of the combined-reporting policies say estimates of increased revenue can be questionable, and that it can distort income gains and losses.

But state Sen. Linda Greenstein (D-Mercer), another sponsor of the New Jersey bill, said businesses of all sizes benefit from the road projects, public safety and other services funded by taxes paid to the state. Permitting multistate companies to shield some of the income that they earn in New Jersey while still allowing them to benefit from those taxpayer-funded services is unfair, she said.

“This is not a tax increase, it’s tax fairness,” said Greenstein.

Lesniak first proposed the legislation last June, but it stalled in the Senate Budget and Appropriations Committee and ultimately died when the last session ended. Now, state Sen. Paul Sarlo (D-Bergen), the chairman of the budget panel, has signed on as a primary sponsor.

Lesniak called Sarlo’s support “important,” while Sarlo said it comes down to “tax fairness.”

“We’re trying to capture some of the taxes that are not being paid in New Jersey,” Sarlo said. “We’re not adding any new taxes or creating a new tax.”

Among the groups supporting the combined-reporting bill is the New Jersey Main Street Alliance, which represents 1,500 independent small businesses across the state. Jerome Montes, the group’s business representative, said small businesses in New Jersey want “a more level playing field.”

“These folks don’t have the ability to hide their revenue in a subsidiary in another state,” Montes said.

One of those business owners, Erick Cedano of Elizabeth-based Fast Photo Plus, also said the combined-reporting bill comes down to a matter of fairness.

“As a small business owner I wear a lot of hats and face a lot of challenges,” Cedano said. “I find it very unfair that I’m paying my share of taxes while multistate corporations aren’t.”

Reached after the hearing, an official from the New Jersey Business & Industry Association, which has more than 20,000 member companies of all sizes, said the organization has yet to take a position on the legislation.

“We will continue to review the proposals and gather input from our members, and look forward to meeting with the sponsors,” said Andrew Musick, NJBIA’s director of taxation and economic development.

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