Recently, I was asked to comment about the 2012 State Business Tax Climate Index report that was released by the Tax Foundation in late January. The index, which is a composite of five different taxes — corporate, individual, sales, unemployment, and property tax — was developed to provide a simple way to compare tax burdens across the nation. Not surprisingly, New Jersey ranked last, a position it held in 2011 as well. While tax burdens are not the only issue that businesses look at when making decisions whether to locate or remain in a state, being known as the tax king of the United States is hardly helpful.
The details of the Tax Foundation’s report are pretty gruesome. First, the good news: the state didn’t rank last in any one of the five taxes. But when you rank 49th in property taxes, 48th in income taxes, 46th in sales taxes, 39th in corporate taxes and 25th in unemployment insurance taxes, it should not surprise anyone that the total tax burden adds up to a lot.
Does being the worst in the nation really make a difference? The economic literature is somewhat mixed on that idea. Most studies do show there is an impact but how much is unclear. One of the biggest reasons is that not all companies can locate anywhere. Firms that need local demand must go to where the customers are. Indeed, with New Jersey being the most densely populated state in the nation, many companies stay simply because they can make it here. In addition, issues such as transportation, skilled labor, and a concentration of similar businesses can overcome tax burdens. While these indices are hardly the gospel, a state at the bottom of the list is at a competitive disadvantage.
So what should New Jersey do? While the simple answer is “cut taxes,” that may not be the best route. It depends upon the state’s fiscal situation. A state’s financial condition is also an indicator of future tax decisions, and with all the underfunded trust funds and pension plans, it is hard to make the case that New Jersey is in good shape.
And that brings me to the dueling tax cut proposals. Gov. Chris Christie’s ten percent solution is to cut income taxes. Of course he needs to pay for the resulting loss of income and he does that by assuming revenues rise by over 7 percent. I would say that is an aggressive forecast. Disturbingly, the average reduction in taxes is not much more than a few pizzas and a movie, and the cut would not move the needle much when it comes to rankings. And the biggest concern in the state is property taxes, which the governor is not addressing.
In contrast, the Democrats have rushed into the void by proposing to cut the property taxes through a twenty percent tax credit. Unfortunately, the cut doesn’t actually lower property taxes. Instead, it provides an incentive for local governments to continue on their merry way. With the state subsidizing their behavior, cities and towns have no incentive to become more efficient by doing things such as consolidating services. Property taxes need to be reduced, not papered over by state greenbacks. It too doesn’t get do that much for the state’s tax burden ranking.
Additionally, the Democrats have been talking about a millionaire’s tax increase to fund, at least in part, their property tax cuts. With the governor ruling out a tax increase, the millionaire’s tax looks questionable, to say the least. That raises the possibility that neither the Democrats nor the governor have the money to pay for their proposals. Basically, both tax ideas contain significant fiscal risks.
Instead, I have an unsolicited idea. Keep the money! There are major structural problems with the state’s fiscal condition. There are too many underfunded trust funds, and the state’s pension plan is a disaster that is coming down the track quickly. The image of a state on the brink doesn’t help business confidence. So I suggest the politicians can the tax cuts and use the money to shore up the state’s finances. Doing that would start to get the state back on solid fiscal footing and show that the government really intends to clean up the financial mess that has plagued New Jersey for twenty years now.