U.S. companies that merge with overseas partners to avoid paying higher corporate taxes at home would face new consequences in New Jersey under a bill that has already cleared the state Assembly.
If the state Senate follows suit in the next few weeks, Gov. Chris Christie could be forced — in the glare of a presidential campaign — to decide whether firms that undergo what’s known as a tax inversion should be banned from receiving state contracts or economic-development tax incentives.
Supporters of the bill say the state should crack down on tax dodges since they ultimately result in more of the federal tax burden being placed on other U.S. companies and individual taxpayers. But critics say the matter is best handled by the federal government and shouldn’t be the subject of a state law.
The measure that passed the Assembly earlier this month was first introduced in 2014. But interest in the issue was i renewed after last month’s announcement by Pfizer, the New York-based drug company with offices in New Jersey, that it is merging with Allergan, a drug company based in Ireland.
The merger, reportedly worth a record $160 billion, would result in Pfizer moving its address for tax-filing purposes to Ireland, which has a significantly lower corporate tax rate than the U.S.
Though not a new practice, corporate inversions have drawn increased national attention in recent years as high-profile companies like Burger King have announced mergers with foreign corporate partners to take advantage of lower tax rates in other countries.
President Barack Obama’s administration has rolled out new federal rules in an attempt to crack down on the practice.
The issue has also come up this year during the primary season for the 2016 presidential election, with many Republican candidates, including Christie, calling for reduced federal tax rates.
Likely Democratic nominee Hillary Clinton has countered with a proposal to levy an “exit tax” on corporations that merge with foreign companies.
So far, no individual states have enacted legislation cracking down on firms that relocate overseas. Advocates for reform say New Jersey would be the first if the bill currently making its way through the state Legislature ultimately becomes law.
Earlier this year, New Jersey lawmakers also introduced legislation that would close a loophole in the state’s corporate-tax policy that allows multistate corporations to shift some profits earned in New Jersey to states with lower taxes.
Assemblyman Troy Singleton (D-Burlington) said lawmakers need to make sure the state’s finite resources aren’t going to those who “walk out on the bill” once they’ve taken advantage of investments by New Jersey taxpayers in areas like infrastructure and education.
“In New Jersey, and elsewhere in this country, we invest together in things like our roads that allow our goods and commerce to move, we invest together in an educated workforce to help make those companies grow,” said Singleton, the sponsor of the legislation, during a debate on the Assembly floor.
“For some to walk out on the bill, so to speak, seems a bit distasteful,” he said.
He added that complaints about a punitive federal tax environment are countered by data that indicate corporations here have been earning record profits in recent years.
Singelton’s bill would prohibit domestic companies that participate in a tax inversion move from getting a contract from state government or a state authority.
The firms would also be barred from receiving state economic-development incentives, and the bill would force companies already receiving those incentives to report their corporate filing status on an annual basis. Those who enter into an inversion would be required to pay back their subsidies.
According to the bill, the only way a company participating in an inversion could receive a state contract or subsidy would be if the prohibition would violate federal law or jeopardize federal funding.
The measure has support from New Jersey Policy Perspective, a liberal think tank based in Trenton.
“New Jersey’s policymakers and economic-development officials should be focused on growing the state’s economy, not rewarding tax dodgers with even more tax breaks,” said Gordon MacInnes, the think tank’s president. “Putting an end to this practice is just common sense.”
But the New Jersey Business & Industry Association is opposing the legislation on the grounds that the matter is really a federal issue.
“Corporate inversions take place because of the federal tax code and have nothing to do with state programs or state contracts,” said Andrew Musick, NJBIA’s director of taxation and economic development. “In fact, they have little to no impact on New Jersey’s corporate business tax collections or the jobs and facilities located in the state.”
Assemblyman Declan O’Scanlon (R-Monmouth) said during the debate on the Assembly floor earlier this month that the bill, while it may be well-intentioned , could end up punishing companies that employ New Jersey residents.
“That company would not be able to work for New Jersey, they’d be out of work, and we’d lose those jobs,” O’Scanlon said.
It’s unclear right now when the Senate version of the bill will come up for a vote before the current legislative session ends on Jan. 11.