Small Tax Break in Cards for New Jersey’s Metal Manufacturers

John Reitmeyer | April 1, 2019 | Budget
Sponsors say it would allow New Jersey foundries to better compete with those elsewhere in U.S. and would have minimal impact on state budget

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Molten metal
New Jersey has a reputation for levying high taxes, particularly on businesses. But lawmakers have sent Gov. Phil Murphy a bill that would establish a new tax cut to benefit the state’s modest network of foundries.

The measure, which received bipartisan support in both houses of the Legislature, would allow metal-manufacturing companies that produce things like steel tools and engine parts to skip paying sales taxes on sands, washes and other materials that they use in the manufacturing process.

Sponsors of the proposed tax break say it would put New Jersey on a more equal footing with other states since most already provide their foundries, of which there are an estimated 20 currently operating in New Jersey, with such a tax benefit.

The proposed policy change is not expected to have a big impact on the state’s nearly $38 billion budget; nonpartisan analysts have suggested the total revenue loss could be $1 million or less based on the experience of other states. But it would provide a new opportunity to buck New Jersey’s general reputation of being unfriendly toward businesses.

Most states don’t charge the tax

“This bill makes our state more affordable and more attractive to industry,” said Assemblywoman Nancy Munoz (R-Union). “The majority of states don’t charge this tax. Eliminating the tax makes us more competitive.”

New Jersey once had a robust manufacturing sector, and at one point during the past century, half of the state’s jobs were in manufacturing, as industries like textiles and telecommunications boomed.

While there’s been a decline since then, manufacturing is still estimated to be a $40 billion industry in New Jersey, with more than 10,000 companies employing an estimated 360,000 people.

A bipartisan “manufacturing caucus” was convened by legislative leaders in 2017 to look into ways to update state laws to better support the manufacturers that continue to call New Jersey home. An important topic for the panel has been the ways new technologies have changed the manufacturing process for many companies, and whether state regulations need to evolve to keep up with those advancements.

For foundries, metal production relies heavily on a process known as sand casting, which involves pouring molten metal into molds to produce things like tools, engine parts and gears, typically composed of steel or alloys.

New Jersey, unlike many other states, forces the metal-manufacturing companies to pay sales taxes on the sands, binders and washes that play a key role in the sand-casting process. Those materials typically don’t qualify for existing tax exemptions that are provided for items used by other industries, largely because they don’t become a “component part of the product produced for sale,” according to tax law.

Attract more metal producers?

Under the legislation that passed the full Assembly last week, a stand-alone sales-tax exemption would be established in New Jersey for “materials used to create a mold or core in an industrial sandcasting process, if those sands, binders, washes, and other similar materials are an integral or essential part of the processing operation.”

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Assemblyman Anthony Bucco (R-Morris)
Assemblyman Anthony Bucco (R-Morris) who’s been participating in the ongoing manufacturing-caucus hearings, suggested the tax break would help New Jersey attract more metal-producing companies and lead to the creation of well-paying jobs.

“We are seeing a significant resurgence of manufacturing jobs in the country,” Bucco said. “This bill will help secure our share of these high-paying career opportunities.”

The legislation was approved 36-0 by the full state Senate in June, and a 78-0 vote in the Assembly last week represented the final action needed to get the measure onto Murphy’s desk. If enacted by the governor, the new tax break would take effect immediately, according to the bill’s language.

Minimal impact on state balance sheet

Murphy’s newly proposed state budget for fiscal year 2020 calls for several new tax increases. They include the establishment of a true millionaire’s tax, something that business groups say will result in a big tax increase for many small-business owners. Murphy is also targeting larger companies with a proposal to create a new “corporate-responsibility fee” to be levied on employers with more than 50 workers who are receiving state-funded Medicaid health benefits instead of company-provided.

The governor has also raised concerns in the past about adopting legislation outside of the normal budget process if it is likely to affect the state’s expenditures or revenue stream. But a fiscal estimate prepared by the nonpartisan Office of Legislative Services suggests the impact from the proposed tax break for the foundries would likely be minimal.

The OLS review looked at four other states that offer their metal manufacturers such a tax break and estimated those states’ revenue losses range from $100,000 to $1.2 million. Still, the fiscal estimate noted that detailed information about the equipment and materials used by New Jersey’s small network of foundries is not yet readily available, and determined the bill would have an overall “indeterminate” impact on state revenues if enacted.