Predictably, the new proposed one-year increase in corporate taxes to provide New Jersey with much-needed resources has produced doomsday howls from business lobbyists and many legislators.
Raising taxes on businesses, they warn, will keep companies from coming to New Jersey and will force many already here to leave for friendlier tax climates. The result, they claim, would bring New Jersey’s already-tepid recovery to a grinding halt.
But the concerns being raised fail the test of reality.
The relationship between economic growth, job creation, and state taxes is far less simplistic than these folks let on with their rigid “no new taxes” stance. In fact, there’s no reason to believe -- from actual experience and substantial research -- that cutting taxes boosts states’ economies and creates jobs or that raising taxes produces the opposite effect. There is, however, plenty of evidence to support increased corporate taxes if the new revenue were invested in improving public assets like education and transportation.
The bottom line from years of analysis across the nation is that tax rates themselves have just a negligible impact on economic growth. But the money taxes bring in has a significant impact in helping a state to invest in the building blocks of a strong economy.
Here in New Jersey, businesses are one of the only two constituencies -- along with the highest-income households -- that have paid lower state taxes in the past five years. The budget year that starts July 1 is to be the fourth of a scheduled five-year phase-in of tax cuts. The governor’s proposed budget includes $616.5 million in tax cuts for businesses, and the final year will increase the annual tax cut to $660 million.
And what has the cumulative $1 billion in tax cuts to date done for New Jersey’s economy? Not much.
The state has recovered just 41 percent of the jobs lost in the Great Recession, far fewer than the nation as a whole, which has regained 101 percent. Neighboring New York has recovered 183 percent of jobs lost, and Pennsylvania 93 percent. Meanwhile, as New Jersey’s tax cuts have grown in size, economic growth has slowed down to a complete standstill in 2013 and 2014. From May 2013 to May 2014, New Jersey was the only state to actually lose jobs. And 63,100 additional residents dropped out of the labor force altogether over that same period.
The reasons for the Garden State’s anemic recovery and stagnating economy are complex, as any economist will tell you. But that’s exactly the point: state economies have a lot of moving pieces. Tax rates are just one of them and, as it turns out, play too small a role in fostering economic growth to be the main driver of policy.
Those against increasing taxes on businesses often point to New Jersey’s already dismal “business climate,” claiming that additional taxation will only make the situation worse. These folks are usually referring to the “business tax climate,” not the “business climate” -- and yes, they are two very different things.
The business tax climate, as measured by the Tax Foundation (whose name should be the Anti-Tax Foundation based on the positions they inevitably take), is designed to measure the “tax-friendliness” to business of each state’s tax system. It has long ranked New Jersey either last or next to last, in the company of other high-tax states like New York and California.
Given the simplicity of this index, one might expect the states with the highest rankings to be home to many of the biggest corporations in America. But that’s not the case. The opposite is actually true.
Of the Fortune 100, just a single company (Florida’s World Fuel Services Corp., if you’re keeping score) is headquartered in one of the five states with the “friendliest” business tax climates. By contrast, 40 -- yes, 40 -- make their homes in one of the states with the five “worst” business tax climates, including four here in New Jersey. In fact, the Tax Foundation acknowledges that its rankings ignore many factors important to economic growth, in the effort to isolate taxes. In essence they are saying their own rankings should be taken with a whole lot of grains of salt.
In short, a state’s business tax climate should never be confused with or substituted for a state’s business climate. Since state and local taxes make up far less than 5 percent of the typical company’s overall cost of doing business, other factors are clearly more important to employers -- and should be to policymakers as well.
The idea that income tax increases – whether on the personal income of the so-called “job creators” or on corporations – will damage New Jersey’s economy is persistent, but it has no basis in reality. Like its cousin, the, it is magical thinking that distracts from policymakers’ important -- and increasingly urgent --task of reforming New Jersey’s tax system to bring stability, predictability, coherence, and fairness to state taxes, spending, and investment.