Plan to let tax on businesses expire draws progressive ire

By: - March 2, 2023 7:16 am

Gov. Phil Murphy during his budget address Tuesday said business leaders say letting the corporate business tax surcharge lapse would mean more money for them to create jobs, invest in new equipment, and lower costs for consumers. (Edwin J. Torres/NJ Governor’s Office)

Progressive groups are pushing lawmakers to extend a surcharge on certain profitable New Jersey businesses, but that push appears doomed amid Trenton lawmakers’ widespread support for letting the tax lapse.

In a move signaled months in advance, the budget proposal Gov. Phil Murphy unveiled Tuesday would allow the tax — a 2.5% surcharge on net profits above $1 million — to expire at the end of 2023, a move Treasury officials said is expected to cost the state $322.5 million in the fiscal year that begins July 1.

Treasury officials predicted the cost of eliminating the surcharge would grow in future years, rising to $1 billion in fiscal 2025, or about 1.9% of all state revenue forecast for fiscal year 2024.

The surcharge’s supporters have argued its elimination would help only a small group of businesses, namely those most able to weather a higher tax burden.

“It’s 2% of all businesses that operate in New Jersey because those are the ones that make over a million dollars in profit annually,” said Sheila Reynertson, a senior policy analyst at New Jersey Policy Perspective, a left-leaning Trenton-based think tank. “And among those 2%, 70% of them make over $10 million of profits a year.”

Lawmakers enacted the 2.5% surcharge in 2018, the same year a 14-point federal tax cut went into effect, amid a search for state revenue and an impasse among Democratic leaders over a millionaire’s tax. It was meant to be temporary, but in 2020 they extended it through 2023 and removed a step-down that would’ve brought the surcharge down by a point for the year before its expiration.

The governor, lawmakers, and industry groups have hailed the move as one that will make New Jersey — a state long and widely derided for its high taxes — more alluring to businesses and more competitive with its lower-tax neighbors.

“We hear from the business community that allowing this surcharge to lapse will mean more money for them to create jobs, to invest in new and more efficient equipment, to lower costs to consumers, and to be able to stay here,” Murphy said during his budget address. “So, just as they’ve trusted us to keep our word in letting this temporary surcharge expire, I’m expecting them to keep theirs with this revenue.”

Murphy’s plan to let the corporate business tax surcharge sunset has faced little negative reaction from lawmakers in Trenton. (Hal Brown for New Jersey Monitor)

Counting the surcharge, New Jersey taxes business income above $1 million in annual net profits more than any other state in the country, according to analysis from the Tax Foundation, a right-leaning D.C.-based think tank.

“We are an outlier, especially and significantly so with our corporate tax rate,” said Chris Emigholz, vice president of governmental affairs at the New Jersey Business and Industry Association. “And when we do moderate that, it’s a win-win for the state, for our economy, and ultimately for employees and the jobs that are created by those corporations for those employees.”

The surcharge’s sunset would make the state’s corporate tax rates the fourth highest in the nation — trailing only Minnesota, Illinois, and Alaska — but it would bring the state closer into line with business tax rates in neighboring states. Without the surcharge, New Jersey’s corporate tax rate is 9%.

New York imposes a 7.25% tax, including a 0.75% surcharge on companies with more than $5 million in profit, and Pennsylvania levies an 8.99% tax on businesses’ net income.

New York’s surcharge is set to expire at the start of 2024, and Pennsylvania lawmakers last year approved a phase-down that will take the state’s business tax rate down to 4.99% by the start of 2031.

“Whether we like it or not, we’re competing with Pennsylvania,” Emigholz said. “We compete with all the states in the nation for businesses, and these multi-state, multi-national corporations — which do create quite a few jobs in this state — they look at tax policy when they make decisions on where to locate and where to expand.”

Surtax supporters said other factors, including voluminous state corporate tax incentive programs, New Jersey’s highly educated workforce, and its access to ports, among other things, make it attractive to businesses despite its high taxes.

“Taxes are kind of on the bottom of the list of considerations that businesses make when they decide to move into a state or expand in a state,” Reynertson said. “The most important considerations happen to be New Jersey’s strongest assets — a robust transportation system, ports, highways, the educated workforce, a massive consumer market that is pretty well-off compared to other states.”

The sunset Murphy proposed has faced little measurable opposition from Trenton Democrats, and state revenue has exceeded expectations in the current July-to-June fiscal year, leaving the state poised to amass a $10 billion surplus through the end of the next fiscal year.

Sen. Paul Sarlo (D-Bergen), the chamber’s budget chairman, backed the sunset in January, and Trenton Republicans have railed against the state’s high corporate tax rate for years.


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Nikita Biryukov
Nikita Biryukov

Nikita Biryukov most recently covered state government and politics for the New Jersey Globe. His tenure there included revelatory stories on marijuana legalization, voting reform and Rep. Jeff Van Drew's decamp to the Republican Party. Earlier, he worked as a freelancer for The Home News Tribune and The Press of Atlantic City.