N.J. considers corporate tax break

Posted: January 06, 2011

TRENTON - New Jersey lawmakers will vote Thursday on adopting a corporate tax break that is intended to reward multistate businesses that hire and expand in the state but that would cost millions of dollars in lost revenue.

The measure is known as the single-sales factor, under which the amount of profit subject to New Jersey taxes is based only on a company's sales. Moving to that system benefits corporations that sell to a national market but have numerous employees and property in New Jersey.

Supporters say the current formula, which factors in a company's in-state payroll and property, penalizes companies that hire and add offices in New Jersey and rewards those that sell a lot there but have little physical presence.

"It seems perverse, and I think that's why [the single-sales factor] has picked up steam over the last few years in a lot of states," said Philip Kirschner, president of the New Jersey Business and Industry Association, which has been lobbying for the change.

Though the measure offers no guarantee that beneficiaries will add jobs and expand factories, about two dozen states have adopted some form of it as a way to keep and attract major corporations.

States are attempting to "game" corporate tax revenues from other states, said Joe Henchman, tax counsel for the Tax Foundation, a Washington organization that ranks state business climates.

"We are not big on advising a state to play this game. . . . Ultimately, it's not tax reform. It's playing games with the interstate division of corporate taxes," Henchman said.

Gov. Christie and legislative leaders say they support the move because they want the state to compete better with nearby states, including New York and Connecticut.

Gov.-elect Tom Corbett wants Pennsylvania to move fully toward the single-sales factor by 2014. The state has been phasing in the change.

A single-sales factor would have no effect on businesses that conduct all of their operations and sales in one state.

New Jersey now averages a company's fraction of in-state sales, employees, and property to determine how much of its nationwide profits are subject to the state's 9 percent corporate income tax. Sales are given double weight in the formula.

So, if a national corporation headquartered in New Jersey has 10 percent of its sales, 50 percent of its payroll, and 60 percent of its property in the state, it is taxed on about one-third of its profits.

If that company were taxed in Pennsylvania, where sales are weighted at 90 percent, the amount of taxable income would drop to 15 percent. The company's tax liability would drop to just 10 percent under a complete single-sales formula.

Experts say that the single-sales factor is less effective as more states adopt it, because companies' gains in one state can be offset by losses in another.

Critics also note that adopting the new formula does not guarantee that a company won't eliminate jobs.

The biotech company Genentech announced last month that it would lay off more than 800 employees in California - after contributing $1.6 million to a campaign that helped defeat a ballot initiative in November to repeal the state's single-sales factor.

After a 2009 budget agreement, California was one of the few states to give businesses the option of choosing the single-sales factor.

Pharmaceutical giant Pfizer also contributed $100,000 to defeat the ballot initiative, known as Proposition 24, and a spokeswoman said the company supports New Jersey's single-sales factor legislation as well.

After acquiring Wyeth, Pfizer announced last year that it would lay off more than 600 workers in the Pennsylvania suburbs and close a Chester County facility. The company has served as one of more than 100 members of the pro-business coalition Compete PA, a leading advocate for the adoption of the single-sales factor in Pennsylvania, where the company still maintains a significant physical presence, said spokeswoman Joan Campion.

A state's tax policy is one factor in Pfizer's decisions, "but not the only one," she said.

"We're under no illusions that one particular improvement in the tax structure by itself is going to suddenly turn us into a promised land. It's simply part of the long, hard slog of dealing with these many different issues that have been allowed to drag on, sadly, for decades," said David Taylor, executive director of the Pennsylvania Manufacturers Association, a member of Compete PA.

Companies are influenced by bigger concerns than corporate taxes, and cut jobs when it makes economic sense, said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities and author of studies questioning the effectiveness of the single-sales factor.

"This just gives an automatic windfall for companies that have a relatively greater share of their property and payroll in a state than their sales in the state, and they don't have to create a single job. . . . In fact, companies can be laying off people and get the tax break," he said.

Mazerov and other supporters of the three-factor formula argue that companies hiring new workers and building factories are receiving additional public services, such as police and fire protection, for which they should pay.

New Jersey, which faces an $11 billion budget deficit in the coming fiscal year, has not analyzed how much money it would lose in the short term by switching to the single-sales formula.

In 2001, state fiscal analysts projected that a similar proposal would result in between $62 million and $197 million in forgone revenue. A 2008 bill to enact the single-sales factor for manufacturers alone was projected to cost $78 million.

Senate President Stephen Sweeney (D., Gloucester), a sponsor of the single-sales factor bill, said New Jersey would survive without the revenue.

"We have to get serious about making New Jersey a more attractive, business-friendly place, and if things are going to get tighter, they're going to get tighter," he said.

Contact staff writer Maya Rao at 856-779-3220 or mrao@phillynews.com.

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