Version of New Jersey's new law to lure businesses has cost Pennsylvania

As Pennsylvania considered overhauling its business taxes in 2004, Air Products & Chemicals Inc. pushed for a change that would give a big break to major companies headquartered in the state.

The measure, known as the single sales factor, was intended to encourage companies that sell to a national market to hire and expand in Pennsylvania. A director at Air Products, one of the world's largest suppliers of industrial gas, told state leaders that it was a "powerful economic development tool."

Yet the Allentown company went on to lay off hundreds of workers after Pennsylvania began phasing in the single sales factor in 2007. Air Products' state workforce has shrunk 15 percent during that time, which it attributes to business divestitures, attrition, and the recession.

About two dozen states have passed some form of the law to try to lure businesses, but critics question why they give up revenue and don't require anything - such as job guarantees - from the companies that benefit.

In Pennsylvania, the move has cost the state $379.3 million in corporate taxes.

New Jersey became the latest single-sales-factor state last week. Supporters say the law, which will take effect next year, will allow the Garden State to better compete with Pennsylvania and other neighbors.

Advocates say the measure corrects a flaw in the method that Pennsylvania, New Jersey, and other states traditionally used to calculate how much of a corporation's profits are taxable.

That formula averaged the fraction of a corporation's in-state sales, payroll, and property to calculate the tax liability, meaning that more of a company's profits were taxed every time it hired and built another factory in that state.

Consider a company that has 50 percent of its property, 50 percent of its employees, but just 5 percent of its sales in New Jersey. In that state, sales are weighted 50 percent and property and payroll are each weighted 25 percent in the formula. So 27.5 percent of the company's profits would be taxable.

If those numbers applied to a firm in Pennsylvania, where sales are weighted at 90 percent, just 9.5 percent of the profits would be taxed. That drops to 5 percent with a complete single sales formula - 100 percent of the sales and nothing else.