A Democratic state lawmaker in New Jersey introduced a bill Monday he claims would increase tax revenues by up to $470 million without raising tax rates.
Hoping to avoid a veto by Republican Gov. Chris Christie, who has indicated he will not sign any tax hikes passed by the Legislature, Democratic State Sen. Ray Lesniak wants New Jersey to adopt an approach to corporate taxation known as “combined reporting,” New Jersey Spotlight reports.
Under a combined reporting system, the nationwide profits of multistate corporations and their subsidies are added up annually, and the combined entity is taxed on the share of those profits generated within the state, ensuring that large corporations pay the same state tax rates as their smaller counterparts.
“This is not a tax increase,” Lesniak told NJ Spotlight. “Without a doubt it’s not a tax increase … the governor should sign this bill.” (RELATED: Everybody Agrees: Cut the Corporate Tax Rate)
Lesniak asserts his proposal would prevent multistate corporations from surreptitiously shifting profits to lower-tax states, and projects combined reporting would generate between $235 million and $470 million in additional tax revenue versus current collections.
The idea behind Lesniak’s bill was first advanced earlier this month by New Jersey Policy Perspective (NJPP), a left-leaning think tank, which describes combined reporting as a way of promoting fairness.
“Limiting the ability of profitable multistate corporations to use accounting tricks to avoid New Jersey taxes would help level the playing field for the state’s small and local businesses,” the group claims, pointing out that combined reporting has already been adopted by 25 other states, including red states like Texas and Alaska. (RELATED: Corporate Tax Debate Ignores Mid-Sized Businesses)
Under the state’s current tax code, NJPP explains, large corporations are able to use subsidiaries in high-tax states to pay rents to other subsidiaries in states with low or no corporate taxes, lowering their taxable income in the high-tax jurisdictions. The rents are then channeled back to the original subsidiary as dividends, which are not normally counted as taxable income.
Combined reporting, however, renders such financial shell games irrelevant, since the total domestic profits of a corporation and its subsidiaries remain the same no matter how much money is shifted across state lines.
Lesniak offered Exxon as an example of particularly egregious exploitation of the existing loophole, according to New Jersey Today. (RELATED: Obama Says His Corporate Tax Plan is Based on GOP Ideas)
“Exxon’s average state tax rate over the previous five years was 2.2 percent,” Lesniak claimed. “They have contaminated the environment, worked out a proposed legal settlement that shortchanges the state, and they have been exploiting this loophole to avoid taxes.”
A spokesperson for Christie’s office declined to comment on whether he is likely to sign the bill if it passes, citing the potential that details could change, perhaps dramatically, before a final version is voted on.
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