Study recommends combined reporting to close N.J. corporate tax loopholes
TRENTON – A New Jersey think tank says the state could reap hundreds of millions of dollars by changing tax rules to close loopholes and make multi-state corporations pay what they owe.
The left-leaning New Jersey Policy Perspective called on lawmakers to enact combined reporting to thwart businesses that operate across state lines and shift profits to states with lower or no corporate income taxes to avoid paying state corporation business taxes.
“New Jersey only gains by ending the corporate version of the old shell game,” NJPP President Gordon MacInnes said in a statement. “Our legislators and governor should join bright red states like Texas and Kansas in plugging at least one hole in the state’s leaky financial boat.”
Two dozen states, including New York, already mandate combined reporting. And Connecticut is taking steps toward a combined reporting system.
Based on experiences in other states that have adopted this technique, New Jersey stands to collect an additional 10 percent to 20 percent, or $235 million to $470 million, in corporation business taxes. But because the state has already taken steps to block some tax avoidance strategies, its gains would likely land on the lower end of that range, according to the NJPP report.
New Jersey’s $33.8 billion proposed budget for the fiscal year beginning next month anticipates collecting slightly less than $2.6 billion in corporation business taxes. The treasurer last month called that revenue “unpredictable,” and pegged this year’s growth rate at 15.8 percent, lower than projected.
The New Jersey Business Tax Reform Act, adopted in 2002, installed some anti-tax avoidance laws, such as dropping the tax deduction for royalties and interest paid to related companies. But other loopholes exist, NJPP said.
In one creative accounting strategy explained by the Wall Street Journal in 2007, a multi-state corporation, such as Wal-Mart, will create one subsidiary to own its stores and pay rent to a second tax-exempt real estate investment trust that pays dividends to a yet another subsidiary in a state with little or no corporate income taxes.
“The shuffling of rent payments reduces taxable profits of the stores by shifting the profits to the REIT and ultimately back to the parent company itself,” the NJPP report said. “But under combined reporting, the profits of the subsidiary located in a low-tax or no-tax state are combined with the rest of the profits across the entire corporation.”
In a combined reporting system, New Jersey would catch its share of the income based on the corporation’s activity in the Garden State. States have different ways of apportioning the income due to them.
“This doesn’t prevent profitable corporations from shifting profits to dummy corporations in Delaware and other states, but it does eliminate the New Jersey tax break they’d get for doing so,” the report said.
The report also stresses the change would eliminate the advantage large, multi-state corporations have over smaller businesses that may ultimately be paying a higher effective tax rate.
Peter Peretzman, spokesman for the New Jersey Business and Industry Association, said Thursday that the group is “reviewing the report and its recommendations to determine what the impact would be on our members.”
