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April 1, 2003

Report: 'New Jersey Plan' helped little there, and could double New York's corporate income tax

The 'New Jersey Plan' of tax increases that public-employee unions and other advocates are promoting as "closing corporate loopholes" is, in fact, "a virtual copy of the disaster that New Jersey inflicted on itself last summer," a new report on New York's state budget debate concludes.

The New Jersey Plan, which did not prevent budget problems in New Jersey this year and next, could actually double New York's corporate income tax, the report, "Why the New Jersey Plan Would Be Bad News for New York," concluded. The report was released April 1 by The Public Policy Institute, the research affiliate of The Business Council.

This is the 12th report in The Institute's Budget Watch '03 series, which since mid-November has been documenting the connection between New York's current budget challenge and high spending.

New Jersey's 2002 tax increases "effectively doubled corporate income taxes in New Jersey, under the guise of closing 'loopholes,'" the report said. "It didn't work-New Jersey still faces a $1.5 billion deficit in its current fiscal year, and a $5 billion deficit in the next year."

The report reviewed the specific tax-increase proposals being advanced by the Fiscal Policy Institute, an Albany "think tank" supported largely by public-employee unions and left-of-center foundations.

Gross receipts tax: The New Jersey Plan would create a corporate alternative minimum tax- that is, a gross receipts tax on corporations. Corporations above a certain size would be required to pay a specified minimum tax payment, even if they had little or no profits. The unions have set a revenue target of $400-$460 million from this proposal.

"A gross receipts tax falls hardest on low-margin businesses-such as grocery stores and other retailers," the report noted. "It could mean the death knell for businesses that are struggling through the recession without making profits. And, incredibly, it could increase a corporation's income tax when its profit go down."

Worldwide combination reporting: The plan would require New York's global companies to pay taxes that they or their subsidiaries earned overseas. Although this is described by unions as "closing a loophole" that lets some companies divert taxable profits to out-of-state subsidiaries, New York in fact "already has the power to disallow such devices when they are not conducted on an 'arms-length' basis," the report noted.

"In truth, combination reporting is simply a device to raise up to $400 million in new taxes from our major corporate employers-only a small portion of which would be connected in any way with these alleged 'loopholes,'" the report added.

Decoupling: The New Jersey Plan would reverse New York's decision last year to remain coupled with federal depreciation schedules, under spell out how fast companies can write off the costs of capital purchases. The unions argue that this would raise up to $545 million, the report noted.

"But every dollar would be taken out of the investment that manufacturers and other would make in new plant and equipment-the very thing we want to encourage, not punish, as we struggle to recover from recession," the report said.

All told, the New Jersey Plan would raise state corporate taxes by up to $2 billion, which is more than double the $1.8 billion collected from the corporate income tax now, the report noted. That tax is only one-sixteenth of all taxes paid at all levels by businesses, the report added, citing another March Public Policy Institute report, A Fair Share-At Least!

"In the last recession, the Legislature adopted a dark-of-the-night tax increase on businesses. So when the national recession ended, New York kept losing jobs for two years after the nation had turned around. And state tax receipts went down, not up.

"It's hard to think of a good reason to wish that history would repeat itself," the report concluded.

The Budget Watch '03 series has examined New York's spending in such areas as Medicaid, school aid, the public sector, and debt, and concluded that New York has a spending problem, not a revenue problem. "The root of the shortfall is that Albany is spending more than its taxpayers can afford. In fact, if state-funds spending had simply risen no faster than inflation since 1998, the state would have saved $7.9 billion in the current fiscal year alone," Budget Watch '03 said.

The Institute inaugurated the Budget Watch '03 series in early November to show the connections between New York's current fiscal challenge and the state's spending habits.

The 12 one-page reports in the series examined such spending-related issues as New York's Medicaid spending, the state and local tax burden, school aid, the size of New York's state and local governments, debt, and state investments in higher education.