STOP the corporate tax increase

March 28, 2003

RE: Say it ain't so! We don't want to raise business taxes and turn New York into New Jersey North.

Last summer, New Jersey did something great—for New York!

The Governor and Legislature in our neighboring state tried to deal with their budget problems by enacting a huge increase in their corporate taxes. Though they pitched it as an effort to close "loopholes," it nearly doubled corporate income taxes in New Jersey.

The damage to New Jersey's business climate was immediate, and we New Yorkers leapt to take advantage of it. I personally invited business leaders there to take a new look at investing in New York—which, I am proud to say, was at the same time cutting taxes on business. Economic developers across New York (and elsewhere) are still using this misstep as they seek to lure businesses out of New Jersey.

Our shameless delight in New Jersey's wrong turn was enhanced by the fact that this corporate tax massacre did not solve their budget problems.

Despite their corporate tax increase (or, indeed, perhaps partly because of the economic damage it did), New Jersey is facing a $1.3 billion deficit in the current fiscal year, and a $5 billion shortfall in the new one. And they've already securitized their tobacco settlement monies. Trenton is, if anything, even more awash than is Albany in protestors decrying budget cuts.

It was therefore deeply shocking to me to learn that at least some factions in Albany are seriously proposing that New York should adopt exactly the same ruinous tax policy.

They won't tell you it's "the New Jersey plan," of course. But the corporate tax proposal drafted by the Fiscal Policy Institute, and now being promoted to individual legislators and the leadership by the public-employee unions, is pure New Jersey North.

In the name of closing "loopholes," it could double corporate taxes in New York, at the very moment that our economy is struggling to emerge from a recession that has dogged us for two years. For anybody who cares about economic growth and solid revenue growth for government, this would be a sorry case of biting the hand that feeds us.

There are, of course, those who complain that business isn't paying its "fair share." The only evidence they cite is the fact that corporate income tax receipts have been declining—as you would expect, since they are based on profits, and profits have been declining.

But the corporate income tax represents only about one-sixteenth of all the state and local taxes paid by business in New York. Our Public Policy Institute has calculated that when you add up all the sales taxes, property taxes, commodity taxes and so on, the total this year will come to more than $30 billion—or 34.1 percent of all the taxes collected by state and local governments in New York, more than one dollar in every three collected. (And by providing over 7 million private-sector jobs, business lays the foundation for all the other taxes that are collected, too.) I am enclosing a copy of the Public Policy Institute's report for your consideration.

With our economy in recession, and tax revenues down as a direct result of that, the very last thing New York State should want to do is to cut off our recovery at the knees by doubling our corporate income taxes.

So the basic principle behind this tax scheme is wrong. And the specifics aren't any better.

Take, for example, the part of the plan that most closely follows New Jersey—the proposal for an "alternative minimum assessment" on the corporate income tax that would be calculated on gross receipts. This harebrained idea turns the whole purpose of a corporate "income" tax—that is, a tax on profits—on its head. It's not an income tax at all; it's a tax on sales. In some cases, a company's taxes could increase when its profits decreased. Year in and year out, this tax would fall hardest on low-margin businesses (grocery stores, for example), while having no impact on the high-margin, highly profitable corporation.

The Legislature has struggled mightily to get rid of the gross receipts tax on utilities. Now we want to bring it back for everybody? I don't think so.

Next there's the proposal to adopt "worldwide combination reporting." As justification for this proposal, you may be told of certain alleged abuses (a tax avoidance scheme built around trademark payments to a subsidiary, for example). But attacking abuses like that by combining every corporation's global income and taxing it all in New York is like using a MOAB to kill a fly. New York already has the power to combine income in cases in which transactions with a subsidiary are not arms-length.

Worldwide combination reporting is an attack on New York's very role in the world economy. Global corporations are the crown jewels of our state's economy—bringing enormous wealth back to our state by virtue of their sales in other states and other countries. Our manufacturing exporters are the very foundation of the economy in one upstate community after another. We want them selling more overseas—not less. For New York to try to capture income earned by their subsidiaries in other countries—income that has nothing to do with operations in this state—will give them a strong disincentive to invest and grow in New York. We want to enjoy the successes they achieve in the global marketplace—not punish them.

And third, the plan would decouple New York from the extra depreciation allowances now permitted under the federal tax code. These allowances don't reduce the total tax paid by a corporation over the years. But they do give a strong, up-front incentive to invest in new plant and equipment in New York now, when we need it most, recovering from a downturn. This is the worst possible time to turn to an idea like this.

New Jersey North: we don't need it.

But I have been discussing these proposals with business leaders across the state, and they are alarmed. People in both large companies and small businesses have seen the tremendous progress that New York has made in recent years, once it started treating corporations as an asset rather than enemy. I want to be able to tell them that this state is not going to reverse course.

Can I assure them that you are going to use New Jersey only as an example of what not to do?