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This article by Jon Shure was prepared for the January 22, 2003 edition of U.S. 1 Newspaper. All rights reserved.

Opinion: Weighing the Costs of Business

In the spring of 2002, New Jersey made significant,

controversial changes in the way the state taxes corporations. Whether

characterized as loophole closing — usually by supporters —

or tax hikes — usually by opponents — the new rules are expected

to bring the state substantially more money. And these changes are

being watched closely across the United States as the shaky economy

erodes state revenues and forces consideration of previously off-limits

topics.

The convergence of scandals that diminished the awe in which business

is sometimes held and a deep shortfall in the state budget brought

about a political moment that New Jersey seized. Now a new report

from New Jersey Policy Perspective (NJPP) describes the changes in

detail — making clear that they were hard fought and are by no

means assured of being permanent.

"A Question of Balance: Taxing Business in the 21st Century"

was written by NJPP policy analyst Mary Forsberg. It will be

released Tuesday, January 28, at 11:30 a.m. at Prudence Hall, Thomas

Edison College in Trenton. Call 609-393-1145. E-mail: njpp@njpp.org.

Forsberg presents the report’s findings, followed by a panel discussion

of national and state experts on current trends in business taxes.

Speakers include David Brunori of the national publication State

Tax Notes; Michael Mazerov of the Washington-based Center on

Budget and Policy Priorities; and Henry A. Coleman, director

of the Center for Government Services at Rutgers University and former

Associate Deputy State Treasurer.

Forsberg cites last summer’s testimony from the Great Atlantic & Pacific

Tea Co. (A&P), QuickChek, and the owner of Pagano’s IGA, a small supermarket

in Bayonne. According to the executive from A&P, one of the 50 largest

companies in New Jersey, A&P has paid only $200 a year in corporate

business taxes. The McGreevey plan would increase this tax by $2 million.

An executive from QuickChek, a privately held mid-sized company with

1,700 employees and no out-of-state stores, said the company paid

$210,000 in taxes and, under the Governor’s plan, it would pay $486,475.

A small business owner who owns a single supermarket in Bayonne said

that McGreevey’s plan would raise his tax bill from $3,000 this year

to $10,000 next year, forcing him to lay off workers. His store was

under pressure from two new supermarkets. One of them is an A&P, the

development costs of which helped drive down the supermarket’s state

tax bill to $200.

If the debate over how to tax businesses came about to some extent

almost by happenstance, it is an important debate nonetheless. And

it was fitting that it should take place in New Jersey because this

is a state where there are so many difficult questions to be asked

about how taxes should be structured. They are, as the title of the

report suggests, in large measure questions of balance. What is the

right mix of taxes on businesses as opposed to people? To what extent

should taxes be based on the value of someone’s house or a business’

property? Does it make sense for less affluent people to pay a higher

percentage of their yearly income in state and local taxes than more

affluent people pay?

Corporate taxation is too important to the well-being

of average people to be left to accountants, lawyers, and lobbyists.

There are important public policy questions to answer, involving issues

like fairness and the adequacy of resources for government to provide

the services people need and want. Indeed, for honest debate about

the appropriate levels of taxation to take place, information must

be available and there must be ways to measure how fair and effective

the tax system is.

The idea behind corporate taxation is simple. Corporations exist because

the law allows them to; they are created as ways to amass more capital,

attract more investment, and make higher profits than what might be

feasible for an individual to accomplish, and with less risk. But,

just like people, corporations thrive in part because a public infrastructure

exists to support them. Good schools, a legal system to protect property

and enforce contracts, reliable services, efficient transportation

networks, and stable markets all are part of the formula for success.

So the basic principle behind corporate taxes is that businesses,

like people, should pay for benefits they receive. If good schools,

good transportation, and stability are essential to the product, then

corporations, just like people, should help to secure them.

But in some respects corporations are not like people. For one thing,

they have shareholders who stand to profit from the corporation’s

activities. In a sense, the shareholders are the true beneficiaries

of the public services provided to corporations. These people often

live in a state other than where much of the company’s business is

conducted. If their state of residence has an income tax, they will

pay some tax levy on their dividends and capital gains. But the ultimate

success of a shareholder’s investment is determined at least in part

by the skills of the company’s employees and the infrastructure where

the company is located. It is, therefore, appropriate for shareholders

to somehow help support the educational system and roads, for example,

where their money is invested. The only way this happens is through

corporate businesses taxes.

And there is one other key difference between a corporation and a

person. Over the years lawmakers have fashioned a widening array of

exemptions, incentives, credits, and other devices that enable corporations

to have far more opportunities to avoid paying taxes than are available

to people.