Much is written concerning the need to attract and retain businesses in New Jersey. A common practice is to offer tax incentives to either retain corporations that are ‘thinking about’ or ‘threatening’ to move to a better business climate.

There is much debate as to the effective­ness of these subsidies. To oversimplify the argument, some suggest that offering these deductions encourages corporations to settle or stay in New Jersey, and, in the long run, the economy here will expand and new jobs will be brought to or retained in the state that otherwise would not happen. Others argue that tax incentives are an ineffective tool because, among other reasons, they so often reward companies for actions they would have taken anyway.

Furthermore, the argument is made that corporations make decisions about locating or retaining business in New Jersey based not just on the corporate tax climate but on our location, the highly educated workforce, desirable communities and good schools. 

The corporate tax has several problems with its structure. Specifically: The taxable value of the entity is measured by net income. While net income may be concep­tually appealing as a measure of economic value, in the real world of separate entity accounting, pass-through entities and extensive deductions, it does not adequately measure business activity. Net income is hardly an objective measure. Rather it  has extensive loopholes that allow the tax to be evaded or reduced for certain corporations. Two other points:

The last two points are illustrative of taxation at its worst — it is neither equitable nor easy to enforce or collect. Currently, there is an army of state govern­ment tax examiners and lawyers trying to understand how each corporation limits its payments and a like army of corporate financial wizards trying to understand the extensive and complicated tax code and how they can limit their liability. These resources could be used more effectively.

The corporation business tax (CBT) is a broken tax that does not meet the needs of businesses or the state. It should be replaced with a simpler business tax that has low costs of compliance and administration, is not dependent on corporate form and raises revenue from the broadest number of entities.

A true “franchise” tax is best, with the activity measured not by net income but by gross profits — New Jersey receipts less deductions for cost of goods sold and normal employment costs. No credits, no other deductions for expenses, no loopholes — just a simple computation based upon an acceptable and logical base. There is a wide range of fee or rate schedules that can be designed to generate as much as the current CBT generates — or more or less — depending on state tax policy. 

As with any proposal that dramatically changes the base for taxation, some will oppose it. It will be called unfair because it imposes a tax on all businesses regardless of profitability. The real question: Is there an easier, more-equitable way to tax business than our current complex, unfair and highly inefficient mix of laws? These and other arguments could go on and on, and frankly are examples of why the present system is so complicated and why we are constantly legislating deductions, credits and other loopholes for certain corporations. 

The goal of tax policy should be to treat all businesses, regardless of form, fairly. The current tax policy is riddled with loopholes and is easy to manipulate. A reliance on net income to measure profitability or activity, while theoretically attractive to the purist, is fatally flawed in practical application.

In my judgment, the conclusion is clear: The corporate income tax is broken and should be eliminated and replaced with a simple tax on all business activity regardless of corporate form and levied on a logical and recognizable base not subject to easy manipulation. More importantly, think what incentive it would present to businesses thinking of coming to or staying in our state if New Jersey eliminated the complicated corporate tax and replaced it with an equitable, understandable tax that did not require an army of high-priced staff. Unlike the CBT, this tax is simple and does not distort business decisions, does not discriminate between business types and need not impose an undue burden on any business entity. That’s truly business friendly. 

This article appeared in the winter 2023/24 issue of New Jersey CPA magazine. Read the full issue.