February 28, 2023
February 28, 2023
At a time when corporations are seeing record profits while not paying their fair share of federal taxes, state corporate income taxes can and should play a role in raising sustainable revenue and adding progressivity to state tax codes. Right now, lawmakers in New Jersey, New York, and Connecticut have a unique opportunity to extend targeted tax changes that have raised billions of dollars from profitable corporations for meaningful public investments. These states have temporary corporate tax surcharges that are set to expire, and all would be well-served by extending these provisions.
Corporations benefit from public services like an educated workforce, reliable infrastructure, and a legal system that not only helps protect their rights but also supports their in-state production. State corporate taxes ensure that these services exist and that profitable corporations that benefit from them help pay for those benefits, just as working people do. At the same time, many of this country’s most profitable corporations pay little or no federal income tax, thanks to a variety of tax avoidance tactics and legislatively enacted tax breaks.
In New Jersey, there is a surcharge on highly profitable corporations that has been in place since 2018, raising hundreds of millions of dollars per year. This surcharge is well targeted at the most profitable corporations — leaving roughly 98 percent of companies doing business in New Jersey untouched — because it raises the marginal rate only on profits in excess of $1 million, by 2.5 percentage points from 9 percent to 11.5 percent. (The law also exempts S corporations and would automatically be suspended if the federal tax rate rose to or above the pre-TCJA level of 35 percent.) This tax is set to expire at the end of the year and Gov. Phil Murphy has assumed expiration in his proposed budget. Legislative leaders haven’t said much about the proposal, so things could still shift in the Garden State in the coming months.
In New York, there is a surcharge amounting to 0.75 percent of total profits for corporations with more than $5 million in such profits that has been in place since 2021 and has raised about $1 billion a year in new revenue. This surcharge, set to expire on January 1, 2024, brings the tax rate for these profitable corporations to 7.25 percent. Gov. Kathy Hochul’s budget proposes extending the surcharge for three years, and the ball is now in the legislature’s court.
In Connecticut, lawmakers have off and on since 1989 applied a surcharge to the profits of corporations with gross proceeds of $100 million or those filing as part of a combined unitary group. This surcharge, which equals 10 percent of Connecticut’s regular corporate tax (which uses a rate of 7.5 percent, so the surcharge is effectively the same 0.75 percent as in New York), has raised around $100 million in new revenue a year and expired this year on January 1. Gov. Ned Lamont’s budget proposes extending the surcharge for three years, and lawmakers will debate this in the coming months leading up to the adoption of a budget.
All of these corporate tax surcharges are well targeted at the most profitable corporations. These large companies can easily afford a higher rate and do business in states like Connecticut, New Jersey, and New York because it serves their economic interests. These big corporations are also often paying less than the statutory corporate tax rate at the federal level, which is already at a lower level than it has been in decades after the Tax Cuts and Jobs Act (the Trump tax law) cut the rate from 35 to 21 percent.
One reality we’re confronting across the nation is a soaring level of inequality in both income and wealth. Strong corporate taxes help slow this runaway inequality by asking more of the extremely wealthy corporate shareholders who pay the bulk of the corporate income tax. Robust taxation of corporations also helps to mitigate racial inequality, as growing corporate wealth has been a major driver of the widening racial wealth gap in recent years.
Meaningful investment in any state’s future requires a smart, fair tax code that recognizes current economic realities and that can raise a sustainable stream of funding for the long haul. Strong corporate taxes are a critical piece of this puzzle.
Allowing these corporate tax surcharges to expire would further enrich a relatively small number of profitable corporations while depriving the people of Connecticut, New Jersey, and New York of essential revenue to fund public needs. Many of these corporations have been getting huge tax cuts at the federal level from the Tax Cuts and Jobs Act, and there is no reason for states to pile on.
Other states are using temporary budget surplus revenues for deep, permanent tax cuts that will make it more difficult to balance state budgets in the future. Connecticut, New Jersey, and New York have wisely used corporate tax policy to ensure that their state tax codes ask more of the corporations that most Americans think pay too little and that those corporations contribute to our local communities. Extending these smart provisions makes sense.