Over the past couple of years, the prevailing policy theme regarding state taxes has been the reduction of statutory tax rates for both business and personal income taxes. States that enacted corporate income tax reductions in 2022 include Arkansas, Idaho, Iowa, Nebraska, New Hampshire, Pennsylvania and Utah. Last year ended with a bang, as Democratic North Carolina Gov. Roy Cooper enacted legislation in 2021 to gradually eliminate the state’s corporate income tax. Moreover, between 2021 and 2022, we’ve seen well over a dozen states enact personal income tax reductions, which affect small and midsize businesses that are taxed as a pass-through.
One of the forces driving the rate reductions is state fiscal health, as many states find themselves in budget surpluses. As inflation continues to rattle the economy, states have been looking to put more money into the hands of taxpayers.
Arguably as decisive in states’ quest to reduce tax rates is the pursuit of business competitiveness. With the post-pandemic world embracing workforce mobility, businesses can drive down labor costs and attract talent from a more expansive geographic labor pool. States are pursuing tax reform so they can be in a position of strength to attract employers and employees. When Iowa enacted rate reductions, Senate Majority Leader Jack Whitver said, “The competition is fierce for citizens and for jobs and we want to make sure that Iowa is looked at as a pro-growth state.” States that have been enacting these cuts believe it will help them compete with other states.
In New Jersey, contrary to the national trends, businesses have faced increasing taxes. In 2020, the state implemented a “millionaires’ tax” on individuals at 10.75% for income in excess of $1 million, which is the fourth-highest rate in the country. This impacts most small and midsize businesses organized as pass-through businesses. In contrast, New York’s rate doesn’t hit double digits until income exceeds $5 million. In addition, on the corporate side, New Jersey extended its 2.5% surtax through 2023, imposing the highest statutory corporate rate in the nation at 11.5%.
As New Jersey businesses gaze across the Delaware River to Pennsylvania, they’ll notice that the Keystone State enacted groundbreaking corporate tax reform last July, cutting the rate in half. Democratic Gov. Tom Wolf said, “This lower rate is a game-changer for businesses in Pennsylvania. We’re going to ensure tax fairness, make Pennsylvania a top location for businesses, and bring new, good-paying jobs here for Pennsylvanians.” In this increasingly competitive landscape, state tax relief has been very much bipartisan. Equally as significant, Philadelphia adopted legislation earlier in the year reducing business income taxes to the lowest rate in decades.
In the past couple of years, many states have responded to workforce mobility by reforming their tax codes to be more competitive. Without question, tax relief is being felt even in high-taxed states in the northeast. In addition to Pennsylvania, earlier in the year New York accelerated middle-class tax cuts as part of its annual budget. Tax cuts that were originally scheduled to take effect in 2025 were fast-tracked to 2023 for income up to $323,200.
Despite the trends in the recent months, New Jersey proposed a “Convenience of Employer” rule, which would tax employees of New Jersey-based employers if they work at home in other states for their convenience. If enacted, this could further disincentivize businesses from locating in New Jersey. Nevertheless, as the tax cut trend has reached the borders of New Jersey, some businesses are optimistic that this will turn the tide in making New Jersey tax code more competitive.
About the Author: Jason Rosenberg is a principal in the state and local tax practice at Withum. He is the leader of the New Jersey Society of CPAs State Taxation Interest Group. He can be reached at email@example.com.
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