Taxpayers pay more because of New Jersey’s ‘uncertainty tax’ | Opinion

By Peter S. Reinhart

There is little debate about the high cost of doing business in New Jersey. Quantifying just how much is more difficult but even so the impact on the state’s economy is real. Some argue it’s the price to be paid for being in the strategic location of New Jersey - proximity to New York City and Philadelphia.

But this doesn’t take into account one of the greatest costs businesses face here: the higher level of uncertainty as to how the laws and rules change in the state. The New Jersey Uncertainty Tax can be defined as the additional cost a business incurs due to the political risk of government change in regulations or laws.

Tacking this Uncertainty Tax onto high labor costs, building rents and other occupancy expenses, housing costs for employees, taxes on the business, taxes on the employees and owners, lost productivity due to long and expensive commutes and mandated employee expenses like sick leave, family leave, and the new mandatory severance payments makes New Jersey far less competitive than New York and Pennsylvania.

A business considering either entering New Jersey or expanding here can deal with this risk in several ways. If new, it can decide to stay away from the state. If existing, it will add costs and can choose either not to expand, reduce its activity, or exit the state. None of these are beneficial to the state’s economy.

The taxpayers of New Jersey also pay more due to the New Jersey Uncertainty Tax on businesses. The product price will increase. The incentives the state must offer to companies considering entering New Jersey end up being much higher than other states.

Take some examples of laws or regulations considered or enacted in New Jersey in recent years:

  • The proposed “millionaire’s tax” has been a subject of legislation for a decade. This potential increase in the top tax rate impacts the key decision makers the most personally and obviously affects their view of New Jersey as a place to earn income. Pennsylvania has a single tax rate of 3.07%.
  • The uncertainty over the potential of higher ticket prices and higher business taxes to pay for the badly needed NJ Transit improvements.
  • The political impasse over state financial incentives has had a serious detrimental effect on the already negative perception of the New Jersey business climate. Whenever and however this stalemate is resolved, the negative impact on the state’s reputation will take time to turn around. Other states can legitimately raise questions as to how safe those New Jersey incentives are from political risk in the future.
  • What will be the tax rate for corporations paying in New Jersey, already one of the highest in the nation?
  • Will other cities enact local city taxes on businesses like Jersey City has done? Whatever the likelihood, the mere potential gives business decision-makers pause.
  • Changes to the Payment in Lieu of Taxes (PILOT) program are being considered that would significantly reduce the incentive to municipal government to enter into PILOT agreements. Without a PILOT agreement, many deals will not happen.
  • The $100 billion plus deficit in New Jersey government employee pension plans and the absurdly high cost of government employee health plans also make the business community wary of additional taxes to cover these.
  • New Jersey needs many billions of dollars to pay for long-deferred infrastructure improvements to roads, bridges, tunnels, water and sewer systems. Many of those improvements can no longer be kicked down the road. Witness the recent publicity over lead in drinking water. Business decision-makers are very wary that a significant portion of those costs will be foisted upon businesses in one form or another.
  • If the state chooses to use public bond issues for these big ticket items, how much will business taxes and fees have to increase to help pay these borrowing costs?

Other states in competition with New Jersey have noticed our inability to get things done and are seizing the opening. In New York, Gov. Andrew Cuomo is spending money to improve mass transit, roads, bridges, subways, and airports. An NYC business will likely opt for the certainty of New York over the uncertainty of New Jersey, or perhaps just as bad, negotiate for even higher incentives from New Jersey to cover the uncertainty, i.e. the New Jersey Uncertainty Tax at work.

To be fair, most states have some level of uncertainty. A business is used to understanding and evaluating risk. But the problem is that the level of uncertainty is so much higher in New Jersey.

The state of New Jersey is once again at a very important crossroad. Do our leaders have the political will to make decisions to make New Jersey competitive in attracting and retaining businesses? So long as there remains uncertainty over how the state will address these concerns, the New Jersey Uncertainty Tax will be an expensive consideration for any business considering remaining in or coming to New Jersey.

Peter S. Reinhart, Esq. is the director of the Kislak Real Estate Institute at Monmouth University.

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