Entrepreneurs and Lower, Simpler Taxes Offer Path to Economic Growth

On October 7, a special committee of the General Assembly met to hear testimony on how to best address the economic downturn facing New Jersey. Jerry Cantrell, President of the Common Sense Institute of New Jersey, noted that the engine of job growth in New Jersey has been new businesses and the entrepreneurs who start them.

CSI-NJ’s complete testimony is available below

Thank you, Chairman Coutinho and members of the committee, for the opportunity to share the Common Sense Institute of New Jersey’s thoughts on New Jersey’s economy and strategies for growth in our state. This hearing comes during an important time in our state’s history, but also one that provides opportunity for serious reform.

The story of this recession has been one of lost jobs, and the story of the recovery will undoubtedly be long. New Jersey currently has 192,000 fewer private-sector jobs than it averaged in 2000. If, as most economists including the Federal Reserve predict, New Jersey begins a sustained recovery in 2012 that resembles our most recent growth period, it may take until 2019 for the state to get back to 2000 employment levels in the private sector. Nearly two decades of stagnant growth in a state as well educated and with such access to capital as New Jersey would be unprecedented.

As this committee hears testimony, and its members work in their standing committees, it is imperative that any economic growth legislation have private-sector jobs as its primary focus.

As such, it is important to remember that job creation in the U.S., and in New Jersey, has traditionally been driven by entrepreneurs. The latest work from the National Bureau of Economic Research further demonstrates that new jobs are created by new businesses . Therefore, it is important that the legislature and Administration continue to focus on removing barriers to new business formation and growth.

The legislature and Administration have already done important work. This body deserves applause for measures such as the extension of Net-Operating Loss write-down period, and the Administration’s continued work on Red Tape Review will benefit new business.

However, entrepreneurs in New Jersey still face major hurdles that this legislature can deconstruct. New businesses, whether traditional Main Street establishments or the highly-specialized companies that support existing companies, face a tax climate ranked worst-in-the-nation by the Tax Foundation. Within the general category of business taxes, property taxes, CBT and marginal tax rates are the most onerous compared to our neighbors and the national average.

New Jersey’s tax code is one marked with high rates on a narrow base. Major exemptions to the corporate business, sales, and other taxes drive up the rates on everyone else and make the state budget less stable. These exemptions also force companies to spend time navigating the tax code in search for exemptions instead of serving their customers.

Reducing these credits and exemptions, while simultaneously lowering rates, would make New Jersey’s tax code less complex and fairer. Different administrations and legislatures have different priorities on what they see as successful in the private sector. Adding new exemptions and layering them on top of existing ones puts policymakers in the position of subsidizing some businesses at the expense of others. For example, New Jersey’s sales tax is one-third narrower than the national average , necessarily requiring a higher rate for the state to reap necessary revenues. This and CBT exemptions destabilize the tax base by putting a larger share of the overall tax burden on a smaller number of companies.

Businesses in the Garden State own approximately six percent of all land, and pay more than 35% of all property taxes collected. The 2% tax cap passed earlier this year will slow the growth and the movement of some tool kit items is encouraging. However, changes to collective bargaining rules are essential for the cap to be workable. Without this major change, government services will decline, despite taxes that would remain among the nation’s highest.

Certainly, New Jersey has had successful economic development programs, especially the Business Employment Incentive Program (BEIP). However, when the state is successful in luring or retaining a company to our state, the economy cannot gain maximum benefit if other, smaller, companies do not also emerge soon after. In order to encourage entrepreneurs, New Jersey must address its complicated tax and regulatory code. The Administration has done meaningful work on the regulatory side, but both the Administration and legislature must work together to improve our tax climate.

As always, the Common Sense Institute of New Jersey looks forward to working with the legislature in generating the ideas to help make New Jersey an even greater place to live, learn, and do business.