TRENTON – A growing trend, according to state Treasurer Andrew Sidamon-Eristoff, is “fewer and fewer classic (corporations), so called, C-Corps.”
Those are the operations that fund the corporate business tax portion of the state revenue stream. But 80 percent of all new businesses created in the state are not C-Corps, Sidamon-Eristoff said Wednesday; they are limited liability corporations (LLCs), where company principals pay taxes on personal income, not business income; and S-Corps, where shareholders divide taxes among themselves also on their personal income filings.
The result, Sidamon-Eristoff said: “The steady diminution of corporate business taxes,” much of which is balanced by growth in income taxes.
He shied away from “draw(ing) overarching conclusions from a graph,” referring to the S&P 500 Index vs. N.J. Millionaire’s Income plotting chart presented by the Office of Legislative Services at a Senate Budget Committee hearing. “It’s tempting,” the treasurer said, to find relationships to the national economy.
But really, everything points to one overriding premise: income volatility for top-earners equals revenue volatility for the state.
“What (OLS’s) graph illustrates and represents is the simple fact that our income tax is highly volatile,” Sidamon-Eristoff said, that and the fact that top-earner salaries fluctuate wildly at times because they are tied to year-end bonuses and incentive packages.
The tax system, in general, he said, is dependant on “upper-income households…most connected, in some way, to financial services (industries).”
Referring to the graph of millionaires in the state by year, state Sen. Kevin O’Toole, (R-40), of Cedar Grove, said, “It shows, kind of, a precipitous up-and-down, and it’s coming up a little bit…What do you attribute that zigzag to?”
Hinting at the administration’s aversion to restoring the millionaire’s surtax, Sidamon-Eristoff said the up-and-down of top-earners is caused by an “extremely aggressive tax rate” that is five times higher at the top end compared to the lower end.
“I think that has sort of a pernicious effect in the end,” Sidamon-Eristoff said.
He also urged the Legislature to treat revenue upticks like this as if they were never coming back, or never came in the first place.
“It’s not uncommon to take on new spending commitments that prove to be unsustainable in the long run,” he said. By not spending the income now, the state could avoid painful spending cuts to programs down the road, “under fiscal duress,” he said, should revenues fall away.