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A new study by the Economic Policy Institute (EPI) suggests that the Republican tax plan could hurt the state’s economy over the next several years. The study uses the EPI model to project how the corporate tax cuts — along with other provisions that increase the amount companies pay in taxes — will affect the state’s economy over the next few years.
Under the current rules under which Congress has adopted the American Taxpayer Relief Act (A Tax Act), a company that is taxed at the federal level in the first year of business — but later pays at the state level in taxes — can write off the difference from income until the second year following. Some people argue that this practice is not fair to small, profitable companies. But the EPI study suggests that companies can write off the difference between their federal tax rate and what they pay in state taxes until they become profitable after a year. This new strategy creates massive incentives for large companies — with large operating margins in high-tax states — to cut costs and shift their production overseas or locate in states with lower taxes for their operations.
The EPI study projects that this new strategy won’t help the state’s economy much over the next several years:
The EPI study says the new corporate tax rule could cost New Jersey more than $1.2 billion in lost revenue between 2017 and 2031.
Between 2017 and 2031, when the company is actually profitable, EPI estimates that the state will lose about $6.5 million in revenue.
According to the EPI study, the state’s economy could only grow by 0.4% over that time period.
The EPI study estimates that between 2017 and 2031, the state will lose more than half of all net corporate tax revenues from the new Republican corporate tax rules.
The EPI study argues that the A Tax Act’s rate changes have already driven a significant wedge between the corporate industry and its shareholders; many of those who use that income to hold onto stock in the corporation.
“If corporations are required to pay lower taxes, then those who own their corporate stocks will need to reduce their holdings of stock, which means that profits will decline in real terms. This could increase earnings and earnings per share, which are vital to the profitability of most companies.” — Ethan Harris, EPI
“At a time with fiscal challenges, a business that creates a huge profit margin will be able to hold onto
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