Stingers: The 2004 State Tax Survey

Bad Boys

Were it not for New Jersey crashing the list of the worst five states, little would have changed from previous surveys—the states that corporate tax officials love to hate remain fairly consistent. This year, we simplified our maps to highlight the states that really stand out. The states marked the least (or most) fair and predictable are those whose survey scores deviated from the average by more than one standard deviation.

What is your overall impression of the tax environment in this state? Is it fair and predictable?

5 Least Fair:

1. New Jersey
2. California
3. Massachusetts
4. New York
5. Pennsylvania

Ouch!

New Jersey was the falling star of CFO's tax survey. The Garden State's grab bag of tax-law changes in July 2002—particularly the introduction of an alternative minimum assessment (AMA) tax on a corporation's gross receipts—earned it the label of the state with the most unfair and unpredictable tax environment.

In fact, New Jersey was ranked among the five most aggressive or least fair states in seven of eight questions we asked, and respondents said New Jersey's tax policies were the most likely to dissuade companies from relocating to or expanding in the state. That's a stunning change for a state that didn't make the worst five in a single question in our 2000 tax survey, and is well known for actively courting business.

New Jersey was also the only state singled out multiple times by corporate tax officials asked to write in their top headaches. "Using New Jersey as a prime example," wrote one, "state governors and legislatures changing only the corporate income tax to balance their budget without any comprehension as to what it does to business." Another responded, "New, unique taxing schemes, such as New Jersey AMA."

The state's long-held reputation for fair tax administration also took a surprising beating, one that can't be directly attributed to recent legislation. In fact, in the Council on State Taxation's (COST) recent tax-administration scorecard—based on objective differences in state tax laws and policies—New Jersey's score was the same as the average score for all states. And, says COST legislative director Joe Crosby, New Jersey tax-division director Robert Thompson and his staff are generally considered fair and evenhanded. He adds that "New Jersey has an independent tax court that is considered to have decisions that are fair and well reasoned."

Yet CFO's survey, which measures the subjective impressions of corporate tax officials, shows how easily such a reputation can be undone. Tax-court independence was the only subject in which New Jersey wasn't ranked among the worst five states. New Jersey's auditors, by contrast, were rated as the most unfair and unable to settle gray issues of any state's. —T.R.

Hello, Goodbye
How do this state's revenue-department policies and systems influence companies' decisions to locate or expand there?

Least Desirable

1. New Jersey
2. California
3. Massachusetts
4. New York
5. Pennsylvania

Kangaroo Courts
How would you rate the independence of this state's administrative appeals process—tax board, administrative law judge, or tax court—from its audit department?

Least Independent

1. Pennsylvania
2. Massachusetts
3. California
4. Louisiana
5. Alabama

Black and White
When it comes to settling "gray issues" at the auditor level, which states' auditors are the most unfair or least able to avoid escalation of these issues?

Worst Auditors

1. New Jersey
2. California
3. Massachusetts
4. Illinois
5. North Carolina

Friends of Geoffrey

New Jersey again had the dubious distinction of leapfrogging into the lead among most-aggressive states, despite losing the Lanco case. Also notable is Maryland's appearance among the most aggressive states on this map after its courtroom win arguing that certain Delaware holding companies were tax-sheltering shams. Not surprisingly, this map corresponds closely to the map of states that have passed or are considering legislation disallowing company deductions between affilliated companies.

Which states are most aggressive about asserting nexus positions for corporate income tax over corporations with only an economic presence in the state?

5 Most Aggressive

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