On March 13th, New Jersey Governor Murphy delivered his administration’s first budget address. In the address and subsequent summary of the budget proposals, the Governor called for a number of different personal income tax, corporate tax and sales tax changes. The corporate tax changes are being labeled as a “modernization” of business taxes. Some of the key tax changes include the following:
- Increasing the Gross Income Tax (“GIT”) deduction for property taxes paid from $10,000 to $15,000.
- Closing the carried interest loophole in New Jersey tax. At this point, it is not clear exactly what form this proposal will take but there is currently pending legislation which would impose a special surtax on such income and eliminate the exclusion from GIT for nonresidents performing investment/intangible management activities in New Jersey.
- Creating charitable organizations for donations in lieu of property tax payments that will preserve deductibility at the federal level and generate a tax credit at the local property tax level.
- Restructuring the Neighborhood Revitalization Tax Credit to provide $15 million in tax credits for contributions made by businesses to nonprofit entities that will be undertaking revitalization, economic development, and housing. The credit would equal 80 percent of the funding provided to the nonprofit.
- Returning the sales tax to 7 percent. The sales tax was reduced as part of the gas tax increase and elimination of the estate tax, as enacted in 2016.
- Imposing a millionaire’s tax for GIT purposes on income exceeding $1 million at the rate of 10.75 percent. The top GIT rate is currently 8.97 percent on income exceeding $500,000. The millionaire’s tax is projected to generate roughly $765 million in additional revenue. The proposed new tax bracket would result in New Jersey only following California for the state with the highest personal income tax marginal rate.
- Adopting combined reporting for Corporation Business Tax (“CBT”) purposes. New Jersey is currently a separate-entity reporting state which means related or affiliated corporations report and pay CBT on a separate and stand-alone basis. This is viewed as a loophole in state tax planning. The reality is that the CBT already has a number of anti-abuse provisions to protect New Jersey revenue.
The proposal includes a limited “water’s-edge” election. A water’s edge election generally allows the reporting group to exclude income and apportionment factors of affiliates and subsidiaries domiciled outside the U.S. and conducting a predominate amount of their business outside the U.S.
- The modernization proposals also call for the adoption of market sourcing for computing the sales factor. The Division of Taxation previously tried to adopt this change via regulation. It appears that a statutory change will be proposed to enact this reform. This represents a significant change for CBT taxpayers that are service providers. Their CBT apportionment should now be tied to the location of their customers or where a particular service is delivered, as opposed to where the service is performed measured by the taxpayer’s cost of performance and where incurred.
- Among the other proposals is a measure being labeled as the “reinstitution” of taxing international holding companies. At this time, it is unclear exactly what this concept is referring to, but this could signal a shift in the Division of Taxation’s CBT policies regarding nexus and intercompany add-backs of related party expenses when paid to an international holding company. This could also signal a shift regarding the CBT tax base, which recent court decision have limited to income effectively-connected with a U.S. operation.
- Finally, the proposals also include taxing income that is repatriated to the U.S. under the Tax Cuts and Jobs Act’s one-time deemed repatriation of foreign income and assets.
We will keep you apprised as these proposals are considered and discussed by the Legislature in the coming weeks and months ahead. For additional details, the budget summary can be found by clicking here.