Bill to revamp New Jersey’s business tax gets mixed reception
Business groups say measure improves competitiveness. Opponents call it a handout
Sen. Paul Sarlo said the bill revamping New Jersey’s business tax would receive a vote at the Senate Budget Committee’s next hearing. (Hal Brown for New Jersey Monitor)
A bill making sweeping changes to the state’s business tax is drawing plaudits from business groups that helped draft it, and criticism from others who worry the measure would slash New Jersey revenue by allowing businesses to move more funds into international tax havens.
The debate over the measure (S3737) comes as lawmakers are poised to allow a separate 2.5% surtax on some businesses to expire at the end of 2023, a move expected to cost New Jersey $1.3 billion in revenue over the next two years.
Supporters of S3737 say it would have no such impact on the state’s coffers, though critics during a Thursday meeting of the Senate Budget Committee called those claims optimistic.
The bill, sponsored by budget chairs in both chambers of the Legislature, would cut New Jersey’s taxation of certain foreign income, called global intangible low-taxed income or GILTI, from a rate of roughly 50% to 5% while eliminating an interest add-back meant to prevent firms from avoiding taxes through sham transactions between them and a subsidiary.
Sen. Paul Sarlo (D-Bergen), the chamber’s budget committee chair, said during Thursday’s hearing that the proposed changes in S3737 are expected to cost New Jersey between $45 million and $50 million in GILTI revenue but said those losses would be countered by other provisions, like a move to a new reporting method that would capture more revenue from outside the state.
Darien Shanske, a tax professor at the University of California, Davis, who testified remotely before the committee, suggested that estimate might significantly undersell the impact.
“Working back from the amount of GILTI reported by the IRS as having been collected, New Jersey should be making about $450 million a year in GILTI, so it’s not clear how it could be the case that it would only lose $50 million,” Shanske said.
One simple answer, Shanske said, is that corporate taxpayers are already deflating their GILTI liability.
Representatives of business groups said the reduction in the GILTI tax rate would draw businesses to New Jersey by bringing it into line with its neighbors, noting states like Massachusetts, New York, and Connecticut tax GILTI at 5%, and Pennsylvania doesn’t tax it at all.
The bill’s opponents question whether slashing the tax would draw more businesses to New Jersey, noting state business growth has already exceeded prepandemic levels. The proposed changes would only enable businesses to move more money into offshore tax havens, said Peter Chen, a senior policy analyst at progressive think tank New Jersey Policy Perspective.
“Looking at the erosion of the corporate tax base over the last 75 years, staying at status quo is a step backwards, is losing ground as multinational corporations continue to accelerate their offshoring,” he said.
Treasury officials and budget committee chairs have stressed that the changes made by the bill would have no effect on state revenue, though the Treasury has not provided the analysis backing those claims, which the New Jersey Monitor first requested in March.
Alan Kline, counsel to the Division of Taxation’s director, on Thursday told lawmakers the Treasury expects to complete that analysis and transmit it to lawmakers next week.
The bill would also allow state tax regulators to add or remove income or losses they believe were cited to avoid taxes. Similar provisions in other states and at the federal level typically draw legal challenges when used.
Representatives from multiple business groups requested that language be removed, saying the Division of Taxation can already audit companies they believe are understating their state tax liability.
“The fear of the business community is that these provisions could be used by the Division of Taxation to change the combined group to whatever results in the most tax due,” said David Shipley, a tax attorney who testified on behalf of the New Jersey Cable Telecommunications Association.
He said he worries the provision could leave businesses guessing about their total tax liability even if they followed the law while filing. Sarlo said he would push to remove that language.
“That’s going to come from the Legislature as part of our input. There’s a lot of input from the Treasury and business community. This will be our input,” the senator said.
To recoup expected lost revenue, the bill would mandate new tax reporting methods requiring all connected firms to apportion income to the state if a single firm met a bar to be subject to New Jersey’s corporate business tax. Under the current reporting method, only businesses that have sales or other business activities in the state are subject to taxation.
Sarlo said the bill would receive a vote at the next hearing of the Senate’s budget committee, where the panel would only hear testimony on any amendments made to it.
Many of the groups that opposed the broader changes discussed Thursday have urged lawmakers to extend the corporate business tax surcharge — levied on businesses with more than $1 million in annual profits — calling its sunset a handout to the state’s most profitable businesses.
The surcharge’s sunset is expected to cost New Jersey $322.5 million in foregone revenue in the fiscal year beginning July 1 and $1 billion in the following fiscal year.
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