On Sept. 29, 2020, New Jersey Gov. Phil Murphy approved a series of bills as the revenue-raising element of the state’s $32.7 billion budget package for the 2021 fiscal year.1 The bills impose a number of tax increases on millionaires and businesses by: (i) raising the top Gross Income Tax (GIT) rate to 10.75% for individuals earning between $1 million and $5 million; (ii) restoring and extending the 2.5% Corporation Business Tax (CBT) surcharge to apply retroactively from Jan. 1, 2020, through Dec. 31, 2023; and (iii) increasing the annual assessment on health maintenance organizations (HMOs). These measures were enacted in part to address the state’s fiscal strain that has been accelerated by the COVID-19 pandemic.
Background
In May 2020, New Jersey projected a budget deficit of over $10 billion through the end of the 2021 fiscal year as a result of the economic impact of the COVID-19 pandemic.2 To help address this shortfall, the state enacted legislation in April that modified its 2020 and 2021 fiscal years in conjunction with extending the filing and payment deadlines to July 15, 2020, for purposes of the CBT and GIT.3 The legislation extended the 2020 fiscal year by three months to end on September 30, 2020 and shortened the 2021 fiscal year to begin on Oct. 1, 2020, and end on June 30, 2021.4 Considering the added financial impact of the pandemic, the governor introduced a revised budget package for the 2021 fiscal year in August, consisting of spending cuts, borrowing and several revenue-raising measures.
2021 revenue-raising bills
The budget package for the nine-month 2021 fiscal year included three accompanying revenue-raising measures, which are outlined in this alert.
Tax increase on millionaires
Coming to an agreement with lawmakers, the Governor achieved a long-sought budget proposal to increase taxes on high-income earners in New Jersey. Assembly Bill 10 increases the top GIT rate from 8.97% to 10.75% for individuals earning between $1 million and $5 million in annual income.5 Prior to the bill’s enactment, the 10.75% rate applied only to individuals earning over $5 million in income. The tax increase is retroactive to Jan. 1, 2020. In order to address potential under-withholding issues for millionaire employees given the retroactive effective date of the tax increase, the bill requires that employers must withhold GIT at a rate of 21.3% from compensation in excess of $1 million but not over $5 million as soon as practicable, but no later than Nov. 1, 2020.6 However, no interest or penalty will be imposed on employers for insufficient withholding of employee compensation paid before Nov. 1 that is attributable to the increased rate.7 In conjunction with the new withholding requirements, the New Jersey Division of Taxation released updated withholding rate tables on its website.8 Penalties will not be imposed for underpayment of increased estimated tax on taxable income received before November 1 that is attributable to the increased rate, but increased estimated payments will be required after this date in order to avoid underpayment penalties.9
Intended as an offset to the increased tax rate on millionaires, the bill also provides tax rebates to certain qualifying taxpayers. Specifically, the bill provides up to $500 in rebates for married couples with gross income under $150,000 and single filers with gross income under $75,000.10 Eligibility is limited to taxpayers having at least one dependent child and a GIT liability greater than zero.11 In total, the millionaire tax increase provision is expected to raise $390 million in additional revenue annually, but the rebate program is expected to cost $300 million per year.12
CBT surtax extended
In 2018, New Jersey enacted a 2.5% CBT surtax on corporate taxpayers other than New Jersey S corporations and public utilities having allocated taxable net income over $1 million, with the tax rate scheduled to decrease to 1.5% in January 2020 and expire on Dec. 31, 2021.13 Assembly Bill 4721 reinstates the 2.5% rate on corporate income over $1 million, retroactively applies the tax increase to tax periods beginning on or after Jan. 1, 2020, and extends the surtax through Dec. 31, 2023.14 The bill provides that all penalties arising from the retroactive application of the increased surtax will be waived.15 Finally, the bill specifies that if the federal corporate income tax rate is increased to at least 35% of taxable income (the tax rate in place prior to the enactment of the Tax Cuts and Jobs Act applicable to the 2018 tax year and thereafter), the surtax will be suspended at the end of the tax year corresponding to the federal rate increase.16 The extended surtax and increased rate is estimated to generate additional revenue in a range of $243 million to $333 million in fiscal year 2021.17
HMO annual assessment increase
The final revenue raising bill, Assembly Bill 4722, increases the annual assessment on net written premiums of HMOs from 3% to 5%, beginning on Oct. 1, 2020.18 The measure is expected to generate approximately $263 million in additional revenue during the 2021 fiscal year.19
Commentary
New Jersey’s governor and legislative leaders reached a budget agreement several days before the beginning of the state’s shortened 2021 fiscal year on Oct. 1. Faced with the challenge of funding a $32.7 billion spending package and addressing a looming $5.3 billion budget deficit hastened by the COVID-19 pandemic, state officials determined that tax increases were necessary in the form of a higher tax rate on millionaires and the restoration and extension of the 2.5% CBT surtax. Offered as a compromise measure to the imposition of new and retroactive taxes during a pandemic, the legislation includes tax rebates for middle-class and working-class families having at least one dependent child.
New Jersey’s ongoing fiscal challenges presented an opportunity for the governor to achieve one of his longstanding legislative goals: expanding the state’s highest 10.75% tax rate to include all millionaires. The proposal was met with resistance from state legislators until the governor was able to secure its passage as part of this year’s budget negotiations. Opponents of the tax increase worry that the higher rate will encourage additional wealthy New Jersey residents to move out of the state, further eroding the state’s tax base. Because the tax increase is applied retroactively, the relatively small number of employees now subject to the higher tax rates must adjust their withholding rates in order to compensate for the increase at an extremely high 21.3% tax rate.
As state officials look ahead to the 2022 fiscal year, they will continue to balance the difficult tasks of maintaining tax revenue to address an ongoing fiscal deficit and limited reserve fund while also supporting taxpayer liquidity during a pandemic.20 Offering a potential long-term solution to the state’s budget issues, lawmakers recently introduced legislation that would impose a new tax of $0.0025 per transaction on persons or entities processing 10,000 or more financial transactions through electronic infrastructure located in New Jersey per year.21 The proposal has been met with resistance by the financial industry, including numerous New York-based stock exchanges and trading firms having data centers located in New Jersey. In response to threats by firms to relocate their data centers outside the state, legislators recently introduced an amendment that would make the financial transaction tax temporary by setting an expiration date of Dec. 31, 2022, and reduce the tax rate to $0.0001 per security purchased.22 New Jersey will continue to weigh the costs and benefits of new revenue-raising measures as the state continues to weather a challenging fiscal situation in the wake of the pandemic.
1 P.L. 2020, c.94 (A. 10, S. 2949); P.L. 2020, c.95 (A. 4721, S. 2934); P.L. 2020, c.96 (A. 4722, S. 2935), Laws 2020.
2 Press Release, Treasury Issues Preliminary Update on Projected Revenue Shortfall through Fiscal Year 2021, N.J. Department of the Treasury, May 13, 2020.
3 COVID-19 Fiscal Mitigation Act, P.L. 2020, c.19 (S. 2238), Laws 2020.
4 For further discussion of this legislation, see GT SALT Alert: New Jersey Enacts Legislation Extending Income Tax Filing and Payment Deadlines, Modifying 2020 and 2021 Fiscal Year Periods.
5 A. 10, Sec. 1, adding N.J. REV. STAT. § 54A:2-1(a)(7), (b)(7).
6 A. 10, Sec. 2(a).
7 A. 10, Sec. 2(c).
8 2020 Income Tax Rate and Withholding Instruction for Income Between $1 Million and $5 Million, N.J. Division of Taxation, Oct. 8, 2020, published at https://www.state.nj.us/treasury/taxation/git2020taxrate.shtml.
9 A. 10, Sec. 2(b).
10 A. 10, Sec. 3.
11 A. 10, Sec. 3(g).
12 Fiscal Estimate to A. 10, N.J. Office of Legislative Services, Sept. 28, 2020.
13 N.J. REV. STAT. § 54:10A-5.41(a).
14 A. 4721, Sec. 1, amending N.J. REV. STAT. § 54:10A-5.41(a)(1); Sec. 3. The bill leaves unchanged the provision that no credits are allowed against surtax liability, other than credits for installment payments, estimated payments made at extension, and overpayments. N.J. REV. STAT. § 54:10A-5.41(b).
15 A. 4721, Sec. 2.
16 A. 4721, Sec. 1, amending N.J. REV. STAT. § 54:10A-5.41(a)(1).
17 Fiscal Estimate to A. 4721, N.J. Office of Legislative Services, Sept. 29, 2020.
18 A. 4722, Sec. 1, amending N.J. REV. STAT. § 26:2J-47(a)(1).
19 Fiscal Estimate to A. 4722, N.J. Office of Legislative Services, Sept. 25, 2020.
20 Even before the onset of the COVID-19 pandemic, the state’s reserve fund balance stood at approximately 1% of annual general fund expenditures. State Strategies for Closing FY 2020 with a Balanced Budget, The Tax Foundation, Apr. 2, 2020.
21 A. 4402 (S. 2902).
22 Draft Amendment to S. 2902.
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More SALT alerts
No Results Found. Please search again using different keywords and/or filters.