29/03/23

US: Lawmakers prepare sweeping changes to New Jersey's business tax.

As published on newjerseymonitor.com, Wednesday 29 March, 2023.

New Jersey lawmakers are preparing to enact vast reforms to the state’s corporate business tax.

A bill introduced recently by budget committee chairs in both chambers would drastically cut taxation of some international income while slashing other deductions, among a host of technical and other changes.

The bill would cut by 90% a tax deduction for businesses meant to ease firms through tax code changes, subject income from certain pass-through entities to higher tax rates under the state’s corporate business tax, and require multi-state corporations to include domestic out-of-state revenue on their tax returns.

Assemblywoman Eliana Pintor Marin (D-Essex) and Sen. Paul Sarlo (D-Bergen), the budget chairs, have said the changes made by the bill would be revenue neutral, a stance echoed by a Treasury spokesperson Friday. Supporters say it would help keep New Jersey competitive for businesses.

“We want our state to be attractive to those giant companies that want to come here and bring those good jobs and good benefits here,” said Chris Emigholz, chief government affairs officer at the New Jersey Business and Industry Association. The group is among those, like the New Jersey Chamber of Commerce, that worked with Murphy administration officials on the bill.

But some detractors are unconvinced. They call the proposal a boon to businesses already preparing for a 2.5% surtax on earnings above $1 million to expire at the end of 2023.

Pintor Marin said she expects the Legislature to advance the bill before lawmakers finalize the next fiscal year’s budget in June.

One of the bill’s provisions would reduce New Jersey’s taxation of global intangible low-tax income, or GILTI, by a factor of 10.

Under provisions of a 2017 federal tax bill, foreign subsidiaries of U.S. firms are subject to a global minimum tax.

Beginning in 2018, the state allowed corporations to deduct 50% of their GILTI from their tax base. The bill would expand that by treating GILTI revenue as dividends, which would allow filers to exclude 95% of GILTI from their taxable income.

That change would bring New Jersey in line with its neighbors. Both New York and Pennsylvania allow firms to exclude 95% of GILTI from their tax base.

“If we do things that make us an outlier with how we tax foreign income, that could make the decision of these international companies to come here less likely,” Emigholz said.

GILTI was enacted to prevent companies from avoiding taxes by shifting profits abroad, perhaps into international tax havens, and Michael Mazerov, a senior fellow at the nonpartisan Center on Budget and Policy Priorities, warned that expanding the exclusion would be a backward step.

“GILTI is one way of recouping the revenue loss from international income shifting, and it was the right thing for New Jersey to do. Repealing it is bad policy,” Mazerov said.

The legislation would also do away with related member interest add back, which is meant to prevent tax avoidance furthered by sham transactions — like paying a subsidiary in another state or country to use a logo — that can otherwise reduce a firm’s taxable income. Mazerov said this would be a bad move for New Jersey, too.

This change, coupled with the one involving GILTI, is “an open invitation taking away the two key things that New Jersey has done to mitigate the impact of its corporate tax base’s international profit shifting,” he said.

The bill would give the state’s taxation director the authority to require firms to add or remove income or losses cited to avoid taxes. Such provisions exist in other states and at the federal level but attempts to use them “almost inevitably” result in costly litigation, Mazerov said.

An aspect of the bill Pintor Marin counts as a win for the state would allow New Jersey to collect more taxes from companies that do business here and in other states.

New Jersey requires corporate parent companies to combine their profits with those of their subsidiaries in a single return, an anti-tax avoidance practice known as combined reporting.

Since September, the state’s combined reporting has operated using the Joyce method, under which corporate income is only taxed if a company has met the bar to be subject to the state’s business tax. The bill would move New Jersey back to the Finnigan model, which taxes income of all firms within a given corporate structure if one connected firm is subject to the state’s business tax.

For example, if two subsidiaries of a corporation each had $1 million in income but only one is subject to New Jersey’s business tax, $1 million of the corporation’s profits would be apportioned to New Jersey under the Joyce model, versus $2 million under the Finnigan model.

The bill would also clearly define what constitutes a New Jersey business for the purposes of the corporate business tax. Businesses with more than $100,000 in annual New Jersey receipts — or with 200 transactions in the state — would be subject to the corporate business tax even if they lack offices in New Jersey.

It would also sharply reduce a deduction meant to defray the impact of the combined reporting changes. Currently, businesses are allowed to deduct 10% of the difference in their tax liability created by the shift to combined reporting, while the bill would reduce the deduction to 1% until 2030, when it would rise to 5%.

The bill would also subject income from certain pass-through entities, like certain partnerships and S corporations, to taxation under the corporate business tax instead of the gross income tax.