NJ Taxes (2) Corporations

This was the massive hike. After years of taking in on average $2.5 billion the FY19 line item for the Corporate Business Tax went up 28%. Here’s why.

According to the Citizen’s Guide to the FY18 budget:

For FY19 the state is expecting over $3.05 billion from this tax. That increase alone of $675 million, were it a separate line item, would be the fourth largest revenue source after the income, sales, and the old corporate business tax. The extra revenue would be due to this law:

A4202 Imposes surtax on corporation business tax liability; decouples certain provisions from Internal Revenue Code; imposes tax on certain dividends.
Passed both Houses In addition to the tax paid by each taxpayer determined pursuant to section 5 of P.L.1945, c.1628(C.54:10A-5), each taxpayer, except for a public utility, shall be assessed and shall pay a surtax as follows: (1) For a taxpayer, except a public utility, that has entire net income in excess of $1 million, but less than $25 million for the privilege period, the surtax imposed shall be 2.5%; (2) For a taxpayer, except a public utility, that has entire net income in excess of $25 million for the privilege period, the surtax imposed shall be 4%. (page 2)

According to the OLS fiscal estimate:

The Office of Legislative Services (OLS) cannot quantify certain provisions of this bill due to the absence of relevant data. However, the OLS projects that imposing a surtax of two-and-a-half percent against a taxpayer which has entire net income in excess of $1 million but less than $25 million, and of four percent against a taxpayer which has entire net income of $25 million or more could generate revenues up to $800 million in each of the two tax years in which the surtax will be in effect. The attainment of the estimated $800 million maximum is predicated on the assumption that current overall economic conditions will largely continue and that higher taxpayer liabilities will not accelerate the application of unused taxpayer overpayments from prior tax years. Further, the OLS notes that actual revenues may be lower than predicted due to impacts related to taxpayer behavior, such as delay ing the realization of income, intended to avoid the imposition of a higher tax rate during the two tax years for which the surtax is in effect.

Nolo explains the corporate tax situation before A4202 this way:

New Jersey taxes corporate income through its corporation business tax (CBT), but the state does not have any franchise or privilege tax generally applicable to businesses. Also, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.

In general terms, the CBT requires that a traditional (C-type) corporation pay the greater of:

  • a graduated tax based on entire net income
  • an alternative minimum assessment (AMA) based on gross profits; or
  • an alternative minimum assessment (AMA) based on gross receipts.

The CBT rates on entire net income are as follows:

  • entire net income $50,000 or less = 6.5% tax rate
  • entire net income greater than $50,000 up to $100,000 = 7.5% tax rate; and
  • entire net income greater than $100,000 = 9% tax rate.

Corporations. New Jersey corporations are subject to the corporation business tax, which generally speaking is based on the corporation’s entire net income.

Example: For the 2012 tax year, your New Jersey corporation had entire net income of $300,000. Other things being equal, the corporation will owe New Jersey corporation business tax in the amount of $27,000 (9% of $300,000).

Looking at corporate income tax rates across the country:

Here are those taxes in a 2017 chart from the Tax Foundation:

The Tax Foundation also noted these recent changes:

Several states passed corporate income tax rate reductions and other reforms, taking effect in 2016 or 2017. Notable corporate income tax changes for 2017 include:

  • North Carolina cut its corporate income tax from 4 percent to 3 percent as the final component of the multiyear phase-in of its comprehensive 2013 tax reform package. North Carolina now has the lowest rate of any state levying a corporate income tax, down from 6.9 percent in 2013.

  • Arizona reduced its corporate income tax rate from 5.5 to 4.9 percent.

  • New Mexico reduced its corporate income tax rate from 6.6 to 6.2 percent. The rate is scheduled to fall to 5.9 percent in 2018.

  • The District of Columbia reduced its corporate income tax rate from 9.2 to 9 percent.

  • Indiana will reduce its corporate income tax rate from 6.25 percent to 6 percent on July 1, 2017. The rate will be reduced further to 4.9 percent by 2021.

At 13% New Jersey now has the highest top corporate tax rate in the nation. The argument for the hike is that most corporations got a massive reduction on their federal taxes and they can afford to pay New Jersey more. The question remains why they would want to pay New Jersey more as they are competing against companies in other states that also got that massive federal tax cut in addition to those tax cuts from their home states who are eager to keep them in business there.

4 responses to this post.

  1. Posted by PS Drone on July 6, 2018 at 1:27 pm

    I guess we are going to see the opposite of the trickle-down theory in action. Seems NJ has figured out a way to obviate the law of diminishing returns.

    Reply

  2. Posted by geo8rge on July 6, 2018 at 5:13 pm

    “The argument for the hike is that most corporations got a massive reduction on their federal taxes and they can afford to pay New Jersey more.”

    I suspect the intended target are people who form a corporation so that they can claim their $1M plus salaries are actually dividends. I wonder who those people are? If they are people who do business with the state of NJ they can’t move (lawyers and lobbyists). I personally wonder if there are top tier doctors that do that? Top tier doctors can easily move.

    Actual productive businesses that are forced to pay the higher rate should consider asking for a special tax rate, sort of like what would be proposed if Amazon moved to NJ.

    Reply

  3. Posted by geo8rge on July 6, 2018 at 5:33 pm

    Off topic but interesting:

    New Jersey pledges $5m for local journalism to boost state’s ‘civic health’

    Civic Information Consortium will focus on places without local newspapers and could serve as model for rest of the country

    https://www.theguardian.com/us-news/2018/jul/06/new-jersey-journalism-local-news-civic-information-consortium

    Reply

  4. Posted by Anonymous on July 8, 2018 at 9:20 am

    They weigh how much it would cost to move to a state with a precipitate tax plus the projected real overall cost of doing business. The ” grass isn’t always greener”.

    Reply

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