New Jersey Officials, Big Business Queue Up Deal to Ease Taxes – Bloomberg Tax
New Jersey lawmakers are close to rolling out a compromise legislative plan that would provide tax cuts for major New Jersey corporations, including relaxing the state’s treatment on the way it taxes earned income abroad, according to two business industry lobbyists who have been involved in the negotiations.
State lawmakers have been actively working on a proposal of corporate business tax changes after Gov. Phil Murphy (D) greenlit a plan that would ease the burden on some of the biggest corporations operating in the state such as Johnson & Johnson, Pfizer Inc., and Anheuser-Busch. The efforts are aimed at boosting New Jersey’s competitiveness against neighboring states like Pennsylvania, which just lowered its corporate tax rate at the start of the year.
The draft measure is part of a deal that’s been under negotiations for months between the New Jersey Division of Taxation and business leaders from the New Jersey Business & Industry Association and the state Chamber of Commerce to make changes to the state’s corporate business tax while remaining revenue neutral.
While the plan doesn’t directly address the state’s current corporate tax rate of 11.5%, it’s expected to reduce how much businesses pay on foreign income and the state’s treatment of net operating losses, according to Chris Emigholz, chief government affairs officer for the business association, who’s been involved in crafting the proposal.
“It’s something that we’ve been wanting for years. It’s something they’ve been wanting for years,” said Emigholz, referring to the administration. “Neither side is getting everything we want, but both sides are getting enough.”
The Treasury Department is still discussing the proposal with lawmakers to find a potential sponsor bill, said Emigholz.
Murphy’s office and a Democratic Senate Budget Committee aide declined to comment on the pending legislation.
The proposal would substantially reduce the amount the state taxes income earned by US-controlled foreign corporations—a category of foreign income created by the 2017 federal tax law—called global intangible low-taxed income, or GILTI.
New Jersey is among a number of states to tax this type of income, and it applies the highest rate among those states. New Jersey currently directs taxpayers to exclude 50% of GILTI, while neighboring New York exempts 95% in their tax base. The proposed change would make the two states exemptions match on this issue.
“I don’t think it’s appropriate for states to be really going after foreign income the way that we do, and New Jersey currently goes after 50% of GILTI,” said Emigholz.
GILTI was developed as a new category of foreign income under tax code Section 951A to discourage multinationals—particularly technology and pharmaceutical companies—from shifting income from patents and trademarks to controlled foreign corporations based in lower-tax countries. Under the federal law, multinational companies could face a federal 10.5% levy when foreign corporations in their control pay less than 13.125% in taxes offshore.
The pending legislation comes as Murphy has already backed allowing New Jersey’s corporate tax surcharge to sunset in 2023.
“A deal is a deal,” said Murphy in a Bloomberg interview earlier this month.
In 2018, New Jersey’s corporate tax rate went from 9% to 11.5% “temporarily.” It was scheduled to be lowered gradually to 10.5% in 2020, and back to 9% in 2021. Instead, the temporary surcharge, which is applied to corporate profits exceeding $1 million, was extended by lawmakers in 2020 until the end of 2023. No other state has a double-digit corporate tax rate.
“When you have a disparity like that between us and the surrounding states, that becomes a major issue,” said Michael Egenton, executive vice president of government relations for the New Jersey Chamber of Commerce, who also has been involved in negotiations of the draft bill.
A progressive statewide coalition already is pushing back on any plans by state leaders to allow the surcharge to sunset, calling it a $600 million tax cut for corporations.
The surcharge is paid by the top 2% of the wealthiest corporations operating in the state, including global corporations such as Amazon.com Inc. and Walmart Inc. that make profits in New Jersey, but aren’t headquartered here.
“It is a misguided tax policy,” said Sheila Reynertson, a senior policy analyst for New Jersey Policy Perspective. “At a time when people are struggling to get by or in the face of potentially another economic downturn, we know those who make very little are the first to feel the effects of a downturn and the last to recover. So who is going to be holding the bag when we have given away $600 million in general revenue?”