The state of New Jersey is required by law to adopt a balanced budget as of June 30 of each year for the upcoming fiscal year that begins July 1. On June 22, 2015, the state legislature announced a $35 billion budget proposal that would fully fund the state’s pension obligations ($3.1 billion), restore the earned income tax credit, implement a “millionaire’s” tax, and impose a one-time 15% surcharge on the corporation business tax (CBT).

The millionaire’s tax would raise the top gross (personal) income tax rate from 8.97% to 10.75% on income above $1 million to generate $688 million in annual revenue over four years, 2015-2018. The 15% CBT surcharge would raise the top tax rate from 9% to 10.35% and generate $435 million in revenue. Several business groups including the New Jersey Chamber of Commerce, the New Jersey Business & Industry Association, and the New Jersey Society of CPAs testified against these proposed tax hikes.

On the other hand, New Jersey Policy Perspective, a nonprofit, nonpartisan organization that conducts research and analysis on state issues, released a report discrediting claims that a millionaire’s tax would hurt small businesses. The report stated that more than 90% of small business owners would not pay more in taxes under the millionaire’s tax proposal. On June 26, Governor Christie, using his line item veto power, vetoed both the millionaire’s tax and the CBT surcharge and vetoed $1.6 billion in spending provisions in the budget proposal, primarily the pension contribution, which was scaled back to $1.3 billion.

The governor noted the move, earlier this year, of Mercedes-Benz USA’s headquarters from New Jersey to Georgia after 40 years in New Jersey. This move, due to excessive taxes in New Jersey, is an example of why he vetoed these proposed tax increases. He labeled the action of legislature as reckless, stating that it is truly deaf and blind to what the tax policies have wrought. He stated his belief that punitively raising taxes on already overtaxed residents and small business owners is not the answer to the State’s short-term or long-term fiscal challenges. The 2015 state business tax climate rankings by the Tax Foundation ranked New Jersey number 50 as far as favorable state tax climates.

Various business tax reforms that were legislated in prior years, including a five-year phase-in (2012-2016) of a business loss carry-forward provision, single sales factor apportionment benefitting New Jersey based businesses at the expense of non-New Jersey based businesses and an increase in the Research & Development (R&D) credit were kept intact. These tax reforms are estimated to provide aggregate tax savings of approximately $660 million during the fiscal year ending June 30, 2016. The Christie administration touts this as an accomplishment.

Governor Christie increased the earned income tax credit (EITC) from 20% of the Federal credit to 30% of the Federal credit from the original budget proposal adopted by the legislature. The budget with the governor’s changes was approved by the state legislature on June 29, 2015. So aside from the EITC increase, there has been no substantive change to any New Jersey taxes as a result of the budget being adopted.

Neil Becourtney, CPA
CohnReznick LLP