Billing Significant changes in the state’s business tax It would reduce New Jersey’s revenue by allowing businesses to move more money to international tax havens, according to the testimony from business groups that helped draft the text and criticism from others concerned.
Argument about the measure (S3737) comes as lawmakers prepare to authorize a separate 2.5% tax on some businesses. In the year Expiring in late 2023, the measure is expected to cost New Jersey $1.3 billion over the next two years.
Supporters of S3737 say it will have no such impact on the state’s coffers, although critics at a Senate Budget Committee meeting on Thursday disputed those claims.
The bill, sponsored by both chambers of the Legislature, would eliminate the interest surcharge and reduce New Jersey’s limited foreign income, international intangible low-taxed income, or GILTI, from 50% to 5%. It is meant to prevent companies from evading tax through sham transactions between them and branches.
Sen. Paul Sarlo (D-Bergen), chairman of the House Budget Committee, said at a hearing Thursday that changes to S3737 are expected to cost New Jersey $45 million to $50 million in GLT revenue, but those losses are opposed by others. Provisions such as moving to a new reporting system that would generate additional revenue outside of the state.
Darin Shanske, a tax professor at the University of California, Davis, who testified remotely before the committee, suggested that the estimate could significantly understate the results.
“From the GLT amount reported as collected by the IRS, New Jersey should be making $450 million a year in GLT, so it’s not clear that it’s only going to lose $50 million,” Shansk said.
One simple answer, Shanske said, is that corporate taxpayers are already underestimating their GILTI liability.
Business group representatives say the GLT tax rate cut will draw businesses to New Jersey in line with its neighbors, with states such as Massachusetts, New York and Connecticut taxing GILTI at 5% and Pennsylvania not paying the tax. at all.
Opponents of the bill question whether the tax cuts will attract more businesses to New Jersey, noting that the state’s business growth has already surpassed pre-pandemic levels. Peter Chen, senior policy analyst at Policy View New Jersey, said the proposed changes would allow businesses to move more money to offshore tax havens.
“Given the erosion of the corporate tax base over the past 75 years, staying at the current level is a step backwards, as multinational corporations accelerate their offshore expansion,” he said.
Treasury officials and the chair of the Budget Committee have stressed that changes to the law would have no impact on state revenue, although the Treasury Department has not provided an analysis to support those claims, the New Jersey Monitor first requested in March.
Alan Klein, adviser to the director of the tax department, told lawmakers on Thursday that the Treasury will complete that analysis and present it to lawmakers next week.
The bill would allow state tax inspectors to add or subtract income or losses they believe have been cited to avoid taxes. Similar provisions in other states and at the federal level attract legal challenges when used.
Representatives of several business groups called for the removal of language that would allow the tax department to preemptively audit companies it believes are underestimating their state’s tax liability.
David Shipley, a tax attorney who testified on behalf of New Jersey Cable, said: “The concern of the business community is that these provisions could be used as tax breaks.” Telecommunications Association.
He expressed concern that the provision could lead businesses to overestimate their total tax liability even if they follow the law while filing. Sarlo said he would push to remove that language.
“This comes as part of our input from the Legislature. There are many inputs from Treasury and the business community. This will be our resource,” the senator said.
To recoup expected lost revenue, the New Jersey bar mandates new tax reporting methods that require all affiliated entities to apportion their income to the state if a corporation becomes subject to New Jersey’s corporate business tax. Under the current reporting system, only businesses with sales or other commercial activity in the state are subject to the tax.
Sarolo said the bill will be voted on in the next Senate Budget Committee hearing, where the panel will only hear amendments to it.
Many groups opposed to the sweeping changes discussed Thursday called for lawmakers to hand over the corporate business tax surcharge — imposed on businesses with annual profits of more than $1 million — into the sunset for the state’s most profitable businesses.
The surcharge is expected to cost New Jersey $322.5 million in revenue starting July 1 and $1 billion in the next fiscal year.
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