On March 13, 2018, New Jersey Governor Phil Murphy (who was just inaugurated in January 2018) issued his fiscal year 2019 state budget. The budget contains many significant proposed tax law changes.

The proposed changes to the Corporation Business Tax include adopting market-based sourcing and worldwide combined reporting, with exceedingly limited "water's-edge" elections, and reinstituting the taxation of international holding companies. The budget proposes a one-time boost to revenue through the taxation of deemed repatriated accumulated earnings and profits of foreign subsidiaries, based on the recently enacted transition tax provisions set forth in Section 965 of the Internal Revenue Code of 1986, as amended by the recently enacted federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Moreover, the State intends to revise New Jersey's tax laws to inoculate itself from any possible tax base reductions attributable to the TCJA.

The budget also would impose a "fairness fee" on carried interest.

In addition, the budget proposes significant changes to the New Jersey Gross Income Tax, the state's personal income tax. The changes include a proposal to increase the New Jersey Earned Income Tax Credit to 40% of the federal level, a childcare and dependent care credit, and an increase of the top bracket to 10.75% for income over $1 million. The State property tax deduction cap would be raised to $15,000.

The budget would increase the sales tax rate to 7% and extend it to cover ridesharing services and transient accommodations. Further, the State's sales tax nexus provisions would be extended to reach certain remote sellers and there would be enhanced focus on tax enforcement for certain remote sales (i.e., increased audit activity in this area).

Lastly, marijuana, which would be legalized, and e-cigarettes both would be subject to tax.

Implications

The proposed budget would require various statutory changes that may or may not be enacted. New Jersey Senate President Sweeney has already expressed his own views, which run counter to many of the Governor's proposals, including the possibility of imposing a surcharge on corporate taxpayers. Accordingly, it is impossible to know what the final outcome will be. But, it is clear that many far-reaching tax changes with broad implications could occur in the future. The budget would generally raise taxes in New Jersey. Certain changes may broaden the tax base, reduce revenue volatility, or benefit small businesses. The change to market-based sourcing may encourage economic development in New Jersey, especially the building of corporate headquarters. Changes to individual rates and carried interest may drive higher-income taxpayers away from the state, while legalizing marijuana and imposing new taxes on e-cigarettes may develop into important, growing sources of revenue for the state.

———————————————