Group Urges New Jersey to End $450M in Business Tax ‘Loopholes’

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By John Herzfeld

New Jersey should enact changes in its business tax to close “loopholes” and end tax breaks for large corporations to add as much as $450 million in annual state revenue, a left-leaning policy group said.

New Jersey Policy Perspective (NJPP), in a Dec. 6 report, said that the state’s “broken” tax system has lost billions of dollars over the past decade from provisions giving preferential treatment to large corporations. That money could have been “better used to help create a prosperous state with a strong economy and thriving communities,” the group said.

The report adds to continuing tax debates as Gov.-Elect Phil Murphy (D) prepares to take office Jan. 1 after eight years of the administration of Gov. Chris Christie (R). Furthermore, the Republican plan to overhaul the federal tax code is expected to place fiscal strains on high-tax states, including New Jersey.

Specific NJPP recommendations included expanding combined reporting, to raise up to $290 million a year; reversing a recent tax cut for large S corporations and updating the state’s tax structure for limited liability corporations ($41 million); and adopting a throwback rule for “nowhere sales” by multistate businesses ($127 million).

NJPP also recommended a narrowing of corporate subsidy programs, a step that it said wouldn’t yield immediate revenue gains but would “help put New Jersey on a stronger footing in the future while making for smarter economic development overall.”

New Jersey tax revenue has stagnated since the last recession, “leaving the state to rely on other taxes or cut vital services to make ends meet,” NJPP Senior Policy Analyst Sheila Reynertson, who wrote the report, said in a statement.

Lift Property Tax Deduction Cap?

In another tax development against the backdrop of federal tax reform, state Sen. Joseph Pennacchio (R) Dec. 4 presented a bill ( S. 3598) to lift New Jersey’s $10,000 annual cap on state income tax deductions for property tax payments.

“Governor-elect Murphy and many state lawmakers of both parties have vocally opposed federal tax reforms that would limit the federal deductibility of property taxes to $10,000,” said Pennacchio, the state Senate’s Republican whip. “At the same time, few have discussed the negative impact of New Jersey’s long-standing $10,000 limit on our state’s property tax deduction.”

Pennacchio said it would be “completely disingenuous to express outrage over limiting the federal deduction to $10,000 for property taxes without doing anything to increase the state deduction that already has such a limit.”

Current law allows for a federal deduction of sales, income, and property taxes paid at the state and local level. Both the House bill (H.R. 1) and the Senate-amended bill don’t completely eliminate the deduction, preserving a property tax write-off up to $10,000. However, Republican lawmakers are discussing a potential compromise that would allow taxpayers to deduct state income tax, House Ways and Means Chairman Kevin Brady (R-Texas) said Dec. 6. And Senate Majority Leader Mitch McConnell (R-Ky.) said Dec. 6 that he’s open to tweaking final tax legislation to allow a deduction of state income taxes.

With assistance from Erik Wasson, Sahil Kapur (Bloomberg); Laura Davison and Kaustuv Basu (Bloomberg Tax)

To contact the reporter on this story: John Herzfeld in New York at jherzfeld@bloomberglaw.com

To contact the editor for this story: Cheryl Saenz at csaenz@bloombergtax.com

For More Information

Text of the NJPP report is at http://src.bna.com/uJX .

Text of S. 3598 is http://src.bna.com/uJ1.

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