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CBT Reforms and Recent Changes Under GIT and SUT in New Jersey*

CBT Reforms and Recent Changes Under GIT and SUT in New Jersey*. Connecticut Legislative Program Review & Investigations Committee State and Local Tax Policy Forum: October 26, 2005 Ranjana Madhusudhan Office of Revenue & Economic Analysis New Jersey Treasury

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CBT Reforms and Recent Changes Under GIT and SUT in New Jersey*

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  1. CBT Reforms and Recent Changes UnderGIT and SUT in New Jersey* Connecticut Legislative Program Review & Investigations Committee State and Local Tax Policy Forum: October 26, 2005 Ranjana Madhusudhan Office of Revenue & Economic Analysis New Jersey Treasury The views expressed are those of the presenter and do not necessarily represent the views of NJ Treasury or the NJ Division of Taxation *** Please do not quote without permission ***

  2. Upon assuming office in January 2002, Governor McGreevey faced multi-billion dollar budget deficits Underlying factors: • Overly-optimistic revenue projections • Economic slowdown, exacerbated by 9/11 • Structural growth in key programs The huge budgetary shortfall was addressed in part by the restructuring of the CBT and closing loopholes

  3. What was wrong with the CBT in New Jersey? CBT share in total revenues has been tumbling (from double-digit to single-digit) CBT collections don’t match the trend in corporate profitability 77% of active corporations in NJ paid the minimum tax of $200 not because they were not profitable but these corporations used loopholes under CBT (2% of total payments) The CBT payments were highly concentrated - The bulk of CBT in 1999 was paid by less than 1% of businesses - Just a fraction, 31 companies, paid >$5M in CBT

  4. The Business Tax Reform Act, P.L. 2002, c.40 (BTRA) Passed July 2, 2002 Effective for privilege periods beginning on or after January 1, 2002

  5. Major Components of the CBT Reform include: Revenue Measures * Minimum Tax * Processing /Filing Fees * Temporary NOL suspension * Other Loophole Closing Measures * Disallow royalty payments * Restriction on the deductibility of inter-affiliate interest expenses * Ending exclusions (Investment Company & Savings Institutions) * Throwout Rule * Disallow the dividend deduction (companies w/ less than 50% ownership) * Other

  6. Alternative Minimum Assessment (AMA) * Corporations pay higher of the CBT or AMA * Computed on the basis of corporation’s NJ gross profits or gross receipts * Maxed at $5M and there is credit provision if the AMA exceeds regular CBT * S corporations, investment companies and professional corporations are exempt * AMA will sunset for NJ corporations by 6/30/06

  7. BTRA Revenue Estimates ($M)

  8. Recent Changes Under the GIT and Sales Tax in NJ GIT - - Imposition of the millionaire tax (MT) @8.97% (P.L. 2004, C. 40, effective TY2004) Major characteristics: Over 29,000 TPs w/ NJTI >$500k • a/c for under 1% of all returns • a/c for nearly 19% of total NJTI • a/c for 44% of TL • redistribution of federal windfall gains • estimated revenue from MT about $1B

  9. Sales Tax – Serious issues w/ base erosion **service based economy **remote sales (e-commerce) **leveling the playing field * NJ adopted the Streamlined SUT Agreement on July 2, 2005 and it became effective 10/1/2005 ~ Uniform product definitions ~ Simplifies registration & reporting requirements for multistate businesses ~ NJ should be able to collect the sales tax due ~ Revenue neutral w/ ST $40M revenue impact due to collection by new vendors *Other Measures ~~ Base broadening (CMPT)

  10. NJ CBT Study Commission The BTRA created a 9-member, bipartisan NJ CBT Study Commission, charged w/ the primary responsibility to study and evaluate the CBT reforms passed under BTRA The Commission’s final report was out in June 2004. Major recommendations include: ~ Further analysis of state tax policies ~ Agreed to sunset AMA for TY beginning 7/1/06 ~ Full restoration of NOL provision ~ Change certain loophole closure measures * We need data for more than one tax year to conduct a thorough analysis of the true impact of changes made under BTRA

  11. Conclusion & Beyond * Why Tax Reform? ** Fiscal Crisis (Budgetary issues) ** Base erosion (SUT) ** Technological /other structural changes ** Changing times (the world is flat!) ** Tax laws out of sync (slow to change) ** Identify problems w/ current structure * Optimal Taxation – standard goals ** Equity, Efficiency, Revenue Adequacy, Simplicity, Other ** Nexus issues ~ economic presence

  12. Conclusion & Beyond (Contd.) * More changes for complete CBT reform ** Need further analysis (Data lags) ** Examine Combined Reporting ** Modified AMA (gross profits) ** Other Alternative Business Tax Structures (BAT, NH, WA) ** Track states w/ recently enacted reforms (e.g. Ohio and Kentucky) * Joining the Streamlined Sales & Use Tax Agreement should enhance compliance and make the system fairer * The primary objective should be to implement reforms to promote sound fiscal policy recognizing the underlying trade offs!

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