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Governor Murphy’s Revised Fiscal Year 2021 Budget Proposal Includes Tax Increases

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On August 25, 2020, Governor Murphy released his revised budget proposal for Fiscal Year 2021 (FY 2021).

The proposal includes tax policy changes estimated to yield just over a billion dollars for the nine-month FY 2021 period, including:

  • Imposing the millionaire’s tax on all income above $1 million;
  • Permanently incorporating the 2.5% corporation surcharge;
  • Restoring the sales tax on limousines;
  • Removing the tax cap on boats; and
  • Applying a 5% surcharge to high-income individuals with federally Qualified Business Income (QBI) who have benefited from a regressive new deduction for pass-through entities created under the 2017 federal Tax Cuts and Jobs Act.

The revised budget proposal also includes targeted spending cuts across State government and emergency borrowing, together the proposal would close what would have been a nearly $6 billion budget hole because of the COVID-19 pandemic.

Millionaire’s Tax.

The Governor again seeks to increase the personal income tax of individuals, trusts and estates with income exceeding $1 million. New Jersey imposes tax at 8.97% on income over $ 500,000 and 10.75% on income over $5 million. The proposal would increase from 8.97% to 10.75% the tax on income between $1 and $5 million.

The Governor has proposed a $1 million threshold for the top personal income tax bracket twice since taking office and has been turned back by the state legislature each time.

Some critics of a “Millionaire’s Tax” have claimed higher state income taxes encourage wealthy residents in New Jersey to move to low or no tax states such as Pennsylvania and Florida.

At the federal level, the top tax rate is 37% for a single filer making $518,401 or more per year, or $622,051 for a married couple filing jointly.

This provision would raise about $390 million in FY 2021.

QBI Surcharge.

Beginning in 2018, taxpayers are allowed a federal tax deduction of up to 20% of their qualified business income (QBI). Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.

For a business owner in the top federal tax bracket who qualifies for the deduction, instead of paying tax at a 37% rate, the effective tax rate on QBI after the deduction is 29.6%.

New Jersey’s Gross Income Tax does not allow a QBI deduction. But, Governor Murphy, viewing the federal QBI provisions as a regressive new deduction primarily benefiting high income taxpayer, proposes a 5% state surcharge on federal QBI income to capture a part of a taxpayer’s federal tax savings. The surtax would take effect starting with tax year 2021 and apply to individuals with income exceeding $1 million.

This provision would raise about $75 million in FY 2021.

Corporation Surcharge.

In 2018, a surtax was imposed on corporations with New Jersey income over $1 million. The four-year surtax was imposed at 2.5% for tax years beginning on or after January 1, 2018, through December 31, 2019. The surtax rate was reduced to 1.5% for tax years beginning on or after January 1, 2020, through December 31, 2021.

The Governor’s proposal would restore the 2.5% rate for Tax Years 2020 and 2021 and beyond.

This provision would raise about $210 million in FY 2021.

Sales Tax on Limousines.

Since 2017, limousine transportation services have been exempted from the New Jersey sales and use tax. A limousine is an automobile, motor car or other vehicle (including vehicles known as “black cars”) that has seating capacity for not over 14 passengers.

This provision would raise about $13 million in FY 2021.

Sales Tax on Boats.

New Jersey exempts all noncommercial boats and other vessels from 50% of the sales and use tax otherwise due. New Jersey limits the sales and use tax on any boat or vessel to a maximum of $20,000. The reduced tax rate and tax cap were effective beginning February 2016.

The Governor proposes to repeal the reduced rate and tax cap. Sales of noncommercial boats and other watercraft would be taxed at the general sales tax rate of 6.625%.

This provision would raise about $7 million in FY 2021.

Cigarette Tax.

The Governor proposes to increase the tax on cigarettes by $1.65, from $2.70 to $4.35 per pack.

This provision would raise about $143.1 million in FY 2021.

Other Revenue Raisers.

Other proposals include increasing firearm fees and implementing excise taxes on firearms and ammunition ($6.3 million), increasing assessments on HMOs ($102.7 million) and increasing registration fees and penalties and levying new assessments on opioid drug manufacturers and wholesalers ($15 million).

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