ASSEMBLY BUDGET COMMITTEE
ASSEMBLY, No. 1676
STATE OF NEW JERSEY
DATED: DECEMBER 14, 2010
The Assembly Budget Committee reports favorably Assembly Bill No. 1676.
This bill modifies the corporation business tax formula used to determine the portion of the income of a corporation subject to tax by the State of New Jersey from a three-factor formula to a single sales factor formula, and establishes a specialized sales fraction formula for airlines that are subject to taxation.
Each state that imposes a corporate income tax determines the portion of the total income of a corporation subject to state tax by using formulas that measure specific activities of the corporation assigned to that state. The portion of the income of the corporation subject to tax by a state is determined by the proportion of some activity in the state to the total of such activity of the corporation.
The New Jersey corporation business tax employs a three-fraction formula that apportions a share of a corporation’s income to this State based on a weighted average of the following fractions: (1) a corporation’s property in this State over the corporation’s total property; (2) a corporation’s sales in this State over the corporation’s total sales; and (3) the corporation’s payroll in this State over the corporation’s total payroll. Currently, the sales fraction accounts for 50% of the apportionment and the property and payroll fractions each account for 25% of the apportionment.
This bill replaces the three-factor formula with a single sales factor formula. The change is phased-in over three years, beginning with privilege periods ending on or after July 1, 2011. For that year, the sales fraction will account for 70% of the apportionment and the property and payroll fractions each will account for 15% of the apportionment. For privilege periods ending after July 1, 2012, the sales fraction will increase to 90% and the weights of property and payroll will each account for 5% of the apportionment. For privilege periods ending after July 1, 2013, the sales fraction will account for 100% of the apportionment.
In addition, certain industries have specialized formulas adopted by regulation which more appropriately measure taxpayers' relative activity in New Jersey than the standard formula. The sales fraction for airlines is currently determined based on the ratio of departures from New Jersey to total departures, weighted as to cost and value of aircraft by type where weighting would give a fairer, more reasonable business allocation factor.
This bill codifies a modified sales fraction formula for airlines. Under its provisions, the current sales fraction based on the ratio of departures is replaced by a sales fraction determined as the ratio of an airline’s revenue miles in this State divided by an airline’s total revenue miles.
The Office of Legislative Services (OLS) notes that this bill may reduce annual state revenues from the corporation business tax by an indeterminate amount. The OLS does not have access to individual corporate returns, and has no other means by which to estimate the impact of this bill on corporate tax liability. Past New Jersey Executive analyses and academic studies of the single sales fraction formula have suggested that total annual corporation business tax revenues may decline, by potentially significant amounts, but precise estimates for New Jersey under this bill are not available.
The tax impact will vary depending on the specific financial characteristics of each corporation. Corporations with a large measure of sales in the State but a small share of property and payroll in the State, would face tax liability increases. On the other hand, corporations with a small measure of sales in the State (a larger proportion of sales outside the State) but a large share of property and payroll in the State, would face tax liability decreases.
For some corporations, their specific financial characteristics may result in no net tax change under this bill. However, the general consensus of past analyses of a single sales fraction formula is that the overall State impact would see corporation business tax liabilities decline. For a bill in the prior legislative session (S-2136 of 2008), the Executive estimated that manufacturing corporations would save $77.5 million in annual liabilities after a shift to a single sales fraction formula. The OLS did not have access to the Executive’s data or methodology and could neither concur or disagree in the estimate. In a paper published in the Journal of State Taxation in 2002, the authors estimated a potential $49 million revenue reduction in the New Jersey corporation business tax in 1997 (when that tax raised about half the amount it currently raises). These amounts are suggestive of the potential magnitude of a switch to a single sales fraction formula, but are not directly attributable to the impact of this bill.
The OLS has no data which would allow an analysis of the section of this bill that changes the sales fraction formula for airlines. The OLS also notes that 4 percent of any revenue loss from the corporation business tax under this bill would also impact resources constitutionally dedicated to certain environmental mitigation programs.