SENATE BUDGET AND APPROPRIATIONS COMMITTEE

 

STATEMENT TO

 

SENATE, No. 2411

 

with committee amendments

 

STATE OF NEW JERSEY

 

DATED:  JUNE 23, 2016

 

      The Senate Budget and Appropriations Committee reports favorably Senate Bill No. 2411, with committee amendments.

      As amended, this bill adjusts various State taxes towards the end of supporting strengthened investments in public, private and charitable assets in this State.

       The various changes in State taxes are described as follows:

 

·         Section 1: Phases out the estate tax over four years, first by replacing the current $675,000 threshold with a $1,000,000 exclusion, and then increasing that exclusion amount until the tax is eliminated.

     The current New Jersey estate tax is determined by reference to a repealed federal credit against a system of federal estate taxation that no longer exists.  The former federal credit was part of a national revenue-sharing policy, no longer in effect, that was originally designed to provide a portion to states of what would otherwise have been a high-rate federal tax.  Because the mechanics of the current tax are a remnant of that former federal imposition, the New Jersey estate tax is initially imposed at a rate of 37 percent until all the tax that would have been imposed on the value of the estate below $675,000 is made up.  Under the current tax, that highest rate is imposed on even the smallest estates subject to tax.

     This bill eliminates that tax rate “bump” by abandoning the references to the old federal credit and establishing the necessary mechanics under New Jersey law.  This allows the bill to replace the former $675,000 tax threshold with a true tax exclusion, initially set at $1,000,000 for the estates of resident decedents dying on or after January 1, 2017.  The bill increases the exclusion amount to $2,000,000 for 2018, and $3,000,000 for 2019.  For decedents dying on or after January 1, 2020, the bill provides that there will be no tax imposed.

     The bill imposes the estate tax on the New Jersey property of nonresident decedents.  Currently, the estate tax is only imposed on the property of resident decedents.  The bill uses a “ratio” method: the estate of a nonresident computes estate tax as though a State resident, then pays the proportion of that liability that the estate’s  New Jersey property is of the estate’s total property.  This change takes effect for nonresident decedent estates January 1, 2017, and ceases on January 1, 2020 along with the tax on resident estates.

 

·         Sections 2 and 3:  Increase the New Jersey gross income tax pension and retirement income exclusions fivefold over four years.  This is intended to reduce the capacity of the State’s personal income tax to diminish the after-tax retirement income available to retired taxpayers in this State.

     Generally under current law, taxpayers with $100,000 or less of annual income, who are at least 62 years old, may claim a pension and retirement income exclusion of up to $20,000 for joint filers, $15,000 for individuals, and $10,000 for married but filing separately.

     This bill increases the personal income tax’s pension and retirement income exclusion to $100,000 for joint filers, $75,000 for individuals, and $50,000 for married but filing separately.  The bill phases in the five-fold exclusion increase over four years as follows:

Filer Type

Present

2017

2018

2019

2020

Joint

$20,000

$40,000

$60,000

$80,000

$100,000

Individual

$15,000

$30,000

$50,000

$60,000

$75,000

Separate

$10,000

$20,000

$30,000

$40,000

$50,000

     Currently, the pension and retirement income exclusions are not allowed to a taxpayer who has gross income of more than $100,000 for the taxable year.  For taxable years beginning on or after January 1, 2021, the bill allows a taxpayer with income of more than $100,000 but not over $125,000 to exclude 50 percent of the amount of pension and retirement income otherwise allowed and a taxpayer with more than $125,000 but not more than $150,000 of gross income to exclude 25 percent of the amount otherwise allowed.

 

 

·         Section 4:  Increases the New Jersey Earned Income Tax Credit (NJ EITC) to 40 percent of the federal benefit amount beginning in Tax Year 2016. The NJ EITC program, which piggy-backs on the federal EITC program, currently provides a refundable earned income tax credit under the State gross income tax equal to 30 percent of the federal benefit amount.

     The federal and State EITC programs are intended to “make work pay” by offsetting the burden of payroll taxes for low and moderate income workers.

     To claim a credit, taxpayers must first file for the federal EITC.  Eligibility for the program is determined by taxpayer income, filing status, and the number of qualifying children.  For Tax Year 2016, the federal Internal Revenue Service has indicated, the following program limits:

 

Maximum Income Eligibility Levels

If filing …

Qualifying Children Claimed

Zero

One

Two

Three or more

Single, Head of Household or Widowed

$14,880

$39,296

$44,648

$47,955

Married Filing Jointly

$20,430

$44,846

$50,198

$53,505

 

     According to the New Jersey Department of the Treasury, it is estimated that some 552,900 taxpayers claimed a credit during TY 2014, the most recent year for which data are available.  Based on available federal Internal Revenue Service data, it is estimated that under the bill, the average NJ EITC benefit amount will increase by $255, from $708 in TY 2015 to approximately $963 in TY 2016.

 

·         Section 5: Allows a New Jersey gross income tax deduction for cash charitable contributions that are made to certain charitable agencies and organizations that primarily provide health, welfare, or human care services to individuals in New Jersey and that are eligible to participate in annual State charitable fund-raising campaigns in this State.

New Jersey gross income taxpayers will be allowed to deduct from gross income cash charitable contributions that are made during the taxable year to a qualified charitable agency or fund-raising organization.  The agencies and organization will be those that are already qualified and participating in the annual New Jersey Employees Charitable Campaign under current law and regulations but will only include those groups that primarily provide health, welfare, or human care services to individuals in this State.

     To assist the Director of the Division of Taxation in determining  which agencies and organizations meet those criteria, the bill establishes a “Charity Advisory Council” comprising the Commissioners of Human Services, Children and Families, Health and Community Affairs (or their designees) and four public members, individuals actively engaged in providing health, welfare, or human care services to individuals in New Jersey, one each appointed by the Senate President, the Speaker of the General Assembly, the Senate Minority Leader, and the Assembly Minority Leader.  The council will annually advise the director.

 

·            Sections 6 through 12: Concern an increase in the petroleum products gross receipts tax rates, which, either by statutory or constitutional dedication, will finance funding for the State’s transportation infrastructure.

     Currently, the petroleum products tax is imposed at the rate of 2¾ percent on gross receipts from the first sale of petroleum products in New Jersey.  In the case of motor fuels, aviation fuels, and heating fuels (home heating fuels are exempt) this rate is converted to $0.04 per gallon.

     This bill increases the base rate on petroleum products other than highway fuel to 7 percent of gross receipts, and increases the base rate on highway fuel to 12.5 percent of gross receipts.

     The 12.5 percent tax on gasoline, gasoline equivalents and liquefied petroleum gas is converted to a cents-per-gallon rate based on the retail price of gasoline before the imposition of State and federal tax.  The 12.5 percent tax on diesel fuel, diesel fuel equivalents and kerosene (other than aviation grade kerosene, which is treated separately), is converted to a cents-per-gallon rate based on the retail price of number 2 diesel before tax.  Initially, the diesel and kerosene rate will be zero; on and after January 1, 2017 it will be 70 percent of the 12.5 percent rate, and on and after July 1, 2017 it will be taxed at the 12.5 percent rate. These cents-per-gallon rates can be adjusted quarterly, but cannot fall below the rates determined for the quarter beginning July 1, 2016.

     The bill provides a cap for the total tax on highway fuel, under the petroleum products gross receipts tax and the motor fuel tax.  The State Treasurer and the Legislative Budget and Finance Officer calculate an amount based on actual sales data from FY2016 as if taxed at the new tax rates; the 2016 motor fuel tax collections of highway fuel, plus the four cents per gallon petroleum products tax now in effect, plus the 23 cents per gallon new imposition under the petroleum products tax.  This is the highway fuel cap amount.

     Each 2017 through 2026 the Treasurer, using U.S. Energy Administration projections for gasoline price and consumption in New Jersey and other data, determines what tax rate should be imposed under the petroleum products tax on highway fuel so that the revenues from the motor fuels tax on highway fuel, the 4 cent per gallon petroleum tax and the percentage rate petroleum tax will result in the State receiving the highway fuel cap amount for the fiscal year, and the new rate takes effect on October 1.   The bill also has a “true-up” provision: if the rate is too high and the State overcollects, then in the next year the rate must be adjusted down to account for the overcollection, and if the State undercollects then the rate is increased to account for the undercollection.

      The 7 percent tax on fuel oil is converted to a cents-per-gallon rate based on the pretax retail price of number 2 fuel oil.  These rates can be adjusted quarterly, but cannot fall below the rates determined for the quarter beginning July 1, 2016.

     Initially, the highway fuels will be subject to an additional cents-per-gallon rate of four cents.  On and after July 1, 2017 the additional rate on diesel fuel and kerosene will be raised to eight cents per gallon.

     Aviation fuel (aviation gasoline and aviation grade kerosene) is currently subject to tax but use of the fuel by common carriers in interstate commerce is exempt except for the “burnout” portion used in takeoff.  This bill eliminates that exemption for common carriers and imposes tax on all aviation fuel.  The 7 percent tax on aviation fuel is converted to a cents-per-gallon rate based on the pretax prices paid by commercial consumers.  This rate can be adjusted annually, but cannot change more than 5 percent from the previous year.

 

·         Section 13:  Establishes a three-member review council, composed of the State Treasurer, the Legislative Budget and Finance Officer, and a third public member selected by both.

·          Requires that the Governor and the Legislature receive by January 15, 2020, the council’s report of the consensus estimate of the increase or decrease in State revenues caused by each section of this bill during the three prior fiscal years compared to the estimates at the time of enactment.

·         Requires the review council to monitor the actions of the Legislature on an ongoing basis for interference with the implementation of the provisions of the bill.  If implementation is impeded, (by, for example, extending a phase-in, freezing a phase-out at a particular level, or repealing one of the bill’s provisions), the council would certify this interference to the Director of the Division of Taxation. This certification triggers the cessation of imposition of one of the components of the petroleum products gross receipts tax, and collection of that part of the tax ends.

 

COMMITTEE AMENDMENTS:

      The amendments provide for the cap for the total tax on highway fuel, and delete the prior $3-per-gallon base cap on highway fuel.

      The amendments add a cross reference in section 13, which concerns the review council, to the section where the council’s certification triggers the cessation of imposition of one of the components of the petroleum products gross receipts tax, and make a technical correction to a grade of diesel fuel.

 

 

 

FISCAL IMPACT:

      The Office of Legislative Services estimates this bill will significantly reduce certain General Fund and Property Tax Relief Fund revenues, while also significantly increasing certain fuels tax revenues.  The net impact to total State revenues from these changes is estimated at a gain of between $1,091,200,000 to $1,128,200,000 in FY 2017 and declining thereafter to an estimated range of net revenue gains between $140,600,000 to $375,600,000 by FY 2022.  The ranges of net gains are estimated by comparing the better case of higher revenue gains less lower revenue losses and comparing the worse case of lower revenue gains less higher revenue losses.  The OLS notes that revenue losses are likely to exceed revenue gains in fiscal years soon after FY 2022. 

      The revenue decreases will be phased in over time, starting with an estimated $122,000,000 loss in FY 2017 and rising to an estimated range of revenue losses between $962,000,000 to $1,160,000,000 by FY 2022. 

      The revenue increases begin in FY 2017 with an estimated range of between $1,213,200,000 to $1,250,200,000 and stabilizing to an estimated range between $1,300,600,000 to $1,337,600,000 for FY 2019 and thereafter from the various fuels tax increases.