SENATE BUDGET AND APPROPRIATIONS COMMITTEE

 

STATEMENT TO

 

[First Reprint]

 

ASSEMBLY COMMITTEE SUBSTITUTE FOR

 

ASSEMBLY COMMITTEE SUBSTITUTE FOR

ASSEMBLY, Nos. 671 and 495

 

with Senate committee amendments

 

STATE OF NEW JERSEY

 

DATED: DECEMBER 15, 1997

 

      The Senate Budget and Appropriations Committee reports favorably Assembly Bill Nos. 671 and 495 ACS ACS (1R) with amendments.

      Assembly Bill Nos. 671 and 495 ACS ACS (1R), as amended, establishes New Jersey gross income tax advantages for employer or employee contributions to “medical savings accounts,” defined identically to medical savings accounts in the federal “Health Insurance Portability and Affordability Act of 1996,” Pub.L.104-191 (26 U.S.C. s.220 et al.). The bill also requires the New Jersey Individual Health Coverage Program Board to adopt modifications to one or more plans as the board determines are necessary to make available "high deductible health plans" compatible with the federally qualified medical savings accounts. (P.L.1997, c.146 enacted in June, 1997 includes a similar requirement for the New Jersey Small Employer Health Benefits Program Board.).

      Recently enacted federal law allows those employees of small employers and the self-employed who are covered by a “high deductible” health plan to establish medical savings accounts. Some of the contributions to these savings accounts can be excluded or deducted from the federal taxable income of the employee. Funds withdrawn to pay eligible medical expenses remain excluded from taxation; funds withdrawn for other purposes are subject to federal taxation and penalties.

      The federal program is a pilot program, limited so that the total number of employees in the United States who will be allowed the federal tax advantages of medical savings accounts may not exceed 750,000. This bill provides parallel New Jersey gross income tax exclusions and deduction for employees participating in the federal pilot program. The bill exempts contributions to federally qualified medical savings accounts from New Jersey gross income taxation if the contributions are exempt from federal taxation; exempts withdrawals from accounts from State taxation if the withdrawals are exempt from federal taxation; and subjects withdrawals to State taxation if the withdrawals are subject to federal taxation.

 

COMMITTEE AMENDMENTS

      The committee amended the bill to limit participation in the State advantages to those qualified to participate in the original pilot federal program.

 

FISCAL IMPACT

      No specific information is available on how many New Jersey gross income taxpayers will be among the 750,000 federal income taxpayers, but if New Jersey residents qualify in the same proportion as all other federal taxpayers, it would be expected that about 24,500 New Jersey residents would qualify for federal benefits and therefore for New Jersey income tax benefits.

       However, this does not lead to any definite conclusions about the State revenue impact of the bill. Some taxpayers already have tax-excluded health plans, and the conversion to use of medical savings accounts by their employers could reduce business expenditures without any reduction in gross income tax revenue. At the extreme, if every one of 24,500 taxpayers changed health plans to defer $3,750, then the revenue impact might be a gross income tax loss of as much as $3 million for that year; however data suggest only some of the taxpayers using medical savings accounts will actually reduce their taxable income, and those who do reduce taxable income will select salary reductions in the range of $1,000 to $2,000 annually. Therefore, the expected revenue impact is a small reduction in gross income tax revenues, of unknown magnitude but is expected to be substantially less than the $3 million maximum.