FISCAL NOTE TO

[First Reprint]

ASSEMBLY, No. 1093

STATE OF NEW JERSEY

DATED: NOVEMBER 14, 1996

      Assembly Bill No.1093 (1R) of 1996 provides taxpayers a credit against the gross income tax for expenditures made by homeowners to remove or replace a home heating oil or motor fuel underground storage tank. The bill permits the credit to be taken for all costs associated with the removal of an underground storage tank, or its replacement with a corrosion-resistant or above-ground storage tank. The bill also permits taxpayers to take a credit for any costs associated with remediating contamination that occurred or was discovered at the time of the tank's removal or replacement. The credit contained in this legislation is not refundable and may not be carried forward into future tax years. This credit expires five years after enactment.

      The Division of Taxation was unable to make a firm estimate of revenue losses associated with this legislation, but calculated that the minimum loss will be between $1.6 million and $2 million annually. According to the division, between 800 and 1,000 cases of underground storage tank removals/replacements are completed annually in New Jersey. Simple tank removals cost between $7,000 and $10,000, more complex removals that involve ground water contamination cost between $50,000 and $200,000 per incident.

      On most occasions, the cost of removing/replacing an underground tank will exceed a taxpayer's gross income tax liability. Because this credit is not refundable and may not be carried forward, the cost of each individual credit cannot exceed a taxpayer's liability in the year in which the cost is incurred. According to the division, the average gross income tax liability for New Jersey homeowners is $2,000. This credit will offset only a portion of most underground tank removal/replacement costs. The division calculates its $1.6 million minimum loss estimate by multiplying the minimum number of cases by the average tax liability.

      According to the division, this tax credit may create an incentive for homeowners to increase the rates at which their underground tanks are removed/replaced, increasing the cost of this bill. The division asserts that up to 20,000 taxpayers may take advantage of the credit resulting in a $40 million loss in gross income tax revenue.

      The Office of Legislative Services (OLS) does not endorse the methodology or conclusions contained in this analysis. The OLS notes that it is not possible to reliably estimate the fiscal impact of this legislation because the cost of this bill is driven primarily by the number of taxpayers claiming the credit and each claimant's tax liability. Because tax liability is dependent upon a taxpayer's level of income, it is possible for two identical underground storage tank removals, for which their homeowners are charged the same price, to have drastically different costs for the State, depending on the income levels of their owners.

      For example, Taxpayer A is a senior citizen with $25,000 of income of which $18,000 is from social security. When he has his underground storage tank replaced at a cost of $10,000 in preparation to sell his home, Taxpayer A will receive no benefit from this credit because he has no tax liability to which a credit may be applied. However, if Taxpayer B, with a gross income of $230,000, chooses to remove her nearly-identical tank, also at a cost of $10,000, she receives a $10,000 reduction on her gross income tax because her tax liability exceeds the cost of the tank replacement.

      The OLS also disputes the division's assertion that this legislation may promote up to 20,000 homeowners to apply for this credit. To reach that number, the current underground storage tank replacement/removal rate of 1,000 per year would have to expand by 95 percent. There is little reason to suspect that this credit would create such a large increase in the number of cases; however, some measure of growth can be expected. Instead, the OLS suggests that number of homeowners who apply for this credit will be substantially smaller than 20,000; however, most will be high income homeowners and the value of each credit will exceed the average tax liability anticipated by the division.

      This legislation offers little benefit to low and middle income homeowners who do not have the tax liability to offset the cost of a tank removal/replacement. Therefore, the OLS anticipates that removal/replacement rates among low and middle income homeowners will be unaffected by the bill. Higher income homeowners, who have sufficient tax liability to offset a tank removal/replacement, have an economic incentive to take advantage of the credit contained in this bill. They may use the credit as an opportunity to upgrade an old tank or to switch to an alternative fuel as a prevention against potential contamination problems in the future. Therefore, the OLS anticipates that growth in tank removal/replacement rates as a result of this bill to be concentrated among high income homeowners potentially increasing the cost of this legislation substantially.

      Since the income and number of credit claimants is such a strong predictor of the cost to the State of this credit, it is not possible to reliably estimate the overall impact of this bill without presenting income level data and estimates of the number of credit claimants. The division's methodology, which uses an average tax liability and assumes that the economic incentives contained in this bill will be equal for all homeowners regardless of income, is not a reliable predictor of the potential costs to the State. The division's overall estimate may, in fact, be accurate; however, there is an equal likelihood that the actual cost of this bill will be substantially above or below their prediction.

      The division also notes that any resident taxpayer is eligible for this credit, including taxpayers with incomes from sole proprietorships, partnerships and Subchapter S corporations. As a result, the credit is available for some businesses, as well. However, the division offered no estimate of the fiscal impact. The OLS has no data to estimate the impact but concurs that it could produce an increase in the revenue losses associated with this bill.

This fiscal note has been prepared pursuant to P.L.1980, c.67.