ASSEMBLY APPROPRIATIONS COMMITTEE

STATEMENT TO

ASSEMBLY, No. 1827

with committee amendments

STATE OF NEW JERSEY

DATED: OCTOBER 7, 1996

      The Assembly Appropriations Committee reports favorably Assembly Bill No. 1827, with committee amendments.

      Assembly Bill No. 1827, as amended, provides fixed tax rates for S corporations, 2% for corporations with annual income in excess of $100,000 and 0.5% for corporations with annual income of $100,000 or less.

      Under subchapter S of the federal Internal Revenue Code, certain business corporations with 35 or fewer shareholders may elect special tax treatment for most of their corporate income. Currently, New Jersey allows corporations that have elected the federal S corporation treatment to elect special New Jersey taxation, including a reduced tax rate. The corporation business tax rate for S corporation income is currently determined as the difference between the corporation business tax rate (currently 9% for corporations with annual income in excess of $100,000 and 7.5% for corporations with annual income of $100,000 or less) and the highest marginal rate under the New Jersey gross income tax (currently 6.37%), so the S corporation tax rate for the 1996 tax year will be 2.63% for corporations with annual income in excess of $100,000 and 1.13% for corporations with annual income of $100,000 or less.

      The bill sets the tax rate for S corporations at 2% for corporations with annual income in excess of $100,000 and 0.5% for corporations with annual income of $100,000 or less for tax years 1997 and thereafter.

      As amended, this bill is identical to Senate Bill No. 231 (2R).

FISCAL IMPACT:

      The New Jersey Division of Taxation has estimated, based on tax information available to it, that the potential fiscal effect of the bill is a loss in corporation business tax revenue of $5 million for FY1997 and a loss of $13 million for FY1998.

COMMITTEE AMENDMENTS:

      The amendment changes the privilege periods to which the new rates will apply from privilege periods beginning on or after July 1, 1996 to those ending after June 30, 1997. This technical change avoids having the two new tax rates appear on the 1996 tax form; the Division of Taxation traditionally expresses tax years in terms of when a corporate tax period ends rather than when it begins.