LEGISLATIVE FISCAL ESTIMATE TO

[First Reprint]

SENATE, No. 231

STATE OF NEW JERSEY

DATED: May 10, 1996

      Senate Bill No. 231 (1R) of 1996 provides fixed corporation business tax rates for subchapter S corporations: a 2% rate for corporations with annual income in excess of $100,000 and a 0.5% rate 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 privilege period 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, a 0.63 percentage point reduction.

      Based on information from a data sample of corporation business taxpayer corporate income analyzed by the Department of the Treasury in 1993 and on estimates made by the Office of Legislative Services (OLS) from national trends in subchapter S corporation activity, the bill could result in a decrease in corporation business tax revenues of $11 million annually. This is a maximum figure that would only be reached if all qualifying S corporations elected New Jersey S corporation status. The OLS Services has no information as to the percentage of qualifying S corporations electing New Jersey S corporation status.

      This legislative fiscal estimate has been produced by the Office of Legislative Services due to the failure of the Executive Branch to respond to our request for a fiscal note.

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