SENATE BUDGET AND APPROPRIATIONS COMMITTEE

STATEMENT TO

[First Reprint]

SENATE, No. 231

STATE OF NEW JERSEY

DATED: MAY 2, 1996

      The Senate Budget and Appropriations Committee reports favorably Senate Bill No. 231 (1R).

      Senate Bill No. 231 (1R) 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%). Therefore, 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 reported, this bill is identical to Assembly Bill No. 1827 of 1996 (DeSopo/Crecco).

FISCAL IMPACT

      The Office of Legislative Services (OLS) estimates the enactment of this bill will result in a decrease in corporation business tax revenues of $11 million annually. This estimate is based on a sample of corporate business taxpayer income analyzed by the Department of Treasury in 1993 and a review of national trends in subchapter S corporation activity. This is a maximum figure that would be reached of all qualifying S corporations elected New Jersey S corporation status.