ASSEMBLY APPROPRIATIONS COMMITTEE

STATEMENT TO

[Second Reprint]

SENATE, No. 231

STATE OF NEW JERSEY

DATED: OCTOBER 7, 1996

      The Assembly Appropriations Committee reports favorably Senate Bill No. 231 (2R).

      Senate Bill No. 231 (2R) 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.

      This bill is identical to Assembly Bill No. 1827 as amended by the committee.

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.