New Jersey "Millionaire's Tax" and Other Tax Increases
Corporate & Finance Alert
July 8, 2004
1. The “Millionaire’s Tax”
On June 28, 2004, New Jersey’s Governor James E. McGreevey signed into law legislation that increased New Jersey’s highest personal income tax rate from 6.37% to 8.97% on persons with income of more than $500,000.
The 2.6% rate increase is retroactive in that it is effective January 1, 2004. The 8.97% rate applies to income over $500,000 for all taxpayers regardless of whether they file as married filing a joint return, head of household, surviving spouses, or unmarried individuals. Estates and trusts are also subject to the new rate.
The new tax rate is enforced in part by a withholding tax of 12% on salaries and wages in excess of $500,000 earned in a given taxable year. This new withholding tax is to be put into place by the New Jersey Division of Taxation by no later than September 1, 2004.
The Governor’s office had estimated that the new tax would raise approximately $800 million in new revenues for the state from approximately 28,500 taxpayers. The funds raised will then be used to make rebates to approximately 460,000 senior citizen homeowners and 1.4 million non-senior homeowners under the state’s Homestead Property Tax Rebate program that will now include the NJ Saver program. The net effect of the new tax will be to more than double the total amount distributed by these programs from about $700 million in fiscal year 2004 to $1.5 billion in fiscal year 2005 that ends June 30, 2005.
Other important tax increases that were signed into law by the Governor on June 30, 2004 consist of the following.
a. 50% Moratorium on Use of Net Operating Losses (A. 3110)
Normally, New Jersey corporate taxpayers can carry forward net operating losses for up to seven years. During the last two calendar years of 2002 and 2003, purely to raise revenue, New Jersey had prevented corporations from utilizing net operating losses (NOLs) generated in prior years. Because of this moratorium, the loss carryover period had been extended for up to two years.
Under new legislation, corporate taxpayers will only be allowed to use fifty percent (50%) of the losses that they could otherwise have used in calendar years 2004 and 2005. To reflect this further limitation, the loss carryover period has been extended for up to two more years to the extent the moratorium prevented use of NOLs. This NOL legislation is expected to raise $140 million annually over the next two years.
b. Suspension of All State Licenses of Tax Debtors (A. 3131)
Effective immediately, the Director of the Division of Taxation is to establish a tax clearance process through which the Director is to require all State licensing agencies to suspend state licenses of licensees if they have an outstanding state tax liability for which the licensee no longer possesses a right of appeal. For purposes of this new compliance measure, a license includes any State agency permit, certificate, approval, registration or similar form of permission to engage in a profession, trade, business or occupation (but not a certificate of incorporation), whether issued by the Judicial, Legislative or Executive branch of the State. There is specifically no right to a hearing prior to the license suspension.
c. Disallowance of Certain Favorable Federal Depreciation Rules (A. 3111)
For both the corporation business tax and gross income tax, instead of relying on federal income tax law to determine the amount of allowable depreciation for business property, the new law will determine allowable depreciation by ignoring certain taxpayer-favorable changes previously adopted in the last few years by the federal government, including “bonus” depreciation. The savings from this decoupling provision, which will generate more complexity for taxpayers, will be used in part to increase certain business retention credits and incentives.
d. Increases in Realty Transfer Taxes (A. 3115)
Two new increases on realty transfer taxes have been approved. The first would increase the realty transfer tax pursuant to a new incremental schedule named the “general purposes fee” on the value of all transferred realty in excess of $350,000. The second would require that buyers of homes valued at more than $1 million pay an additional amount of realty transfer tax of 1% of the full sales price. Combined, these two provisions, which take effect for transfers on or after August 1, 2004, are expected to raise $98.5 million annually.
e. Estimated Tax on Nonresident Sellers of Real Estate (A. 3128)
Nonresident individuals, trusts and estates that recognize gain on the sale of New Jersey real estate will be required to pay estimated New Jersey gross income tax for sales after August 1, 2004. The withholding tax will equal 8.97% of the amount of the gain (which gain cannot be less than 2% of the deed consideration). The estimated tax must be paid to the county recording officer in order to record the new deed. Refunds of excess estimated tax will be available to a nonresident upon filing of a gross income tax return.
To fund the Health Care Subsidy Fund, the new law adopts several new taxes. First, the State will impose an annual assessment of 3.5% of the gross receipts of each licensed ambulatory care facility operating in New Jersey with gross receipts of at least $300,000, with a maximum assessment of $200,000. This measure is expected to raise $31 million.
Another measure will impose a “special interim assessment” on health maintenance organizations in the amount of 1% of the net written premiums received by each HMO. This assessment is expected to raise $55 million annually.
A fourth bill will transfer $100 million in payroll taxes from the unemployment compensation fund to the Health Care Subsidy Fund in fiscal year 2005.
g. New $0.90 Monthly Tax on Cell Phones and Land Lines (A. 3112)
A bill signed on June 30th imposes a fee of $0.90 per month on (i) each mobile voice grade access service number and (ii) each voice grade access service line, effective for phone billing periods ending on or after July 1, 2004. This tax is expected to raise $33 million annually to fund costs of the 9-1-1 System and Emergency Response Trust Fund Account.
h. New 6% Gross Receipts Tax on Cosmetic Medical Procedures (A. 3125)
Another of the new bills imposes a 6% gross receipts tax on cosmetic medical procedures, which are defined as medical procedures directed at improving the patient’s appearance without meaningfully promoting a bodily function or preventing or treating a disease. Although cosmetic dentistry is taxable, reconstructive surgery or dentistry is not. Reconstructive surgery or dentistry includes “any surgery or dentistry performed on abnormal structures caused by or related to congenital defects, developmental abnormalities, trauma, infection, tumors or disease, including procedures to improve function or give a more normal appearance.” The bill is expected to raise $26 million annually.
i. Miscellaneous Tax Increases and Changes
1. Increased Cigarette Tax (A. 3113). Assembly bill 3113 will increase the cigarette tax by $0.35 a pack, from $2.05 to $2.40 per pack, effective July 1, 2004. This will raise about $100 million annually.
2. Increased Motor Vehicle Insurance Surcharges (A. 3114). Effective June 30, 2004, the motor vehicle insurance surcharge imposed on drivers who have accumulated six or more motor vehicle penalty points is increased from $100 to $150. In addition, a person who is convicted of an “unsafe driving” offense will be subject to a $200 surcharge for the first offense, and then a $350 surcharge for the second offense and a $500 surcharge for a third offense, if committed within ten years of the prior offenses.
3. Taxes Related to Motor Vehicles (A. 3107 and A. 3106). New car buyers or lessees will be required to prepay four years of registration fees at the time of purchase or lease, beginning October 1, 2004. In addition, a new tax of $1.50 will be imposed effective immediately on the sale of all new tires for motor vehicles. This tire tax will fund a Tire Management and Cleanup Fund.
4. Environmental Taxes (A. 3117 and A. 3118). Retroactive to January 1, 2004, the Spill Fund tax will be increased from 1.5 cents per barrel to 2.3 cents per barrel on petroleum products and certain other hazardous substances. For certain other hazardous substances the tax is increasing from 1% to 1.53% of the fair market value of the substance. In addition, there will be an increase in the surcharge on toxic air emissions ranging from 10 cents a pound to $10 a pound, depending on the substance emitted.
5. Phase Out of Tax on Casino Complimentaries (A. 3120). The current tax of 4.25% on casino complimentaries, such as food, drinks and lodging, will be phased out over the next several years so as to be eliminated by June 30, 2009.