NJ Governor Murphy’s Revised FY 2021 Budget Includes Several Tax Increases
Gibbons Corporate & Finance News - Legislative Tax Alert
August 28, 2020
On Tuesday, August 25, 2020, New Jersey’s Governor Phil Murphy released his revised Fiscal Year 2021 budget proposal. This proposal updates the Governor’s initial budget proposal released on February 25, 2020, and has been drafted in response to an unprecedented $5.6 billion budget shortfall triggered in large part by the coronavirus pandemic and accompanying lockdown.
The proposal contains approximately $1 billion in tax increases, which are paired with proposals for over $1 billion in spending cuts and $4 billion in emergency borrowing to make up the shortfall. The tax provisions show how the Governor would like to raise a portion of the funds necessary to balance the final budget for FY 2021, which will be the short fiscal year running from October 1, 2020 through June 30, 2021.
Perhaps the most noteworthy proposal is a surcharge on high income individuals who have benefited from the Section 199A 20% pass-through deduction enacted as part of the federal 2017 Tax Cuts and Jobs Act. A 5% surcharge would be applied to certain federally qualified business income (QBI) for individuals with income greater than $1 million. The IRS defines QBI as the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.
The Governor also seeks to expand the Millionaire’s Tax, lowering the threshold for the top 10.75% marginal income tax rate from $5 million to $1 million, effective beginning in the 2020 tax year. The Governor’s office projects this change will impact more non-New Jersey residents than in-state residents.
The temporary Corporate Business Tax (CBT) surtax dropped to 1.5% in January of 2020. The proposed budget returns the CBT surtax to the prior rate of 2.5% and seeks to make it permanent.
The proposed budget contains several other tax increases, including but not limited to: raising the cigarette tax from $2.70 to $4.35 per pack, raising firearms and ammunition taxes and fees, increasing the Health Maintenance Organization assessment from 3% to 5%, removing an exemption and cap from sales and use tax for new and used boats, and restoring the sales and use tax exemption on limousine services.
While there is no guarantee that any of these specific proposals becomes law, together they serve as the starting point in the Governor’s negotiations with the Assembly to craft the budget for FY 2021.