Dueling news conferences, but signs of compromise in Trenton budget battle

By Anjalee Khemlani
Trenton | Jun 26, 2018 at 6:01 am

The annual budget battle in Trenton is becoming more of a debate over numbers than a war of words.

Both sides — Gov. Phil Murphy and the leaders of the Legislature — said Monday that they are looking to strike a balance on differing taxes, and the anticipated revenues from them.

Murphy announced he was willing to consider a restructured corporate business tax, along with increasing his projections of the online sales tax — as a result of the U.S. Supreme Court decision in a South Dakota case last week — to about $125 million.

But he stopped short of any sign of acquiescing there Monday at a news conference.

Murphy provided a handout to reporters that he said showed the Legislature’s budget was off-target by at least $855 million, resulting in a deficit of at least $104 million.

That has to do, in part, with the corporate business tax revenue projections, as well as what the governor called overestimated, unachievable or unfunded items.

The Legislature passed a new bill on the corporate business tax Monday, which will reduce its revenue projection, but by how much is still unclear.

On Thursday, as part of the budget package, the Legislature passed a bill that would impose a 2.5 percent hike on companies with net revenues from $1 million to $25 million, to 11.5 percent, and a 4 percent hike, to 13 percent — the highest in the country — for companies with net revenues over $25 million. The bill also taxed repatriated assets at 9 percent. All of those plans would expire after two years.

The new bill, which passed the Senate 21 to 17, and the Assembly 41 to 34, shrinks the net from which the state is capturing funds, but keeps the two-year expiration.

Also, as reported Friday, it eliminates the repatriation tax, changes the definition from net revenue to allocated revenue — meaning only the amount earned in New Jersey — and allows companies to claim tax credits towards what they would owe.

In addition, in place of the repatriation fee, the state will tax 10 percent of dividends from the allocated income, retroactive to 2017, and reduce that to 5 percent for the subsequent year.

This is likely to decrease the amount of tax revenue that the Office of Legislative Services projected — up to $800 million — by a couple million dollars, according to several experts.

In his handout Monday, Murphy projected a shortfall of at least $233 million on the corporate business tax.

The original bill was projected to bring in about $805 million, but business leaders previously told ROI-NJ that was inaccurate — the original bill would have given the state billions of dollars of revenue.

Tax experts, who are also speaking with the Legislature, said the corporate business tax can be circumvented through accounting strategies like deferred income and shifting income to another state. But public companies are subject to audited accounting rules, and would be unlikely to delay income because it would impact publicly reported earnings.

And the Legislature remains confident that the $800 million is the accurate estimate, with some members even saying the estimate may be less than what the state will actually gain.

That doesn’t align with the Treasury’s revenue projections and realizations over the past 10 years.

In fiscal years 2008 through the current fiscal year, the Treasury has reported a decrease in the amount of revenues realized, compared with the estimates, in four of the last 10 years. The total deficit ranges from $20 million to $300 million.

That could be a result of overestimation, or it could be a sign of the decrease in businesses.

But there is equal pushback on Gov. Phil Murphy’s millionaire’s tax, which also affects some small businesses. He is proposing an increase from 8.97 percent to 10.75 percent.

The state treasurer has estimated the tax would rake in $765 million this year for the state.

The difference between the taxes, according to McCarter & English tax partner Michael Guariglia, is that the state can rely on the personal income tax with more certainty than it can the business tax.

That’s because companies can shift around the income to make it appear as if the allocated income is in another state, or defer income until the business tax expires — both of which would result in a significant loss of revenue for the state, Guariglia said.

But others have said that the millionaire’s tax is an equally unreliable tax, because the amount millionaires make is often based on bonuses and other fluctuating metrics — so there is no way to determine the actual revenue that can be realized from that pool of residents. Nonresidents might also be able to avoid the full impact of the tax with a financial planning strategy.

Murphy said his criticism of the Legislature’s budget is a result of the information Treasurer Elizabeth Muoio has that the OLS does not.

“Only OMB (Office of Management and Budget) and Treasury have access to the tax rolls and the tax realities,” Murphy said. “That’s a fact, that’s not taking shots at OLS by any means.”

He spoke to a crowded room of reporters and lobbyists, flanked by Muoio and Lt. Gov. Sheila Oliver.

Assembly Speaker Craig Coughlin (D-Woodbridge) held a news conference earlier in the day reiterating that the OLS projections can be trusted.

“The Legislature has fulfilled its constitutional obligation and duty,” he said.

Coughlin was joined by Assembly Majority Leader Lou Greenwald (D-Voorhees) and Assembly Budget Chairwoman Eliana Pintor Marin (D-Newark).

“I have had lengthy conversations with OLS, where they have disagreed with revenue projections. But I have debated them intellectually where I have gotten to a point where they’ve been able to prove their numbers to me in a way that is verifiable,” Greenwald said.

The business community has remained opposed to either tax, despite providing the Legislature with experts from around the state to help craft the legislation.

“We brought those people in to talk to them about the ramifications to that group, the corporations, on the increase in the corporate business tax,” said New Jersey Chamber of Commerce CEO and President Tom Bracken.

“In the beginning, they said, ‘If this (passes) the way it is, we’re not going to lay off people, we’re not going to close up shop,'” said Michael Egenton, the chamber’s vice president. “‘But we’re not going to invest here.'”

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Anjalee Khemlani | akhemlani@roi-nj.com | @anjkhem