Budget compromise still working its way through Legislature on Sunday; some suggest snag over combined reporting

Trenton, New Jersey - State Capitol Building

The budget compromise reached Saturday night between Gov. Phil Murphy and the Legislature may have a hit a snag Sunday.

As of 1 p.m., the Senate and Assembly had not yet voted on a bill related to the compromise — specifically, a bill sponsored by Sen. Paul Sarlo (D-Wood-Ridge) that details unitary combined reporting.

On Saturday night, Senate President Steve Sweeney (D-West Deptford) and Assembly Speaker Craig Coughlin (D-Woodbridge) announced early morning voting sessions Sunday, starting at 8 a.m.

“We will be caucusing at 7 a.m. and we will be voting at 8 a.m.,” Sweeney said. “We have to get our bills ready.”

But the Senate is in recess as of Sunday afternoon, likely because legislators are facing fierce pushback about the combined reporting aspect of the budget bill.

On Saturday night, Murphy said combined reporting “ensures companies cannot park profits in other lower-income states.”

In addition, it helps the state defend itself against the litigation that is already being threatened by corporations, according to New Jersey Policy Perspective analyst Sheila Reynertson.

This is because, as part of the deal, New Jersey also will tax offshore repatriated assets — that is, profits parked offshore that were made in New Jersey.

“It would protect New Jersey from litigation when it comes to the repatriation of offshore assets that they are expecting,” she said. “They would have the evidence that they have a right to tax some of that profit that was made in New Jersey. But large, multinational corporations are looking to litigate that. To avoid that, combined reporting is that firewall.

“So, if it does end up in litigation, any revenue the state hopes to get will be put off, on hold, as it sits in court and gets litigated.

“There are two major reasons to (include combined reporting) within this budget scope. Long-term, combined reporting is smart policy for New Jersey. Twenty-five other states have combined reporting.”

At the end of the day, Reynertson said it helps fill the state’s coffer in perpetuity.

“It tightens up the CBT surcharge’s ability to capture that revenue that it hopes to capture,” she said.

That also includes ensuring that notorious tax havens, used by the likes of Kenilworth-based Merck and New Brunswick-based Johnson & Johnson, are legitimate, and not just stashing cash, she said.

Corporations with multistate divisions could potentially sue New Jersey over the provision, Reynertson said.

Gary Bingel, EisnerAmper partner-in-charge of the state and local tax group, said multistate companies are not the only ones that may be impacted by combined reporting.

The combined income also would impact companies that have multiple divisions in New Jersey, he said.

Bingel said it is likely to hurt multistate companies because they will not be able to shift income to other states, and they will have to combine all income in the state among different entities.

So, if a corporation has 10 different companies, each of which made a specific amount, rather than tax them all equally, they can currently get taxed per entity, he said. This results in the ability to pay less for companies that make less. Instead, the lump sum would be taxed for income in New Jersey, Bingel said.

For a New Jersey-only company, the taxes they pay could result in more revenues for the state or lower revenues for the state — so, there is no clear-cut impact.

Bingel said that, if a corporation is combining its income in the state, and some units are making money while others are losing, the net income could result in having to pay lower taxes.

And that’s not considering addbacks, which companies use as a way to reduce their payment to the state, based on taxes paid to other states.

“Like any tax, there are winners and losers,” Bingel said.

It’s a complex situation with many nuances that also need to be factored in, he said.

Reynertson dismisses the argument that the policy is complex.

“This is a very common policy that 92 percent of the large multistate corporations that operate in New Jersey are already familiar with,” she said.

The difference is that Sarlo has publicly acknowledged his bill is imperfect, after introducing it in January. He has suggested cleaning up the bill after it is passed.

The problem with that is the bill in its current form would apply to the next calendar year, but is also retroactive to previous years. That is a hefty burden on the state’s Division of Taxation, which is seeking an upgrade to its existing software system.

And companies would need at least two years to adapt to any change, Bingel said.

The mention of combined reporting Saturday took business groups by surprise.

Tom Bracken, the CEO and president of the New Jersey Chamber of Commerce, told ROI-NJ on Sunday morning that he had thought combined reporting was off the table because it was not mentioned in the final week.

Bracken said he is now hearing it’s an issue that is requiring negotiation.

Regina Egea, president of Garden State Initiative, said in an email Sunday morning that the budget deal was a bad one.

“Taxpayers and job creators are once again being treated like a no-limit credit card, which they will cut up when they flee to other states,” she said.

Egea, a former top official in Gov. Chris Christie’s administration, said the immediate consequences are apparent.

“The worst business climate in the nation continues a downward spiral,” she said. “With higher business taxes, we have created more incentives for job creators to relocate out of state.

“The exodus of taxpayers, especially those who comprise the majority of the 1 percent who contribute the 40 percent of our total income taxes collected, will continue unabated and intensify.”

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