LEGISLATIVE FISCAL ESTIMATE
SENATE, No. 3128
STATE OF NEW JERSEY
220th LEGISLATURE
DATED: DECEMBER 5, 2022
SUMMARY
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Synopsis: |
Concerns tax treatment of individual’s income earned outside state of residence. |
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Type of Impact: |
Indeterminate net impact on State revenues. Increase in State costs. |
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Agencies Affected: |
Department of the Treasury. Economic Development Authority. |
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Office of Legislative Services Estimate |
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Fiscal Impact |
FY 2024 and Annually Thereafter |
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State Revenue Impact |
Indeterminate Net Impact |
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State Cost Increase |
Up to $10,000,000 |
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· The Office of Legislative Services (OLS) concludes that the bill will have an indeterminate net impact on annual State revenues. Additional income tax revenues collected by the State due to the implementation of a “convenience of the employer” test may be offset by tax credits awarded to New Jersey resident taxpayers who are refunded taxes paid to other states or jurisdictions under certain circumstances. The OLS lacks the informational basis to project the magnitude of the two countervailing State revenue effects.
· The bill establishes an annual $10 million new employee relocation grant program to be administered by the Economic Development Authority.
BILL DESCRIPTION
The bill establishes a “convenience of the employer” test for residents of states that impose a similar test. This means that if an employee’s state of residence uses a convenience of the employer test when determining the source of income of nonresidents, and the employee works for a New Jersey employer from a location in the employee’s state of residence for the employee’s own convenience, then the New Jersey employer must include those days as days worked in New Jersey and withhold income tax accordingly.
The bill also provides a refundable gross income tax credit to resident taxpayers who: (1) pay any income tax or wage tax imposed for the taxable year by another state of the United States, or political subdivision of such state, or by the District of Columbia; (2) apply for and are denied a refund from such state or jurisdiction for taxes paid to that state or jurisdiction on income derived from services rendered while the resident taxpayer was within New Jersey; (3) file an appeal with a tax court or tribunal through which the resident taxpayer formally protests the denial of the refund request; and (4) obtain a final judgement from the tax court or tribunal in the resident taxpayers’ favor. The credit would be equal to 50 percent of the amount of taxes that are refunded by such tax court or tribunal and allocated to New Jersey.
Finally, the bill establishes a pilot program, to be administered by the Economic Development Authority, through which the authority will provide grants to businesses to assign their New Jersey resident employees to New Jersey locations. A business is eligible for a grant if the business has 25 or more full time employees and is legally domiciled in another state. The bill caps the sum of all grants awarded in any fiscal year at $10 million and makes an initial one-time $10 million appropriation from the General Fund for the grant program.
FISCAL ANALYSIS
EXECUTIVE BRANCH
The OLS has not received a fiscal estimate for this bill from the Executive. The Department of the Treasury has provided information which enhances OLS understanding of the bill.
OFFICE OF LEGISLATIVE SERVICES
The OLS concludes that the bill will have an indeterminate net impact on State revenues and result in an increase in State costs of up to $10 million in the first year of implementation.
Convenience of the Employer Test. Under current law, nonresidents are taxed on all income sourced to New Jersey. For nonresidents earning income in New Jersey and another state, their New Jersey gross income tax liability is based on the percentage of their total income that comes from New Jersey. Income is sourced based on where the service or employment is performed. Compensation paid for work performed by nonresident employees who are physically present in New Jersey is subject to tax. The amount of tax due is calculated using a method of allocation which takes into account the number of days a nonresident taxpayer works in New Jersey, the total number of days the nonresident taxpayer worked in the entire year, and their total income for the entire year.
New Jersey currently does not have a convenience of the employer test. If nonresident employees are working for a New Jersey employer only remotely from their home state, the compensation paid to the employees would not be subject to the gross income tax because the work is not being performed in New Jersey. The enactment of a convenience of the employer test would allow New Jersey to tax income earned by these nonresident taxpayers even though they are not physically present in New Jersey, thereby generating additional State gross income tax revenues. Information on the total amount of untaxed income earned by these employees (or nonresident taxpayers) and the amount of additional gross income tax revenue that may be generated by taxing that income is unknown.
New Tax Credit for Resident Taxpayers. The bill establishes a new tax credit to be awarded to New Jersey resident taxpayers who file successful legal actions against other states that collect taxes paid on income derived from services rendered while the resident taxpayers were within New Jersey. The tax credit is equal to 50 percent of the amount of taxes paid to another jurisdiction that are refunded to the taxpayer by a tax court or tribunal and allocated to New Jersey. The OLS cannot predict the magnitude of the State revenue loss because the amount of tax credits awarded will be driven by the amount of taxes refunded to New Jersey taxpayers by tax courts and tribunals in other states.
Under current law, New Jersey taxpayers are allowed a credit against their gross income tax liability for taxes paid to other jurisdictions when their income is subject to tax by both New Jersey and the outside jurisdiction. The credit is equal to the greater of the tax paid to the other jurisdiction or a calculated amount representing the proportion of taxpayer’s income that is subject to tax in the other jurisdiction as compared to income from all sources which is taxable to a New Jersey resident. According to the Department of the Treasury, if a taxpayer obtains a final judgement from the tax court or tribunal and is refunded taxes paid to another state or jurisdiction, then the tax credit initially awarded to the taxpayer for taxes paid to another jurisdiction would be disallowed because the income sourced to another state (that served as the basis for the initial credit) would be sourced to New Jersey instead. This income would not be subject to taxation by the other state; it would be subject to the New Jersey gross income tax. The taxpayer would have to file an amended tax return to apply for the new credit.
Employee Relocation Grant Program. The bill establishes an annual $10 million grant program to be administered by the Economic Development Authority, through which the authority will provide grants to businesses that assign employees, who are New Jersey residents assigned to locations outside of the State, to New Jersey locations. To be eligible for a grant, a business must have 25 or more full-time employees and be legally domiciled in another State. The grant award would equal the net revenue realized by the State through New Jersey gross income taxes paid by resident employees who are reassigned by an eligible business to a New Jersey location, up to a maximum of $100,000. Given that this is a new program and that the OLS can predict neither how many eligible businesses will relocate employees to New Jersey nor the amount of gross income tax revenue paid by those residents, the total amount of grants that will be awarded is unknown.
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Section: |
Revenue, Finance, and Appropriations |
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Analyst: |
Principal Fiscal Analyst |
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Approved: |
Thomas Koenig Legislative Budget and Finance Officer |
This legislative fiscal estimate has been produced by the Office of Legislative Services due to the failure of the Executive Branch to respond to our request for a fiscal note.
This fiscal estimate has been prepared pursuant to P.L.1980, c.67 (C.52:13B-6 et seq.).