LEGISLATIVE FISCAL ESTIMATE
[First Reprint]
ASSEMBLY COMMITTEE SUBSTITUTE FOR
ASSEMBLY, No. 4455
STATE OF NEW JERSEY
221st LEGISLATURE
DATED: JULY 3, 2025
SUMMARY
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Synopsis: |
Allows exemption from New Jersey gross income of certain capital gains from sale or exchange of qualified small business stock. |
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Type of Impact: |
Annual State revenue loss to the Property Tax Relief Fund. |
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Agencies Affected: |
Department of the Treasury. |
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Office of Legislative Services Estimate |
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Fiscal Impact |
FY 2027 & Annually Thereafter |
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State Revenue Loss |
$10 million to $12 million |
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· The Office of Legislative Services (OLS) projects that the bill will result in a loss of State gross income tax revenues of approximately $10 million to $12 million annually. This estimate assumes that the bill will be enacted in calendar year 2025.
· There are no precise data regarding the utilization of the federal qualified small business stock deduction by taxpayers in different brackets. However, a report published by the U.S. Department of the Treasury indicates that almost 90 percent of all excluded qualified small business stock income was attributable to taxpayers with income of $400,000 or more.
· The OLS assumes that the taxpayers most likely to exclude income from the sale or exchange of qualified small business stock have a gross income of $500,000 or more. Accordingly, the OLS estimates that income from the sale or exchange of qualified small business stock that would be excluded from taxation under the bill would be subject to a higher effective tax rates under current law.
BILL DESCRIPTION
The bill provides an exemption from New Jersey gross income for the capital gains derived from the sale or exchange of qualified small business stock to the extent that such gains are exempt for the purposes of federal taxation pursuant to section 1202 of the federal Internal Revenue Code of 1986.
Under federal law, gains derived from the sale or exchange of qualified small business stock that is held for more than five years is exempt from federal income taxation provided that the aggregate amount of such gain from dispositions of stock issued by such corporation which may be taken into account for the taxable year does not exceed the greater of either: (1) $10 million reduced by the aggregate amount of eligible gain taken into account by the taxpayer in prior taxable years; or (2) 10 times the aggregate adjusted basis of qualified small business stock issued by such a corporation and disposed of by the taxpayer during the taxable year.
The bill takes effect immediately and applies to taxable years beginning on or after the January 1 next following enactment.
FISCAL ANALYSIS
EXECUTIVE BRANCH
The Executive has not submitted a formal, written fiscal note on this bill. However, in the FY 2026 Budget in Brief, the Executive indicated that excluding certain capital gains from the sale or exchange of qualified small business stock would reduce State revenue collections by $10.4 million annually, beginning in FY 2026. The Executive’s estimate is based on information from the federal Statistics of Income prepared by the Internal Revenue Service (IRS) and federal tax expenditure prepared by the U.S. Department of the Treasury. The Executive’s estimate is also based on a Statewide effective gross income tax rate of 3.2 percent for all taxpayers in tax year 2018.
OFFICE OF LEGISLATIVE SERVICES
The OLS generally concurs with the Executive that the bill will result in an annual State revenue loss. However, the OLS estimates that the bill will result in State revenue loss of approximately $10 million to $12 million annually, beginning in FY 2027. The OLS concludes that the taxpayers most likely to exclude gains from the sale of qualified small business stock will have higher New Jersey gross income and that the income from the sale or qualified small business stock would be subject to higher gross income tax rates under current law.
Assuming this bill is enacted in calendar year 2025, there will be no revenue loss prior to FY 2027 because the bill allows taxpayers to exclude from New Jersey gross income gains from the sale of qualified small business stock beginning or after the January 1 next following enactment. If the bill enacted in calendar year 2025, the exclusion will first apply in calendar year 2026. Calendar year 2026 tax returns, in turn, will be due in April of 2027, or in FY 2027.
There is no precise information regarding the utilization of the federal qualified small business stock deduction among taxpayers within different income brackets. However, in a working paper issued in January 2025, the Office of Tax Analysis in the U.S. Department of the Treasury indicated that although taxpayers account with income of $400,000 or more account for 45 percent of qualified small business stock deduction claims, almost 90 percent of all excluded qualified small business stock income was attributable to taxpayers with income of $400,000 or more. The IRS Statistics of Income for tax years 2018 through 2022 also indicate that 70 to 80 percent of net income from capital gains is reported by taxpayers with adjusted federal gross income of $500,000 or more.
The U.S. Department of the Treasury estimated in March 2024 that the federal exclusion from taxable income of gains from qualified small business stock dispositions would reduce federal FY 2024 revenue collections by $1.93 billion. Using the IRS data, the OLS estimates that 2.73 percent of reported net income from capital gains for federal tax purposes in tax year 2021. Applying that proportion to the $1.93 billion federal tax expenditure yields an estimated $52.6 million in income from the sale or exchange qualified small business stock attributable to New Jersey taxpayers. Assuming that taxpayers most likely to exclude gains from the sale of qualified small business stock are taxpayers with gross income of $500,000 or more, the OLS calculated estimated effective State and federal income tax rates. To account for differences in State and federal taxation, the OLS proportionalized the estimated effective tax rate for New Jersey to the estimated effective federal tax rate. The proportionalized rate was then applied to New Jersey’s estimate share of the federal qualified small business stock tax expenditure to arrive at a projected State revenue loss of $10 million to $12 million.
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Section: |
Revenue, Finance and Appropriations |
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Analyst: |
Staff Fiscal and Budget 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.).