LEGISLATIVE FISCAL ESTIMATE
[Second Reprint]
SENATE, No. 1422
STATE OF NEW JERSEY
221st LEGISLATURE
DATED: MARCH 21, 2024
SUMMARY
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Synopsis: |
Allows taxpayers to utilize alternative method of depreciation of certain expenditures in connection with construction of new affordable housing developments. |
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Type of Impact: |
Annual State revenue loss to the State General Fund and 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 |
First Year of Implementation |
Thereafter |
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State Revenue Loss |
$1.2 million to $2.3 million |
Indeterminate |
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· The Office of Legislative Services (OLS) projects that the bill will result in annual State revenue losses incurred by the General Fund and Property Tax Relief Fund in the range of $1.2 million to $2.3 million in the first year of implementation.
· State revenue losses thereafter will be dependent on several factors that may influence the amount of depreciation that is deducted from income using the new method provided by the bill, including the pace of affordable housing construction, the value of new affordable housing developments, and whether an affordable housing development has received an affordable housing subsidy or a property tax abatement or exemption.
· The alternate method of depreciating the value of new housing construction under the bill would allow taxpayers to accelerate the depreciation of property sooner than is the case under current law, and potentially claim larger depreciation deductions, thereby lowering the amount of income that is subject to taxation. This would, in turn, reduce State revenue collections from the corporation business tax and gross income tax.
· There are several factors, such as the percentage of affordable housing units in an affordable housing development, and differences in the methods of calculating depreciation under current law and the bill, that may cause State revenue losses to be higher or lower than anticipated in this estimate.
BILL DESCRIPTION
This bill allows a taxpayer to claim a depreciation deduction under the corporation business tax and the gross income tax for eligible property expenditures incurred by the taxpayer for the construction of a new affordable housing development owned by the taxpayer. The bill permits a taxpayer to claim the deduction over a 10-year period.
To calculate the percentage of eligible property expenditures that may be depreciated, the taxpayer would be required to apply the following formula: 2 times (the number of affordable housing units in the development divided by the total number of housing units in the development).
The bill defines an “affordable housing development” as a development: (1) for which construction commences on or after the effective date of the bill; (2) for which taxes are not abated or exempted pursuant to the Long Term Tax Exemption Law, P.L.1991, c.431, or does not receive an affordable housing subsidy for the construction of low- and moderate-income housing; and (3) that includes one or more units of housing, at least 20 percent of which qualify as affordable housing, a defined in the bill.
The bill allows a depreciation deduction to be claimed for affordable housing developments placed in service during any tax year or privilege period beginning January 1, 2025, or thereafter.
FISCAL ANALYSIS
EXECUTIVE BRANCH
None received.
OFFICE OF LEGISLATIVE SERVICES
The OLS projects that the bill will result in annual State revenue losses incurred by the General Fund and Property Tax Relief Fund in the range of $1.2 million to $2.3 million in the first year of implementation. State revenue losses thereafter will be dependent on several factors that may influence the amount of depreciation that is deducted from income using the new method provided by the bill, including the pace of affordable housing construction, the value of new affordable housing developments, and the percentage of affordable housing units in each development. This estimate has been calculated using data published by the Department of Community Affairs in the New Jersey Construction Reporter and is based on certain assumptions regarding housing construction activity.
Deprecation is an annual deduction from income that allows a taxpayer to recover the cost or other basis of certain property over the time that they use the property. Except as otherwise provided under current law, New Jersey follows the rules for depreciation set forth in the federal Internal Revenue Code. The approaches used to depreciate the value of different types of property and determine the amount a taxpayer may deduct from income due to the decline in a property’s value are prescribed by the Internal Revenue Code. Taxpayers may claim depreciation as a deduction from income, thereby lowering their State and federal tax liabilities.
Although the Internal Revenue Code does not specifically reference affordable housing, it does establish a method used to determine depreciation for residential rental property (defined as any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units). The code requires residential rental property to be depreciated over a period of 27.5 years using a straight-line method of depreciation. The straight-line method of depreciation allows a taxpayer to deduct the same amount of depreciation each year over the useful life of the property. Residential real property depreciates by about 3.636 percent annually. The bill establishes an alternate formula for calculating the amount that may be depreciated for affordable housing developments and requires that amount to be depreciated over a period of 10 years. Under this new formula, the amount of depreciation is based on the number of affordable housing units in a development.
The Construction Reporter contains statistics on the construction activity in New Jersey from data submitted by construction officials who administer the State Uniform Construction Code. According to the Construction Reporter, about 30,900 building permits for the construction of new housing units were issued in 2022. The estimated cost of construction of these new units was approximately $5.74 billion. Under the bill, a development qualifies as an affordable housing development if 20 percent of the housing units are affordable housing. Thus, if all 30,900 new housing units authorized by building permit for new construction in 2022 were located in affordable housing developments, then at least 6,180 units would have to qualify as affordable housing in order for the taxpayer to utilize the new depreciation method.
The bill provides that the amount to be depreciated would use the following formula: two times the quotient of the number of affordable housing units in the development, divided by the number of housing units in the development. Applying this formula to the 2022 housing unit data yields a product of 40 percent [(6,180/30,898) x 2 = .40]. The total amount to be depreciated is determined by multiplying the total amount of eligible property expenditures by the depreciation percentage. The OLS assumes that the $5.74 billion in construction costs for new housing units would also qualify as eligible property expenditures. Multiplying that amount by the depreciation percentage yields a depreciation amount of $2.3 billion over 10 years, or $230 million per year. As noted above, the current depreciation method provides that real property depreciate by 3.636 percent annually over 27.5 years. If all 30,900 new housing units were to qualify as residential real property and the $5.74 billion in associated construction costs were depreciable, then taxpayers would currently be able to deduct about $208.7 million annually. In each circumstance, the impact of the depreciation on State revenue collections would be proportional to the marginal income tax rate of the entity claiming the deduction.
A taxpayer subject to the bill’s provisions would be subject to corporation business tax, gross income tax, or the pass-through business alternative income tax, depending on the structure of the taxpayer’s business. However, information regarding the corporate structure of those taxpayers most likely to use the alternate depreciation method is not available. For purposes of this estimate, the OLS assumes that those taxpayers are subject to State tax rates ranging from 5.675 percent to 10.9 percent. The State revenue loss is equal to the difference between each taxpayer’s tax liability after accounting for the amounts that would be deducted from income using each method of depreciation. Applying these rates to the estimated amounts of depreciation in the first year of the bill’s implementation ($230 million and $208.74 million) yields projected State revenue losses of $1.2 million to $2.3 million.
The OLS notes that the bill does not allow a taxpayer to employ the alternate depreciation formula if the property tax liability for an affordable housing development has received a property tax abatement or exemption or an affordable housing subsidy. The bill broadly defines an affordable housing subsidy as financing that is intended to support the development of affordable housing and provided by the Department of Community Affairs, New Jersey Housing and Mortgage and Finance Agency, or a municipal affordable housing trust fund. This restriction will limit the State’s revenue losses because it reduces the number of affordable housing developments for which the alternate deprecation may be utilized. Information regarding the number of affordable housing developments that have received an affordable housing subsidy is not readily available.
However, the OLS notes that there are additional factors that may cause actual State revenue losses to differ from these amounts. First, this estimate presumes that 20 percent of new housing units will be affordable housing. This is the minimum amount required for a taxpayer to be allowed to use the alternate depreciation method under the provisions of the bill. If an affordable housing development contains a greater proportion of affordable housing, a taxpayer would be able to depreciate a higher amount of eligible property expenditures, thereby increasing the amount they may deduct from income and the State’s revenue losses. Second, this estimate is based on a dollar amount of construction, $5.74 billion, indicated in the Construction Reporter. The Construction Reporter defines the “dollar amount of construction” as the estimated cost of work as reported by a permit applicant to the construction official. There are likely construction costs reported on a permit application that are not depreciable, and therefore, deductible from income. In these instances, the State revenue loss would be lower than anticipated. Third, this estimate assumes that all housing units authorized for construction in 2022 were part of an affordable housing development, as defined in the bill. As such, this estimate may overstate the total amount of eligible property expenditures that may be subject to the depreciation allowance. Lastly, federal Internal Revenue Service guidance provides that a taxpayer may deduct depreciation only on that part of their property used for rental purposes. The bill allows a taxpayer to deduct depreciable costs for eligible capital expenditures associated with the construction of an entire housing development, thereby permitting a deduction for depreciation for a potentially larger amount of expenditures.
The application of the new formula may cause certain taxpayers to claim the deduction for depreciation over a shorter time-frame, thereby resulting in higher amounts of taxable income in the years after its application. The new formula may also incentivize some taxpayers to make deductible investments in the construction of new affordable housing developments they may not otherwise make. To the extent that these factors might contribute to higher business earnings and increase economic activity overall, State tax collections may increase by an indeterminate amount.
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Section: |
Revenue, Finance, and Appropriations |
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Analyst: |
Section Chief |
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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.).