A tax law Gov. Phil Murphy signed last January to soften the blow of a $10,000 cap on state and local property tax deductions brought in an extra $1.3 billion of tax revenue between December 2019 and December 2020.
Tax collections for the state were $4.3 billion last month, up $1.3 billion, or 44.8% – from the less than $3 billion in December 2019, according to a Jan. 20 announcement from the State Treasury Department.
But, the Treasury noted, the way the new tax law was crafted means that “in the long run,” the law would have no impact, or a “neutral” impact, on the state’s coffers.
Murphy signed the Pass-Through Business Alternative Income Tax Act in January 2020, or PT-BAIT in response to the $10,000 federal cap on the SALT deduction. It went into effect in October.
Critics said that the cap would be painful for higher-tax states like New Jersey and New York. It was passed as part of the 2017 federal tax cuts when the GOP controlled Congress and the White House. However, the Democratic control of Congress and the White House has prompted speculation about the possibility of a repeal of the federal SALT cap.
The law allows owners of certain businesses to pay some of their state taxes through the businesses they own.
This “pass-through entity” – where the corporate income tax is paid by the owners and not at the corporate level – is aimed at avoiding double taxation for business owners. Under the state legislation, whatever the business owner paid, they would receive that amount as a tax credit against what they owe to the state.
Federal law has very loose requirements for the number of business expenses that could be claimed on a federal tax return.
Owners of S-corporations, limited liability companies and partnerships would be eligible to take advantage of this new SALT workaround.
The changes could provide up to $450 million a year in federal tax cuts for small business owners, professionals and their families, according to a 30-page report released summer 2018 by the 25-member Economic and Fiscal Policy Working Group panel convened by Senate President Stephen Sweeney, D-3rd District.
“This legislation will help to defray the out-of-pocket income tax hit for ‘mom and pop’ small business owners who were hurt by the cut in the SALT deduction at no cost to the state budget,” one of the bill’s main sponsors, Sen. Troy Singleton, D-7th District, said in a December 2019 statement.
Treasury officials maintained that because of the tax credits, the PT-BAIT law would have no impact on state tax revenue.
Business owners could claim those tax credits through the end of the current budget year, which ends on June 30, and those are certain to shadow any money from a revenue boost.
“Ultimately, the PT-BAIT collections are largely a timing shift rather than a new State revenue stream,” the state treasury said on Wednesday.
