New Jersey Enacts Tax Increases to Close Budget Gap

New Jersey enacted several tax increases as part of a revised Fiscal Year 2021 budget, including:

  • increasing the Millionaire’s tax;
  • extending the 2019 Corporate surtax rate; and
  • increasing the Health Maintenance Organization assessment.

The Governor and legislative leaders agreed to the increases to address budget shortfalls caused by the COVID-19 pandemic.

COVID-19 Impact on Budget

Due to the COVID-19 pandemic, New Jersey projected it would have a $6 billion budget shortfall. In order to address the decrease in revenue, the Governor proposed a revised budget that had cuts, tax increases, and a proposal to borrow $4 billion.

Following negotiation with the legislature, the approved budget includes the three tax increases above, cuts, and the approved borrowing authority.

Millionaire’s Tax

The existing Millionaire’s tax was amended. The tax rate on income between $1 million and $5 million was increased for tax years beginning after 2019.

The rate increased from the current 8.97% to 10.75% for every dollar earned between $1 million and $5 million annually.

The 10.75% rate was the same as the existing rate for income earned over $5 million.

Withholding

Employers must withhold income tax at the rate of 21.3% from salaries, wages and other remuneration in excess of $1 million, but not in excess of $5 million, for the remainder of the taxable year. The higher withholding rate allows taxpayers affected by the rate increase to “catch up” on their withholdings for the year since the new tax rate is retroactive to January 1.

New Jersey will not impose interest or penalties for insufficient payment of estimated tax and/or withholdings that may be due before November 1, 2020, if the underpayment is a result of the new tax rate.

Corporation Surtax

The corporation surtax is now 2.5% if a corporation has allocated taxable net income over $1 million for 2018 through December 31, 2023. The surtax rate was going to be 1.5% in 2020 and 2021. The increase returns the surtax to the rate used in 2018 and 2019.

The increase applies retroactively to privilege periods beginning on or after January 1, 2020. The law waives all penalties that a taxpayer may incur because of the retroactive imposition of the surtax rate.

Further, if the federal corporate income tax rate is increased to a rate of at least 35% of taxable income, the surtax will be suspended following the conclusion of a taxpayer’s privilege period corresponding with the increase to the federal rate.

HMO Assessment

New Jersey also increased the Health Maintenance Organization (HMO) assessment from 3% to 5% on net written premiums. The change in rate is applicable beginning in fiscal year 2021, which began on October 1, 2020.

COVID-19 National Impact

Many states are facing similar budget shortfalls due to COVID-19.

New Jersey is one of the first states to enact income tax increases due to the COVID-19 pandemic. Other states will need to make similar decisions as the pandemic continues to cause a slowdown in the economy.

By Andrew Soubel, J.D.

Wolters Kluwer is by your side to help you stay up-to-date with tax and compliance changes and support your ability to work remotely. Please visit our Coronavirus (COVID-19) Resource Page for Tax & Accounting Professionals.

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