On behalf of New Jersey’s business community, comprised of thousands of businesses across our great state of New Jersey, NJBIA thanks you for the opportunity to speak today to express our perspective on Governor Sherrill's recently proposed FY2027 (FY27) State Budget.
Like almost any massive spending document, the proposed FY27 $60.7 billion state budget has some positive features for the business community and some that are concerning, so on behalf of our thousands of members throughout our State, this budget testimony will walk the Legislature through our perspectives on the proposed budget’s key elements:
- Inflection Point on Spending
- Concerns About New Revenues
- Pro-Business Investments
Inflection Point on Spending:
More than anything else, the FY27 state budget now before you represents an inflection point on our state spending philosophy in New Jersey. We recently faced a turning point with pension payments in the state budget after previous legislators
and governors shirked their pension responsibilities for years. Thankfully, we finally made the right decision to ramp up pension payments and maintain full funding for years now even if that meant not being able to afford to spend as much on other programs. The decision before you now is whether to begin to rein in spending increases as Governor Sherrill called for or continue to let the budget grow at unsustainable levels as it has in recent years. The $24.1 billion/69.5% increase in Governor Murphy’s eight budgets has led to the currently proposed $1.7 billion structural imbalance as noted below.
NJBIA commends Governor Sherrill’s proposal to make significant cuts in the state budget, including the popular but overly generous Stay NJ property tax relief program for seniors. It is a welcome change of pace to see the business community is not alone facing new burdens in the budget as has been the case in recent years. Beyond the initially proposed FY27 spending cuts, NJBIA hopes that further structural reforms such as school consolidation and shared services, benefit reform and those proposed in the bipartisan Path to Progress report can be explored to continue to make New Jersey more affordable.
NJBIA also strongly supports Governor Sherrill’s call for no more legislative or executive add-ons, after the previous eight Murphy budgets included more than $6 billion in add-ons over what was originally proposed by the governor. Just imagine a budget surplus healthier by $6 billion today. Imagine what a $6 billion investment in building higher education facilities, K-12 schools or other infrastructure investments done through a competitive formula statewide could mean for jobs and the economy. Finding cuts is necessary and sometimes challenging, but maybe easier than finding a cut is the discipline to say NO to new unnecessary spending in the first place.
Additionally, NJBIA hopes that choosing fiscal discipline and shared pain today will help pave the way to the statutorily scheduled sunset of the Corporate Transit Fee two years from now. The most important thing in today’s proposed budget is to make decisions to put that sunset in motion, so New Jersey no longer is a corporate tax outlier with the highest corporate tax rate in the nation and the only state with a rate in double digits.
Do we hold the line on Governor Sherrill’s proposed cuts and her pledge to not include budget add-ons, choosing fiscal responsibility, transparency, consistency, predictability, and a climate that is conducive to tax cuts or do we choose the unsustainable spending growth that got us into this situation with a multi-billion dollar structural deficit and the constant push for more taxes in one of the highest taxed states in the nation? I think the choice should be clear and hope FY27 marks that spending inflection point where we commit to real change for our taxpayers.
Concerns About New Revenues:
As the state with the second highest unemployment rate in the nation behind California and the only state in the nation in the top third of each of the four major state and local taxes, NJBIA is concerned about any tax increase that makes New Jersey less competitive. These include the three proposed new revenue raisers (temporary Net Operating Loss cap, alternate business calculation deduction limit, and employer Medicaid assessment) in the FY27 state budget that totals $750 million in new state revenue for New Jersey.
TEMPORARY NOL CAP
The budget proposes a temporary $1 million cap on all NOL deductions under the corporation business tax for a three-year period from tax year 2026 through tax year 2028, increasing state revenues by $485 million annually over those three years. This proposed cap impacts 600 taxpayers.
This tax change is disappointing for several reasons, not the least of which is the fact that the increase in NOL use comes from a change to NOL policy that the business community recently negotiated with New Jersey Treasury officials just a few years ago. It is NOT a corporate loophole, but a common tax policy to incentivize entrepreneurship and risk-taking. NOL policies encourage investments in the state, yet a pullback of this policy, even temporarily, shows corporate America that New Jersey is not a safe and predictable business environment. Many policymakers in New Jersey have been critical of the frequent federal policy flip-flops making it harder to do business, and these state tax changes can be seen similarly. This seesaw tax policy discourages investment because you cannot reasonably plan for the future.
Lastly on the NOL policy, if some change is determined to be necessary, it is critical to keep the change as temporary as proposed by Governor Sherrill. Going along with that, the 20-year carry forward in NOL law should be extended by three years to go along with the three-year temporary pause to preserve as much of the tax planning ability as possible. That would help ensure that it is just a deferment of future tax savings to which a job creator is entitled.
LIMITING ABC DEDUCTION ELIGIBILITY
The budget also proposes limiting the eligibility threshold of the Alternative Business Calculation (ABC) Adjustment that was instituted as part of Governor Christie’s business tax reforms, which were sponsored back in 2011 by Senate Budget Chairman Sarlo and Majority Leader Greenwald. The law brought equity/parity to pass-through taxpayers when comparing them to other states and to corporate taxpayers. The budget proposes reducing the deduction for taxpayers with gross income between $500,000 and $1 million to only 25% and completely eliminating the deduction for those with gross income above $1 million. This change is estimated to increase revenues by $120 million annually, and out of the 240,000 taxpayers that claim the adjustment on a return, only 10,000 returns will see an increase in tax liability because of this proposed change.
Even if it is true that it should be better focused on small businesses, a threshold of GROSS income over $1 million is just not focused on small businesses but tiny businesses. There also seems to be a disconnect to limit eligibility for a NET income program by using GROSS income. At the very least, the eligibility threshold should be examined to include small and mid-sized job creators.
EMPLOYER MEDICAID ASSESSMENT
Last of the new revenue raisers but perhaps the most anti-business is a proposed graduated assessment per employee for all private employers with 50 or more employees on NJ FamilyCare to raise $145 million annually. This is projected to impact about 750 employers.
There are many employers that fall into this category, both public and private, that provide excellent health benefits but still have part-time and/or seasonal employees who are ineligible for health benefits or employees who decline health benefits. How can an employer reasonably be penalized for not providing health benefits to an employee that only works a few hours per week or just a few weeks per year? Additionally, many low-income and/or transient employees choose Medicaid over a more expensive and less portable plan provided by their employer. Again, how can employers be penalized for the choice of their employees? This policy runs the risk of unintentionally disincentivizing the hiring of low-income or part-time workers.
Additionally, public employers in this category show that these are NOT bad actors who fail to offer health benefits, and also show the folly of penalizing one set of employers for doing the same thing as another set of employers that gets away with the same behavior. This flawed proposal is also contrary to any affordability agenda because many of the industries where affordability is a more common concern, like healthcare, grocery stores and childcare, are the industries that will become more expensive because of this new assessment. Massachusetts had a similar Employer Medical Assistance Contribution (EMAC) Supplemental Assessment from 2017 to 2019, but problems with handling part-time and teen employees, plus employees declining benefits, were identified and it was discontinued.
Pro-Business Investments:
The proposed FY27 budget includes many pro-business investments that should be maintained. NJBIA is delighted to see investments to effectuate Governor Sherrill’s regulatory reform/Saving You Time & Money agenda: $13.3 million to the New Jersey Innovation Authority for the permitting dashboard, $12.2 million to improve DOBI operations, $4.3 million for more DEP employees to expedite permitting, turbo-charging the New Jersey Business Action Center, and $3 million to upgrade occupational licensing technology. These investments will improve New Jersey’s regulatory climate and help many job creators, especially the small businesses that often lack the compliance resources of large employers.
NJBIA is also happy to see other investments such as $500,000 for procurement assistance for minority and women-owned business enterprises to address New Jersey’s woeful procurement disparities, a doubling of the high-impact tutoring funding to $15 million, and an extra million each toward local government efficiencies and summer youth work programs as well as, of course, a full pension payment for the sixth straight year.
On top of the pro-business spending items already included, NJBIA asks the Legislature to focus any future spending on the three pro-growth spending areas: workforce development (educating and training the future workforce), innovation (developing New Jersey’s innovation ecosystem so new products, technologies and services develop and stimulate the economy here) and infrastructure (building energy, transportation, water, broadband and other infrastructure).
Figuring into all three of these pro-growth areas, manufacturing investment is critical. While not advocating for new line items, NJBIA requests budget language or a new law to facilitate off-budget spending on the vital NJMEP program that was cut last year yet has a significant return on investment. It is also important to restore NJEDA’s wildly successful Manufacturing Voucher Program (MVP) that was also cut last year, and tax incentives to support this program might be appropriate if a line-item is no longer possible.
CONCLUSION:
NJBIA looks forward to working with the Sherrill administration and the State Legislature to remove or moderate the three revenue raisers, and we will also help Governor Sherrill maintain her proposed spending cuts and pledge to avoid future last-minute add-ons. NJBIA will do this while trying to maintain investments
in the three pro-growth spending areas of workforce development, infrastructure and innovation, especially in manufacturing. This is responsible budgeting done with the hope of being able to sunset the corporate transit fee (CTF) per its statutory schedule in two years.
Thank you for considering NJBIA’s perspective on the proposed FY27 state budget. We look forward to working with all of you over the next few months to make this budget best meet the needs of our great state of New Jersey. Please email Christopher Emigholz at cemigholz@njbia.org to further discuss any of NJBIA’s budget points.
