Many things make New Jersey exceptional; taxes shouldn’t be one of them.
Unfortunately, Gov. Mikie Sherrill, in proposing to roll back a key bipartisan business tax reform enacted in 2011, would position New Jersey once again as a negative outlier in our region and a less competitive place to start and build a business. In the interest of informing the forthcoming budget season debate, here’s a little background.
In 2011, as New Jersey was emerging from the Great Recession, Republican Chris Christie’s administration (in which I served) and the Democratic Legislature came together to enact a series of important business tax reforms. The broad bipartisan goal was to make the Garden State more competitive by bringing New Jersey policy into closer alignment with other states.
Legislation took several steps on the corporation business tax. It shifted to single-sales factor apportionment for income — used by a large majority of peer states — and repealed New Jersey’s “throwout rule,” thus aligning with all states in our region. It also reformed New Jersey’s treatment of small businesses and pass-through entities that are taxed under New Jersey’s anachronistic Gross Income Tax, or GIT, such as partnerships, S-corporations and limited liability companies.
In a major departure from the federal income tax and other states, New Jersey’s GIT prior to the 2011 reforms prevented the offsetting of gains by business owners who generate income from different types of business entities or activities, among them sole proprietorships; partnerships including LLCs taxed as partnerships; S-corporations; and rents, royalties, patents and copyrights. Business interests had long cited this restriction as both highly unusual and a significant disincentive to creating and growing new businesses in New Jersey.
The 2011 legislation created an “alternative business calculation” adjustment or deduction under the GIT, to let taxpayers who generate income from different types or categories of business entities to offset a portion of gains from one type of business with losses from another. It also permitted taxpayers to carry forward business-related losses for up to 20 taxable years. The legislation limited the fiscal impact by capping the maximum savings at 50% of the savings that would accrue from unlimited netting between income categories and the net loss carryforward, as is available under every other state’s business tax system.
Fast forward to March 2026.
As a part of what Sherrill called “over $700 million in new revenue from closing corporate tax loopholes,” the governor proposed scaling back the alternative business calculation deduction by reducing to 25% the savings maximum for taxpayers with gross income between $500,000 and $1 million. It would eliminate the savings for those with gross income above $1 million.
According to Sherrill’s 2027 “Budget in Brief,” this “change is intended to better align the deduction with its original purpose — providing a benefit to small businesses and leveling the playing field with larger businesses.”
No loophole
Hold on.
The alternative deduction is not a corporate tax loophole. And aside from the obvious fact that the intent of the proposed change is to raise more revenue — estimated at $120 million for the fiscal year that starts July 1 — the governor’s characterization of the deduction’s original purpose is not quite true.
The 2011 reforms, sponsored by Sen. Paul Sarlo (D-Bergen) and Assemblyman Lou Greenwald (D-Camden), among others, reflected a strong bipartisan consensus to better synch New Jersey’s tax system with that of our regional and national competitors. Reversing a key component of those reforms would amount to a big step backward.
We’re not talking about a minor adjustment.
In the real world, businesses with $500,000 or even $1 million in gross revenue are hardly “large businesses.” By the administration’s numbers, the proposed change would cost approximately 10,000 New Jersey taxpayers an average of $12,000. It also would constitute 26% of the proposed budget’s projected $457.7 million (2%) increase in gross income tax revenue for fiscal 2027.
Be bold
The Legislature, instead of doubling down on an exceptionally negative feature of New Jersey’s tax system, should consider eliminating all restrictions on the netting of business income and losses under the gross income tax.
Bolder and better yet, the governor and Legislature should bite the bullet and finally replace New Jersey’s gross income tax with a tax on net incomes (i.e., after deductions) using federal adjusted gross income as a starting point, just like every other state.
Making the switch on a revenue-neutral basis, and without impacting taxpayers at different income levels, would require making — and explaining — numerous rate and bracket adjustments. New Jersey’s tax system, though, would be more transparent, efficient and competitive over the long term.
