A1406 —

A1406 FISCAL ESTIMATE   LEGISLATIVE FISCAL ESTIMATE ASSEMBLY, No.

1406 STATE OF NEW JERSEY 218th LEGISLATURE   PRE-FILEDDATED: FOR INTRODUCTION IN THE 2018 SESSION     Sponsored by:

Assemblyman NOVEMBER ANTHONY27, M.    SUMMARY   Synopsis:

BUCCOExcludes Districtunder 25gross (Morrisincome andtax Somerset)certain Assemblywoman contributions BETTYLOUto DECROCEqualified Districtpension 26plans, (Essex,deferred Morriscompensation plans and Passaic)provides Assemblyman deduction EDWARDfor H.certain individual retirement savings.

THOMSONType Districtof 30Impact: (Monmouth and Ocean)   Co-Sponsored by:

AssemblywomanAnnual Handlin,State Assemblymenrevenue Howarth,losses, DiMaio,gains, McGuckin,and S.Kean,shifts Space,across Clifton,fiscal Bramnick,years Assemblywomanaffecting N.Munoz,the AssemblymenProperty PetersonTax andRelief HaroldFund.  J.Agencies Affected:

WirthsDepartment  of  the  Treasury.   SYNOPSIS      Excludes under gross income tax certain contributions to qualified pension plans, deferred compensation plans and provides deduction for certain individual retirement savings.

  CURRENT  VERSIONOffice OFof TEXTLegislative     Services IntroducedEstimate PendingFiscal TechnicalImpact Review  by  Annual State Revenue Deferral $140.5 million, of which an indeterminate portion will be a revenue loss across fiscal years   Annual State Revenue Loss $16.0 million plus an indeterminate portion of the annual State revenue deferral that will be lost across fiscal years   Annual State Revenue Gain Indeterminate         ·         The Office of Legislative Counsel.Services (OLS) estimates that the State will not collect about $140.5 million each year because of the deferral of the taxation of contributions to concerned employer-sponsored retirement savings and deferred compensation plans from the year of contribution to the year of withdrawal.  An indeterminate portion of the total will be collected in future tax years.  The indeterminate remainder will be lost across tax years.  The revenue loss will accrue as some taxpayers who make contributions that will become tax-deferred under the bill will no longer reside in New Jersey when they withdraw the contributions.  In addition, some taxpayers will have reduced gross incomes taxed at lower rates when they withdraw balances from their savings plans relative to the time of contribution.  ·         The OLS estimates that an annual State revenue loss of $16.0 million will result from establishing a gross income tax deduction for taxpayer contributions to individual retirement accounts that qualify for federal income tax deductions.

  ·         AnSome Actof excludingthe certainrevenue contributionslosses towill qualifiedbe pensionoffset plans,by deferredindeterminate compensationannual plansState andrevenue providingincreases abecause deductiondeferring forthe certaintaxation individualof contributions to certain retirement savings underplans thewill increase a taxpayer’s gross income tax,in amendingyears N.J.S.54A:5-1in andwhich P.L.1983,the c.571taxpayer andwithdraws supplementingfunds chapterfrom 3the ofaccount.  TitleThis 54Amay ofnewly disqualify certain taxpayers from the retirement income exclusion.    ·         Additional annual State revenues may be generated by taxpayers who were not New Jersey Statutes.residents when they contributed to concerned retirement savings plans but reside in New Jersey when they withdraw balances from qualified accounts, as these taxpayers will newly pay income tax on their contributions.

        BeBILL ItDESCRIPTION Enacted  by      The bill accords tax-deferred status under the Senategross andincome Generaltax Assemblyto ofcontributions to the Statefollowing employer-sponsored retirement savings plans:  1) qualified defined benefit pension plans under section 401(a) of Newthe Jersey:federal Internal Revenue Code (IRC);

 2)     qualified 1.   deferred N.J.S.54A:5-1compensation isplans amendedof toa readstate asor follows:local government under section 457 of the federal IRC;

     3) 54A:5-1. annuity Newcontracts Jerseyunder Grosssection Income403(b) Defined.  New Jersey gross income shall consist of the followingfederal categoriesIRC; of income:

     and a.4) the federal Thrift Savings Fund.

 Salaries,      wages,Current tips,law fees,only commissions,allows bonuses,taxpayers to exclude from their annual gross income employee and otheremployer remunerationcontributions receivedto foremployer-sponsored servicesdefined-contribution renderedretirement whethersavings inplans cashauthorized orunder insection property,401(k) of the federal IRC.  Contributions and amountstheir paidinvestment orearnings distributed,only orbecome deemedtaxable paidupon orwithdrawal distributed,from outthe ofplan.  aIn medicalcontrast, savingsemployee accountcontributions thatto other employer-sponsored retirement savings plans are notcurrently excludedtaxable fromin grossthe incometax pursuantyear toin sectionwhich 5the contributions are made.  At the time of P.L.1997,withdrawal, c.414the (C.54A:6-27).contributions are tax-exempt with only the investment earnings and employer contributions being subject to tax.

      b.In addition, the bill establishes a gross income tax deduction for taxpayer contributions to individual retirement accounts and for premiums paid for the purchase of individual retirement annuities (together known as individual retirement arrangements, or IRAs) under section 408 of the IRC that qualify for federal income tax deductions.

 Net  profits  fromFISCAL business. ANALYSIS The  netEXECUTIVE incomeBRANCH from  the      operationNone ofreceived. a business, profession or other activity after provision for all costs and expenses incurred in the conduct thereof, determined either on a cash or accrual basis in accordance with the method of accounting allowed for federal income tax purposes but without deduction of the amount of:

  OFFICE OF LEGISLATIVE SERVICES         (1)  The taxesOLS basedconcludes that the enactment of this bill will have various countervailing effects on income;annual State gross income tax collections that are deposited into the Property Tax Relief Fund.  The tax law changes will apply to taxable years beginning on or after the January 1 next following the bill’s date of enactment.        The largest fiscal impact will be an annual State revenue shift across fiscal years attributable to the deferral of the taxation of contributions to enumerated employer-sponsored retirement savings plans from the year of contribution to the year of withdrawal.  The OLS projects that because of the deferral approximately $140.5 million will cease to be collected each year.  An indeterminate portion of the total will be collected in future tax years.

      The (2)  indeterminate aremainder civil,will civilrepresent administrative,a orrevenue criminalloss penaltyacross ortax fine,years.  includingThe arevenue penaltyloss orwill fineaccrue underas ansome administrativetaxpayers consentwho order,make assessedcontributions andthat collectedwill forbecome atax-deferred violationunder ofthe abill Statewill orno federallonger environmentalreside law,in anNew administrativeJersey consentwhen order,they orwithdraw anthe environmentalcontributions.  ordinanceIn oraddition, resolutionsome oftaxpayers awill localhave governmentalreduced entity,gross andincomes anywhen interestthey earnedwithdraw onbalances thefrom penaltytheir orsavings fine,plans andrelative any economic benefits having accrued to the violatortime asof acontribution.  resultAs of a violation,result, whichthe benefitsamounts arecontributed assessedmay andbe recoveredtaxed inat a civil,lower civilrate administrative,in orthe criminalyear action, or pursuant to an administrative consent order.  The provisions of thiswithdrawal paragraphthan shallin notthe applyyear to a penalty or fine assessed or collected for a violation of acontribution.  State      orFurthermore, federal environmental law, or local environmental ordinance or resolution, if the penaltyOLS orestimates fine was for a violation that resultedan fromannual fire,State riot,revenue sabotage,loss flood, storm event, natural cause, or other act of God$16.0 beyondmillion thewill reasonableresult controlfrom ofestablishing thea violator,gross orincome causedtax bydeduction anfor acttaxpayer orcontributions omissionto ofIRAs athat personqualify whofor wasfederal outsideincome thetax reasonabledeductions. control of the violator;

and      The annual State revenue losses may be partially offset by indeterminate annual State revenue increases due to two factors.  First, deferring the taxation of contributions to retirement savings plans will increase a taxpayer’s gross income in years in which the taxpayer withdraws funds from the account.  This may newly disqualify certain taxpayers from the retirement income exclusion under the gross income tax.  Second, taxpayers who were not New Jersey residents when they contributed to concerned employer-sponsored retirement savings plans but reside in New Jersey when they withdraw balances therefrom, will newly pay New Jersey gross income tax on their contributions under the bill.    State Revenue Deferral with Revenue Loss Potential       (3)  The trebleOLS damagesprojects paidthat approximately $140.5 million in gross income tax revenue will cease to be collected each year because amounts employees deposit in employer-sponsored retirement savings plans will no longer be taxed in the Departmentyear of Environmentalcontribution.  ProtectionAn pursuantindeterminate portion of the total will be collected in future tax years as contributions will become taxable in the year of withdrawal, while the indeterminate remainder will represent a revenue loss across tax years.  The revenue loss will accrue as some taxpayers who make contributions that are taxable under current law but that will become tax-deferred under the bill will no longer reside in New Jersey when the newly taxable withdrawal of the contributions occurs.  In addition, some taxpayers will have reduced gross incomes when they withdraw balances from their savings plans relative to subsectionthe a.time of contribution.

of As sectiona 7result, ofthe P.L.1976,amounts c.141contributed (C.58:10-23.11f)may forbe coststaxed incurredat bya thelower departmentrate in removing, or arranging for the removalyear of,of anwithdrawal unauthorizedthan dischargein upon the failureyear of thecontribution. discharger to comply with a directive from the department to remove, or arrange for the removal of, a discharge.

        c. According Nettax-deferred gainsstatus orto incomecontributions fromto disposition of property.  Net gains or net income, less net losses, derived from the sale,following exchangeemployer-sponsored orretirement othersavings dispositionplans ofwill property,cause including real or personal, whether tangible or intangible as determined in accordance with the methodestimated ofinitial accountingnon-collection allowed for federal income tax purposes.  For the purpose of determining gain or loss, the basisfollowing ofannual propertyState shallrevenue:  be1) thedefined adjustedbenefit basispension used401(a) forplans, federal$80.1 incomemillion; tax purposes, except as expressly provided for under this act, but without a deduction for penalties, fines, or economic benefits excepted pursuant to paragraph (2), or for treble damages excepted pursuant to paragraph (3) of subsection b.

of2) this403(b) section.annuity plans, $33.4 million;

     3) Adeferred taxpayer'scompensation net457 gainplans, or$16.0 lossmillion; on the sale, exchange or other disposition of a share of an S corporation shall be calculated by increasing the adjusted basis of the share by an amount equal to the shareholder's net losses and deductions in respect of the share allowed and deducted from income for federal income tax purposes, not including any personal net operating loss deductions, to the extent that such net losses were not offset by the taxpayer's pro rata share of S corporation income otherwise subject to taxation pursuant to subsection p.

ofand this4) sectionfederal inThrift respectSavings ofFund, another$11.0 Smillion. corporation, subject to rules of priority and assignment determined by the director.

       For1) theContributions taxto yearDefined 1976,Benefit anyPension taxpayer401(a) withPlans a      taxThe liabilityOLS underestimate thisof subsection,an orannual under$80.1 themillion "Taxin onState Capitalrevenue Gainsthat andwill Othercease Unearnedto Incomebe Act,"collected P.L.1975,for c.172the (C.54:8B-1year etin seq.),which shalltaxpayers notmake becontributions subject to paymentdefined ofbenefit anpension amount401(a) greaterplans thanhas thetwo amountcomponents:  he$79.0 wouldmillion havefrom paidcontributions ifto eitherpublic returnsector hadplans coveredand all$1.1 capitalmillion transactionsfrom duringcontributions theto fullprivate taxsector yearplans.   1976;      Public Sector Defined Benefit Plans:

provided, In however,FY that2017, theNew rateJersey whichState shalland applylocal togovernment anyemployees capitalcontributed gain$2.068 shallbillion beto thatthe inState’s effectfive ondefined thebenefit datepension ofsystems.  theContributions transaction. increased Toby thean extentannual thataverage anyof loss3.0 ispercent usedfrom toFY offset2012 anythrough gainFY under2017.  P.L.1975,At c.172,that itrate, shallcontributions notwill begrow used to offset$2.2 anybillion gainby underFY the2020. "New Jersey Gross Income Tax Act," N.J.S.54A:1-1 et seq.

      Assuming Thean termaverage "neteffective gainsmarginal ortax income"rate shallof not3.5 includepercent, gainsthe orOLS incomeestimates derivedthat fromdeferring obligationsthe whichtaxation are referred to in clause (1) or (2) of N.J.S.54A:6-14employee ofcontributions thisto actpublic orsector fromdefined securitiesbenefit which401(a) evidenceplans ownershipwill inlower aState qualifiedrevenue investmentcollections fundby as$77.0 definedmillion in sectionFY 22020. of P.L.1987, c.310 (C.54A:6-14.1).

The      termThere "netis gainsno orreadily netavailable income"information shallregarding notthe includecontributions gainsto orthe incomefederal fromdefined transactionsbenefit toplans by federal employees who are New Jersey taxpayers.  However, the extentUnited toStates whichOffice nonrecognitionof isPersonnel allowedManagement’s forFiscal federalYear income2017 taxAgency purposes. Financial TheReport termindicates "sale,that exchangeall orfederal otheremployees disposition"contributed shall$3.8 notbillion includeto the exchangeFederal ofEmployees stockRetirement orSystem securities(FERS) and Civil Service Retirement System (CSRS) in afederal corporationFY a2017.  partyThe toBureau aof reorganizationEconomic Analysis in pursuancethe United States Department of aCommerce planestimates that in 2017 the federal government paid 1.5 percent of reorganization,its solelysalaries and wages for stockfederal orcivilian securitiesand inmilitary suchemployees corporationto oremployees located in anotherNew corporationJersey.  aApplying partythe 1.5 percent ratio to the reorganization$3.8 billion in nationwide FERS and theCSRS transferemployee ofcontributions propertyyields toan aestimated corporation$57.0 bymillion onein orFERS moreand personsCSRS solelyemployee contributions by New Jersey residents in exchangefederal forFY stock2017.  orThis securitiesamount in suchcurrently corporationtaxable ifNew immediatelyJersey aftergross income will be deferred to future tax years under the exchangebill.  suchAssuming persona or3.5 personspercent areaverage effective tax rate, the OLS projects that if the bill had been in controleffect ofin tax year 2017, it would have reduced gross income tax collections by $2.0 million.         Private Sector Defined Benefit Plans:  Information regarding the corporation. number Forof purposesNew Jersey private sector employees who are members of thisa clause,defined stockbenefit 401(a) plan or securitiesthe issuedamount forthey servicescontribute shallto notthose beplans consideredis asunavailable.  issuedHowever, inaccording returnto forthe property.Private Pension Plan Bulletin:

     Abstract Forof purposes2015 ofForm this5500 clause,Annual theReports, termwhich "reorganization"was means--published      by (i)the  AEmployee statutoryBenefits mergerSecurity orAdministration consolidation;(EBSA) in the U.S.

     Department (ii)The acquisition by one corporation, in exchange solely for all or part of itsLabor, votingemployer stockand (oremployee incontributions exchangeto solelyprivate forsector alldefined orbenefit aplans partequaled of$116.1 thebillion voting stock of a corporation which is in control2015 ofnationwide.  theEmployees acquiringcontributed corporation)$896 ofmillion stock of another corporation if, immediately after the acquisition,total.  theU.S. acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);

     Bureau (iii)of  TheEconomic acquisitionAnalysis bydata oneshow corporation,that inNew exchangeJersey solelypersonal forincome all or part of its voting stock (or in exchange2015 solelyapproximated for3.45 allpercent or a part of thenational votingpersonal stockincome.  ofApportioning a3.45 corporationpercent which is in control of thenationwide acquiringprivate corporation),sector ofdefined substantiallybenefit allplan ofemployee thecontributions propertiesto ofNew anotherJersey corporation,and butthen inapplying determiningan whetheraverage theeffective exchangemarginal istax solelyrate for stock the assumption by the acquiring corporation of a3.5 liabilitypercent ofto the other, or the fact that propertyamount acquiredyields isan subjectestimated totax adeferral liability,of shall$1.1 bemillion. disregarded;

      (iv)That  Aamount transfermay bydecrease aover corporationtime.  According to the EBSA, the number of allprivate orsector defined benefit plans declined by almost 75.0 percent from a parthigh of its172,672 assetsplans toin another1986 corporationto if45,672 immediatelyplans afterin the2015.  transferSimilarly, the transferor,number orof oneactive orparticipants morein ofprivate itssector shareholdersdefined (includingbenefit personspension whoplans werepeaked shareholdersat immediately30.1 beforemillion thein transfer),1980 orand anydeclined combinationto thereof,14.4 ismillion in control2015.    2) Contributions to 403(b) Plans       The OLS estimate of thean corporationannual $33.4 million in State revenue that will cease to be collected for the year in which taxpayers make contributions to 403(b) plans has three components:  $22.0 million from non-governmental plans, $11.2 million from plans for school district employees, and $207,000 from the assetsNew areJersey transferred;Supplemental Annuity Collective Trust (SACT).         Non-governmental 403(b) Plans:

     Since (v)2009,  Anon-governmental recapitalization;403(b) plans have been required to file Form 5500 with the U.S.

     Department (vi)of  ALabor.  mereInformation changepublished in identity,the form,EBSA’s orPrivate placePension ofPlan organizationBulletin: however effected;

orAbstract       (vii)  The acquisition by one corporation, in exchange for stock of a2015 corporationForm (referred5500 toAnnual inReports thisindicates subclausethat asU.S. "controlling corporation") which is in control of the acquiring corporation, of substantially all of the properties of another corporation which in the transaction is merged into the acquiring corporation shall not disqualify a transaction under subclause (i) if such transaction would have qualified under subclause (i) if the merger had been into the controlling corporation, and no stock of the acquiring corporation is used in the transaction;

     private (viii)sector  Aemployee transactionand otherwiseemployer qualifyingcontributions underto subclause403(b) (i)plans shalltotaled not$32.1 bebillion.  disqualifiedOf by reason of the fact that stockamount, ofabout a$18.2 corporationbillion (referred to in this subclause as the "controlling corporation") which before the merger was incontributed controlby ofplan theparticipants.  mergedU.S. corporation is used in the transaction, if after the transaction, the corporation surviving the merger holds substantially all of its properties and of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction);

andBureau inof theEconomic transaction,Analysis formerdata shareholdersshow ofthat theNew survivingJersey corporationpersonal exchanged,income forin an2015 amountapproximated 3.45 percent of votingnational stockpersonal income.  Apportioning 3.45 percent of thenational controllingnon-governmental corporation,employee contributions to 403(b) plans to New Jersey and then applying an amountaverage effective marginal tax rate of stock3.5 inpercent theto survivingthat corporationamount whichyields constitutesan controlestimated tax deferral of such$22.0 corporation.million.

      For403(b) purposesPlans offor thisSchool clause,District theEmployees: term "control" means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

      OLS Forresearch purposesindicates ofthat this403(b) clause,plans theare termcommonly "aoffered partyby school districts to atheir reorganization"employees.  includesAccording ato corporationState resultingpension fromdata, athere reorganization,were approximately 133,000 active members of the Teachers’ Pension and bothAnnuity corporations,Fund (TPAF) in FY 2017.  A 2017 survey conducted by the caseNational Association of aGovernment reorganizationDeferred resultingCompensation fromAdministrators thefound acquisitionabout by34 onepercent corporationaverage ofparticipation stockamong oreligible propertiesemployees nationwide.  For purposes of another. this Inestimate the caseOLS ofassumes athat reorganizationschool qualifyingdistrict underemployees subclauseparticipating (i)in by403(b) reasonplans contribute an average of subclause$3,575 (vii)per year to the termplans.  "aThat partyamount tois athe reorganization"average includescontribution of the controllingapproximately corporation56,000 referredState toemployees who participated in suchthe subclauseNew (vii).Jersey State Employees Deferred Compensation Plan (SEDCP) and the SACT in FY 2017.  The employees contributed a combined $200.4 million.

      NotwithstandingThe anyOLS provisionsestimates hereof,based uponon everythese suchvariables exchangethat ortotal conversion,annual theschool taxpayer'sdistrict basisemployee forcontributions theto stock403(b) orplans securitiescould receivedrange shallfrom be$161.7 themillion same(at asan theemployee taxpayer'sparticipation actualrate orof attributed34 basispercent) forto $475.5 million (if all employees participate).  Applying an effective marginal tax rate of 3.5 percent to those amounts yields a tax deferral of $5.7 million to $16.6 million.  For purposes of this estimate, the stock,OLS securitiesconcludes orthat propertya surrenderedmid-range intax exchangedeferral therefor.estimate of $11.2 million is reasonable.