How NJ Legislature almost made a $7 billion tax mistake

Nicholas Pugliese | NorthJersey

Show Caption Hide Caption Charlie Stile and James Nash talk NJ budget battle Charlie Stile and James Nash talk NJ budget battle and Governor Murphy's reaction on June 21, 2018.

Last Thursday, as Democratic lawmakers scrambled to pass a $36.5 billion spending plan in defiance of Gov. Phil Murphy, they also rushed through an inscrutable, 24-page bill meant to raise the corporate tax rate and help balance the budget with about $915 million in new revenue.

Lurking in the legalese and abstruse references to federal tax law, however, was language that would have forced New Jersey’s corporations to pay billions more than intended — as much as $7 billion in one year, according to some estimates.

Lawmakers were made aware of the mistake and immediately started working on a fix. But they went ahead and voted on the faulty bill anyway.

How could that happen? Well, welcome to June in Trenton.

The story of bill A-4202, although it will likely prove inconsequential, sheds a light on how New Jersey’s future laws can be thrown together hastily and with inadequate vetting, especially when the Legislature is running up against deadlines like the end of a fiscal year or a legislative session.

In this case, those systematic shortcomings were compounded by a subject matter so complex that it took the intervention of outside tax experts to explain to lawmakers what they had done wrong.

‘Drafted in the dark of night’

The error, apparently, started with Murphy, who saw an opportunity in the tax cuts President Donald Trump signed into law in December.

Among other breaks to corporations, that federal law commenced a so-called repatriation holiday that allowed companies to pay a one-time low tax rate on overseas assets they brought back into the U.S.

In his March budget proposal, Murphy called for “modernizing” New Jersey's corporate business tax to capture more revenue from the state's multinational corporations, including by taxing some of the repatriated assets.

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The governor’s office said the entire modernization package was worth $110 million.

When the administration sent lawmakers a draft bill earlier this month, though, it contained a provision that would have taxed the repatriated assets at a much higher rate than intended, according to Democratic and Republican legislative aides.

Murphy's office did not respond to a request for comment Tuesday.

“If you talk to everybody from AT&T, Verizon, Pfizer, all those groups, there’s great commonality, this is a $7 billion [tax],” Senate Minority Leader Tom Kean, R-Union, said Thursday. He faulted Democrats for the way the bill was “drafted in the dark of night.”

New Jersey’s business community went into crisis mode.

“These dividends represent 30 years of foreign earnings and profits and should not be taxed,” Michele Siekerka, chief executive of the New Jersey Business and Industry Association, told lawmakers last week. “In many cases, there may be cash or fiscal assets not available to cover that.”

Democrats in a bind

Democratic lawmakers started to realize something was awry around June 19, when they attached their estimated $805 million corporate tax hike to Murphy’s draft and put the bill through the Senate and Assembly budget committees.

That was a Tuesday. By Thursday, lobbyists for New Jersey’s corporations had convinced them a fix was needed, but legislative leaders were determined to pass a budget that day — a strategic move that put Murphy on notice that they wouldn’t support his proposals to raise the sales tax or introduce a millionaires tax but that left enough time before the June 30 budget deadline for further negotiations.

That created a problem. Democrats couldn’t pass the budget bill without first passing the corporate tax bill, whose revenues were crucial to balancing their budget, as required by law.

Senate Democrats asked their Republican colleagues to back what’s known as an “emergency resolution” to allow the bill to be amended on the fly. Republicans refused.

“Senate Republicans did not want to help Democrats repeat their mistake of rushing another vote on a billion-dollar tax increase that members — both ours and theirs — had little opportunity to review,” Bradley Schnure, a spokesman for the Senate Republicans, said in a statement.

So the Democrats passed the defective bill.

Mopping up

On Monday, they revisited the issue, approving in both houses a cleanup bill that, among other changes, would replace the heavy-handed tax on repatriated assets with a much less aggressive one more in line with Murphy’s stated intent.

Afterward, Senate President Stephen Sweeney, D-Gloucester, dryly summarized the drama in a conversation with reporters.

“We knew the language had an issue,” he said. “We had the bill to fix it the same day we had the legislation. The Republicans wouldn’t give us an emergency. We passed the bill today to fix the mistakes.”

Asked if it could really have been a $7 billion hit for corporations, Sweeney responded: “It could have been. It’s not now.”

Murphy is opposed to the corporate business tax hikes anyway, so it’s unlikely he would have ever signed the original bill into law. And even if he had, it’s possible the offending language could have been sanitized by state regulators before taking effect.

Corporations were also prepared to mount a legal challenge.

But the tax legislation and the possibility of its $7 billion error shows how disorganized the legislative process can be, especially when mixed with deadlines and politics.

And budget season’s not over yet.

Staff Writer James Nash contributed to this article. Email: pugliese@northjersey.com