New Jersey’s business tax surcharge lapses as funding needs loom

A 2.5% surtax on the state’s most profitable businesses lapsed with the start of the new year, a fact that will reduce New Jersey’s revenue by roughly $1 billion each year amid an ongoing decline in tax collections.

The expiration of the surcharge, which was levied on corporations with $1 million or more in annual profits, means New Jersey no longer boasts the highest corporate tax rate of any state in the nation, though at 9%, its topline rate will remain among the nation’s highest.

Business groups have long called for the surcharge to sunset, claiming it made a state already known for its high taxes that much less desirable to large businesses.

“As we’ve stated before, honoring this commitment sends a strong message to our existing businesses — and those looking to move here — that New Jersey’s leaders understand the importance of growing the economy,” Tom Bracken, president and CEO of the New Jersey Chamber of Commerce, said after legislators broke for the holidays without extending the surcharge.

The surcharge was first enacted in 2018 as a temporary measure after Gov. Phil Murphy reached an impasse with lawmakers on a millionaire’s tax. Though the surtax was set to expire at the end of 2021, lawmakers extended it through the end of 2023 to plug expected pandemic-related budget holes that never fully materialized.

Progressive groups and some local leaders have chaffed at the end of the surtax, charging lawmakers have effectively approved a handout to the state’s most profitable businesses just as state revenue began to sour.

They expressed worry that the loss of the surcharge, which accounts for roughly one-fifth of annual corporate business tax collections, will force the state to reverse course on some of the policies enacted under Murphy’s tenure.

“The math doesn’t add up unless you’re able to come up with revenues to support these big investments, and again — we think big investments are good,” said Peter Chen, a senior policy analyst for New Jersey Policy Perspective. “Fully funding the pension is good. Getting close to fully funding the school funding formula is good. Preschool expansion is good. We support all of these things, but they have to be paid for.”

The surcharge could still be revived during the coming budget cycle, and such a revival could include provisions to make the tax apply retroactively. The 2020 legislation that extended the surcharge through 2023 and raised its rate from 1.5% to 2.5% included such language.

Funding NJ Transit

The surcharge’s sunset leaves lawmakers without a clear funding source to bridge the fiscal cliff that NJ Transit faces over the coming budgetary years.

The agency has struggled to reclaim ridership lost to the pandemic, and federal funds that have kept NJ Transit’s fiscal house in order in recent years are due to run dry partway through fiscal year 2025.

That year, NJ Transit faces a $119.4 million deficit. The shortfall will increase to $917 million the following year.

Though Senate President Nicholas Scutari (D-Union) has more than once said the state could fund transit using the corporate business tax surcharge, the proposal has met with resistance from the governor and top lawmakers in his own chamber.

A spokesperson for Scutari did not return a request for comment.

Lawmakers are exploring other options to fund NJ Transit in the coming fiscal years. Those discussion are still in early stages, but some have suggested reversing a 0.375% sales tax cut enacted under Gov. Chris Christie to meet the transportation network’s revenue needs.

Reversing that cut would bring the state roughly $750 million in annual revenue, but it appears an unlikely path for legislative Democrats who have centered their platform around affordability for the past two years.

Sales taxes are regressive because low-income residents spend a greater share of their income on taxable goods, and the taxes are broad-based, meaning most residents will feel the impact of a sales tax hike.

But it’s not even clear lawmakers will attempt to dedicate funding to NJ Transit in the coming fiscal year. While the agency’s shortfall is expected to grow dire in fiscal year 2026, when it faces a $917 million fiscal cliff, the $119.4 million it needs to meet expenses in the coming fiscal year is far from insurmountable.

“You won’t need it for ’25. It’s the following year that you’d need it. We have two years to come up with a dedicated funding source,” Sen. Paul Sarlo (D-Bergen) told the New Jersey Monitor in late November, referring to fiscal years.

New Jersey is forecasted to end the 2024 July-to-June fiscal year with roughly $8.3 billion in surplus.

Sarlo at the time declined to say whether lawmakers would pass a budget for the coming fiscal year without dedicating funding to NJ Transit.

“It’s hard to say. Let’s get through lame duck first,” he said.