SENATE, Nos. 1885 and 2354 STATE OF NEW JERSEY DATED: SEPTEMBER 22, 2011
The Senate Budget and Appropriations Committee reports favorably Senate Committee Substitute for Senate Bill Nos. 1885 and 2354.
This substitute establishes for a period of five years, commencing on the effective date of the bill, a new tax deduction for taxpayers providing loans to businesses located within Urban Enterprise Zones (UEZs). This substitute will permit lenders making loans directly to a qualified UEZ business to receive tax-free treatment of the interest income earned on those loans. The tax-free treatment of the interest income will serve as an incentive that will promote lending to small businesses within UEZs.
Specifically, the substitute bill permits taxpayers who are subject to the corporation business tax to deduct from their entire net income the amount of net interest received in payment of indebtedness from a qualified UEZ business that is engaged in the active conduct of trade or business within a UEZ. The bill also permits taxpayers who are subject to the New Jersey gross income tax to deduct from their gross income an amount equal to the amount of net interest received in payment of indebtedness from a qualified UEZ business engaged in the active conduct of a trade or business within a UEZ.
No tax deduction will be permitted under the substitute bill unless all of the following requirements are met:
1) the qualified UEZ business is located solely within a UEZ;
3) the taxpayer provided to the qualified business, loans having an interest rate at the prevailing market rate or less, as determined by the Department of the Treasury; and
4) the taxpayer claiming the deduction has no equity or other ownership interest in the debtor.
The deduction will apply to loans made on or after the enactment of the substitute bill.
This substitute requires that, within five years of the effective date of the bill, the Director of the Division of Taxation in the Department of the Treasury shall submit a written report to the Governor and, pursuant to section 2 of P.L.1991, c.164 (C.52:14-19.1), to the Legislature describing the demand for both programs, the total amount of tax deductions awarded from each program, an assessment of the success of both programs, and any recommendations as to whether the programs should be continued.
The Office of Legislative Services (OLS) projects that the bill's net fiscal impact on the State and local governments will be a loss of indeterminate magnitude. On the one side of the ledger, the OLS estimates that the bill will produce an indeterminate five-year State revenue loss from granting the deduction plus its indeterminate opportunity costs—opportunity costs capture the fiscal benefits the State forgoes as spending is redirected from one economic activity to another. On the other side of the ledger, additional economic activity resulting from loans for which the deduction is the impetus will also generate indeterminate indirect fiscal benefits to the State and local governments that may partially offset the direct revenue loss and opportunity cost of providing the subsidy.
Only the indirect State and local revenue gain from tax deduction-induced loan issuances is to be included in the bill’s fiscal impact analysis. This is so because the deduction prompts the issuing of the loans and their ramifications are thus attributable to the bill. In the converse, deductions for interest payments received on loans that taxpayers would also make absent the tax incentive will produce sunk costs to the State, or an expense without a benefit, as the deduction has no bearing on the decision to make the loan and the subsequent accrual of any ripple effects. Indirect fiscal effects from loans that would be made anyway therefore have to be excluded from the analysis as unaffected by the bill. Given that the bill does not limit the deduction to loans that are directly caused by the deduction, the OLS expects the bill’s indirect revenue gain therefore to fall below its direct State revenue loss, as the deduction is likely to be extended to interest payments on loans that would be made anyway. The OLS, however, cannot gauge the volume of deduction-induced loan issuances and their ensuing indirect effects on State and local government tax receipts.