The changes in the Federal and state tax climate are creating value opportunities for New Jersey’s transferable tax credits in 2018. Buyers and sellers of Grow NJ tax credits can benefit, as summarized below.
Federal Tax Reduction
The most dramatic tax change is the reduction in the Federal top marginal corporate rate from 36% to 21%. It will significantly increase the net after-tax value of New Jersey tax credits, both for Grow NJ recipients that sell their tax credits, as well as for those that use their own credits.
Here is how:
Not all companies were paying Federal taxes at the top 36% rate, such that this simple example may somewhat overstate the real increase in after-tax benefit for some companies. Nonetheless, this change is financially material to the billion-dollar market for these credits, making them significantly more valuable—bolstering expectations for an even deeper, more active market in 2018 and beyond.
State Business Tax Increase
The growing likelihood that New Jersey will adopt a unitary or “combined” filing format portends significant potential increases in state corporate income tax liability for many of the state’s largest corporations. During his campaign, New Jersey Governor Phil Murphy estimated that closing this “loophole” would generate an additional $120 million in tax revenue annually. In addition, Senate President Sweeney has recently announced a plan to impose an additional 3% surcharge on the corporate income tax. All of these developments would increase the demand for Grow NJ tax credits to offset the increased NJ tax liability, again deepening the market and likely putting upward pressure on the trading prices of these credits.
New NJ Legislation
A bill recently enacted by the NJ State Legislature, effective on January 16, 2018, made many beneficial changes to the Grow NJ tax credits. Most importantly, it eliminated the state income tax on proceeds of Grow NJ tax credit sales, increasing its net after-tax value by nearly 9%—further increasing demand for state tax credits and deepening the tax credit transfer market. The law also extends the effective carry-forward period from three to 20 years and makes other improvements in the transfer process.
Reduced Supply
In addition, with the Governor’s announced plan to reduce future Grow NJ project awards, and ultimately to amend or replace the program, the emerging reality of constraints on the supply of future tax credits will further tighten the market in favor of sellers as buyers take steps to assure they have access to credits going forward.
The Governor’s strategy also benefits the state in another way – the simple fact that credits will be worth more means that the State can achieve the same economic development impact with a lower notional amount of tax credits, getting even more efficient impact from the use of limited tax dollars.
Jay is the Executive Managing Director at Biggins Lacy Shapiro & Co., one of the most highly regarded site selection and incentives advisory firms in North America. BLS & Co. helps manage the complexities associated with finding optimal locations and securing incentives to support new ventures.