In response to President Donald J. Trump’s federal tax plan, Senators Paul Sarlo (D-36), Steve Oroho (R-24), Troy Singleton (D-7) and Anthony Bucco Sr. (R-25) today announced a bipartisan legislative initiative that will preserve the federal deductibility of an estimated $23 billion in state income taxes for New Jersey’s small businesses and partnerships.

The legislation will amend New Jersey’s state tax code to the system that was in place prior to 1993 under which S corporations, Limited Liability Corporations (LLC’s) and other business partnerships directly paid the state income tax liability of their owners and partners.

“We’re going ‘Back to the Future’ with an IRS-proof solution,” said Sarlo, chairman of the Senate Budget and Appropriations Committee. “I don’t see how the IRS could challenge our decision to return to a tax system that was in place for decades. This legislation doesn’t solve the whole problem created by a federal tax law that targets New Jersey by sharply curtailing the federal deduction for State and Local Taxes. But we are going to do everything we can to help New Jersey taxpayers.”

“This legislation will save billions of dollars for the 80 percent of New Jersey’s small businesses that are registered as S Corporations and pay their corporate taxes through the state income tax, as well as all of the law firms, medical groups, accounting practices and other partnerships that were created as LLCs,” said Oroho, a Certified Financial Planner. “This plan works because the federal tax plan allows businesses to continue to deduct all of their taxes.”

The senators said they have been working on the plan with assistance from the New Jersey Society of Certified Public Accountants and its executive director, Ralph Thomas. The original idea for the legislation was proposed in January by Alan Sobel, a Certified Public Accountant in Livingston. Connecticut Governor Dan Malloy’s Department of Revenue Services unveiled a similar plan last week.

“We are grateful to Ralph Thomas and his working group at the Society of CPAs for helping us to vet the concept over the past five weeks,” Bucco said. “The bill itself will move during the budget process, but it will be retroactive to January 1 of this year, and we wanted those who would be affected to know that we plan to make this tax policy change.”

Based on the most recent IRS statistics, more than 260,000 individuals and families in New Jersey reported $23 billion in S corporation and partnership income in 2015 that would no longer be tax-deductible under the federal tax law if paid on individual income taxes, but would be deductible if New Jersey returned to the previous entity-level system of taxation.

“Now more than ever, ‘mom and pop’ business owners need laws that provide tax fairness and don’t negatively impact their bottom line,” said Singleton. “This legislation will help to defray the out-of-pocket income tax hit for small business owners here in New Jersey and help alleviate the inequities created by the federal tax law.”