A state tax deduction meant to help small business owners has grown into a $190 million giveaway that overwhelmingly benefits New Jersey’s wealthiest households, according to a new report from New Jersey Policy Perspective (NJPP). The report, “Not As Easy As ABC,” finds that reforming the deduction could recover more than $120 million in revenue without affecting tax returns for 99 percent of New Jersey households.
The Alternative Business Calculation (ABC) allows filers with certain types of business income to use losses in one business category to offset income in another, reducing their personal income tax bill. Introduced in 2011 to address a narrow gap in the tax code, the deduction has more than doubled in cost over the past decade, and its benefits have become heavily concentrated among the wealthy.
More than 60 percent of the deduction’s benefits flow to fewer than 0.6 percent of New Jersey tax filers, all with incomes above $1 million. Meanwhile, filers with incomes above $2.5 million now claim more in ABC benefits than all filers with incomes below $500,000 combined.
“This deduction was never designed to be a tax shelter for millionaires, but that’s exactly what it has become,” said Peter Chen, Senior Policy Analyst at New Jersey Policy Perspective and author of the report. “The state is facing a dangerous structural deficit, and this is $120 million we can recover without asking anything of the vast majority of New Jersey families.”
The deduction’s rapid growth, 108 percent since 2016 compared to roughly 49 percent for all other gross income deductions combined, has also been difficult to track. A 20-year carryforward window allows filers to hold losses and deploy them in the years that are most advantageous, making revenue forecasting harder for the state.
Gov. Sherrill’s Fiscal Year 2027 budget proposal would cap the deduction at $1 million in income, recovering an estimated $114 million. The proposal would also reduce the benefit by half for filers between $500,000 and $1 million in income, raising an additional $18 million.
NJPP’s report recommends additional reforms beyond the Governor’s proposal, including shortening the carryforward window from 20 years to one or two, and applying greater audit scrutiny to pass-through business income, an area the federal Government Accountability Office has flagged as ripe for noncompliance.
“Reforming the ABC is a straightforward way to make the tax code fairer and shore up state finances at the same time,” said Nicole Rodriguez, NJPP President. “The vast majority of New Jersey business owners would see no change at all. This is a targeted fix to a benefit that has drifted way off course.”
Read the full report at njpp.org.
