For the sixth time since 2010, New Jersey politicians attempted to pass a millionaires’ taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and failed. The first five were during Republican Governor Chris Christie’s administration and were expected to fail given Christie’s steadfast opposition to income tax increases and regular sparring with the Democratic-controlled legislature. However, unified Democratic government in Trenton has not produced a different result. Governor Phil Murphy signed the state budget on June 30 without a millionaires’ tax, as he and Senate President Steve Sweeney were at loggerheads—Murphy in favor and Sweeney (despite past support) opposed. Sweeney’s resistance carried the day.
New Jerseyans worried about an increasingly uncompetitive business tax code can relax for the time being. The Garden State’s tax code is already the least competitive in the nation according to our 2019 State Business Tax Climate Index, and the 10.75 percent top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate on income over $5 million is the third-highest top bracket in the country. The millionaires’ tax would have made that rate kick in at $1 million—and only made a bad situation worse.
The millionaires’ tax is a bad idea for New Jersey both for what it does and what it doesn’t do. What it does is punish pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es and high earners alike with an uncompetitively high tax rate to gain an unstable source of revenue for the state. What it doesn’t do is address New Jersey’s pressing tax and fiscal concerns: the nation’s least competitive tax code, high property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es for the middle class, and complexity for filers.
High-earning individuals aren’t the only ones who pay the top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. . Pass-through businesses like S-corporations, partnerships, and sole proprietorships file their tax returns as individuals, and many make enough money to be taxed at a state’s top marginal rate. New Jersey’s second-highest tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. is on income from $500,000 to $4,999,999 at 8.97 percent. For perspective, only four states (California, Hawaii, Oregon, and Minnesota) have higher top bracket rates than New Jersey’s second tax bracket. Pass-through businesses in New Jersey making over $1 million per year right now are already being taxed at an uncompetitive rate compared to other states.
According to 2016 IRS data (the most recent available), 277,000 partnerships or S-corporations filed individual income taxes in New Jersey. However, the most successful 13,170 of those pass-through businesses were responsible for 55 percent of all New Jersey pass-through income, and it is these businesses that would pay higher taxes under a millionaires’ tax. Subjecting businesses responsible for over half of a state’s small business income to a tax hike does not come without adverse economic effects and further outmigration, two problems already afflicting New Jersey that should be considered by proponents of the millionaires’ tax.
Millionaires’ taxes are a fickle source of revenue for state budgets. While they may give a short-term boost, taxes on income beyond $1 million are made up of capital gains, interest earnings, and pass-through business income. The income of high-earners varies significantly year-to-year and generally follows the boom-bust cycle with the general economy. That means during recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. s, when the government needs revenue more, a millionaires’ tax will provide less. And during an expansion, when the government needs revenue less, a millionaires’ tax will provide more.
Besides those theoretical concerns, New Jersey’s income tax structure in practice is already too dependent on high-earners. In 2016, one billionaire’s move out of the state resulted in a New York Times report on the revenue implications. According to The Times, the move from New Jersey to Florida (a state with no income tax) was estimated to cost New Jersey hundreds of millions of dollars. A well-structured tax has a broad base, so that one person leaving the state should not be a cause for alarm, as it was in this case. A millionaires’ tax would add even more instability to New Jersey’s already unstable individual income tax.
What New Jersey really needs is a more competitive tax code and property tax relief for middle-class families. Gov. Murphy proposed a one-time $125 property tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. to entice legislators to approve a permanent millionaires’ tax, but one-time relief isn’t going to cut it. New Jerseyans already face the highest effective property taxes in the country at an average effective rate of 2.13 percent on the market value of owner-occupied housing, more than double the national average. In absolute terms, the average New Jersey property tax bill is $8,767. Policymakers should focus their attention there; New Jersey homeowners certainly wish they would.
Another area in need of reform is simplifying New Jersey’s tax code. For example, New Jersey has a complex scheme for taxing S-corporations. While many states just require S-corporations to fill out a separate tax form and be otherwise taxed like individuals, New Jersey concocts a whole separate rate system. S-corporation income subject to federal taxation is taxed at 9 percent. However, if an S-corporation’s entire net income is greater than $50,000 and less than or equal to $100,000, the flat rate is only 7.5 percent. S-corporations making less than $50,000 are taxed at 6.5 percent. It must be noted that these are not marginal tax brackets. An S-corporation making over $100,000 per year pays 9 percent on all its income, not just the income over $100,000. To add to the confusion, there is also a minimum tax on S-corporations based not on net income but on gross receipts. The minimum tax is broken into five segments and ranges from $375 to $1,500. And that’s only one example. Making New Jersey’s tax code more comprehensible to filers should be a higher priority for policymakers than a millionaires’ tax.
A millionaires’ tax is like a sugar high of tax policy: it provides a quick revenue boost, but it’s poor nutrition for a state’s budget and bad for a state’s long-term fiscal health and economic growth. While it may be tempting to think this is the last gasp for it in New Jersey, Gov. Murphy seems to believe the seventh time will be the charm. He vowed to continue to push for the tax after signing the budget on Sunday—meaning that the millionaires’ tax will live to fight another day.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe