Who Wants to Tax a Millionaire? The State of New Jersey

In his recent budget address, as reported by CBS Philly, New Jersey Gov. Phil Murphy (D) presented a budget of $38.6 billion, 3 percent higher than the previous budget—a difference of about $1 billion. Reportedly, he plans to partially fund this increase through a “millionaire’s tax.”

New Jersey currently taxes earnings above $500,000 and $5 million at rates of 8.97 and 10.75 percent, respectively. The millionaire’s 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. would expand the top bracket to include everything over $1 million. While the current $5 million bracket includes roughly 6,700 New Jerseyans, the new plan would include about 18,000. This accounts for the highest-earning 0.4 percent of the 4.7 million filers in New Jersey.

The governor also pushed for a four-year surtax on corporations as part of the plan. Companies with more than 50 employees who use Medicaid as their health care would pay a “corporate responsibility fee” of $50 per worker.

The plan is far from top-tier. An ideal tax structure is levied on a broad base with low rates, and is simple, stable, transparent, and neutral. The millionaire’s tax violates principles of stability and neutrality, while doing nothing to solve the state’s current problems with complexity and lack of transparency. It makes the state budget even more reliant on high earners, creating a more volatile source of revenue. The tax also has a nonneutral effect on economic growth by distorting incentives for higher earners and inducing even more outmigration.

New Jersey has seven income tax bracketsA 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. with high top rates, a complex system that ranks worst in the nation on our 2019 State Business Tax Climate Index. At best, this new plan retains the status quo of complexity while increasing tax uncertainty. After all, the state would be changing a bracket that was only created in July of 2018.

The surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. also fails to be neutral, as it is levied upon certain corporations and excludes others. The surtax hits corporations that have employees on Medicaid, in effect taxing them for not providing their employees with a health-care alternative to Medicaid. However, one reason that some of these corporations might not provide a health-care plan is that they might have low profit margins, meaning that the surtax might hit the corporations least able to pay. Penalizing corporations through the tax code is a distortive and ill-guided way to achieve a policy goal like company-provided health-care.

Under the millionaire’s tax, the uncompetitive Garden State would fall even further behind its neighbors. Overburdened New Jerseyans could look to Pennsylvania with its flat rate of 3.07 percent. Or to others nearby: Rhode Island and Connecticut have top rates of 5.99 and 6.99 percent, respectively. New Jersey is already seeing large outflows of income-earning power to states like Florida, Pennsylvania, North Carolina, and Texas.

In 2018, the Garden State saw the most outmigration of any of the 48 contiguous states. New Jersey would benefit from a way to attract residents, and a better tax system would be a good place to start. It should look toward creating a simpler, more neutral tax code instead of pushing changes like the millionaire’s tax that lead to greater revenue instability and stronger incentives for high earners to relocate to a lower-tax jurisdiction.

New Jersey’s tax code ranks last in our Index. This fact matters because a state’s tax system can make a difference in where a business chooses to locate. After all, corporations tend to put down roots where they have the greatest competitive advantage. This, in turn, can affect a state’s economic growth and job creation. As New Jersey’s tax code is already uncompetitive with other states, it seems misguided to accept a proposal that will make things even worse.

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