Lawmakers Weigh Tax Schemes in the Garden State

Download Fiscal Fact No. 315: Lawmakers Weigh Tax Schemes in the Garden State

New Jersey doesn’t have the best reputation when it comes to taxes. Not only did the Garden State rank 50th in the 2012 State Business 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. Climate Index,^[1] its citizens also have the highest total tax burden in the country.^[2] Further, the state had the highest per capita 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. collection in 2009^[3] and has been ranked as one of the top five states with the worst individual tax burden since 1977. The desire for tax relief in the state has grown in recent years, with Governor Chris Christie (R) pledging, “I'm not going to increase taxes on the state that the Tax Foundation has said is the highest burdened tax state in America.”^[4] As the June 30 deadline to pass the state budget looms, Democrats in the legislature have also weighed in on reform ideas. Three plans have emerged in recent weeks:

Governor Christie’s Across-the-Board Income Tax Cuts

Governor Christie has pushed for 10 percent across-the-board 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. cuts for all tax brackets.^[5] Under this plan, the cuts would be phased in over four years, while the Earned Income 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. would be increased from its current rate of 20 percent of the federal earned income credit^[6] to a new rate of 25 percent. Table 1 shows income tax rates under this proposal.

Table 1: Individual Income Tax Rates Under Governor Christie’s Plan
Bracket	Current Rates	Proposed Rates (with 10% cut)
>$0	1.40%	1.26%
>$20,000	1.75%	1.58%
>$35,000	3.50%	3.15%
>$40,000	5.53%	4.98%
>$75,000	6.37%	5.73%
>$500,000	8.97%	8.07%

The New Jersey Senate Income Tax Credit Plan

Senate Bill S. 10, sponsored by Senate President Stephen Sweeney, has proposed a homeowner income tax credit of 10 percent of property tax bills up to $10,000.^[7] This bill would also have a phase-in period of four years and would be limited to annual incomes of $250,000 and under. Senate Democrats claim that:

“…a family earning $50,000 a year would save, on average $600, and a family earning $100,000 a year would save an average of $800; millionaires would get absolutely zero. Under the governor's proposed income tax scheme, a family earning $50,000 a year would only save $80.50, and a family earning $100,000 annually would only save $275, while a millionaire would get a $7,265.75 tax break…”^[8]

This bill also provides tax relief for renters in the form of a “renter’s credit.” This credit was formerly only $50 but will reach $200 after a three year phase-in period.^[9]

The New Jersey Assembly Income Tax Credit and Millionaires Tax Plan

The General Assembly is considering a plan similar to that of the Senate, but the income tax credit would instead be 20 percent. The credit would be funded by a “millionaires’ tax”—a new 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. for those earning more than $1,000,000. These filers currently pay the top marginal rate of 8.97 percent but they would be subject to an escalated 10.75 percent under the Assembly bill.^[10]

Don’t Tax Me, Tax Someone Else

U.S. Senator Russell B. Long (D-LA) famously quipped that the idea of tax reform was merely “Don’t tax you, don’t tax me, tax that fellow behind the tree!” The Assembly proposal aims to do just that: shift the cost of government to “someone else.”

In his February budget address, Governor Christie asserted that he was “proud to have twice vetoed the effort to reintroduce [higher marginal tax rates]” and “will veto any tax increase again.”^[11] Assuming that the governor upholds his promise, the Assembly proposal featuring a millionaire’s tax is not likely to be implemented through traditional legislative procedure.

However, in an effort to bypass the governor’s threatened veto, Democrats have threatened to put the measure on the ballot as a constitutional amendment. A January 2012 poll reported that 58 percent of New Jerseyans supported a millionaire tax for budget-balancing purposes, a decrease from 64 percent in late 2011.^[12] Despite the slight decrease in support, this is still enough to pass the measure if it were to reach voters—the state constitution only requires a majority of voters for a constitutional amendment to be adopted.^[13]

Regardless of their popularity, attempts to increase the tax burden on high-income individuals would be damaging to long run growth in New Jersey. Economic research indicates that progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. rates disincentivize developing job skills and career advancement, and reduce the number of hours people are willing to work.^[14] Furthermore, taxes on high income filers include business income, and raising taxes on this group would have negative effects on long term economic growth.^[15]

Progressive tax rates create practical problems for funding government services because they tend to be more volatile than other ways of collecting revenue. Because most of the burden falls on capital gains, the revenue stream is linked to the economic expansions and contractions associated with business cycles.^[16] As states battle with budget shortfalls, moving away from progressive taxes will help provide more stable revenue streams.

Finally, as a long term strategy for crafting good public policy, tilting the tax code toward high income earners creates what Nobel laureate economist James Buchanan calls “fiscal illusion,” an economic problem where citizens demand more in government services because they do not bear the full cost of them.^[17]

Proportionate Means Proportionate

Proponents of the Assembly and Senate plans argue that in comparison with Governor Christie’s proposal, they give more aid (in the form of dollars saved per year) to low and middle income individuals. Critics of the governor’s plan contend that it saves more money for the wealthiest residents, and have even called the plan “disproportionate.”

Of course, by definition, an “across-the-board” cut reduces each tax bracket’s rate exactly proportionately, by an equal percentage. While high-income earners benefit by greater dollar amounts, in a relative sense, the tax cut is actually equal.

Conclusion

Ultimately, New Jersey lawmakers will have to address problems on the spending side in addition to cutting taxes, particularly in light of reports from both the Office of Legislative Services and the State Treasurer that indicate state revenue projections overestimated income for the current and upcoming fiscal years.^[18] By addressing some of its tax deficiencies, the Garden State can move toward a tax code that collects a stable, neutral revenue stream.

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