Millionaires’ Tax Clears New Jersey Legislature, Faces Likely Veto
June 30, 2014
If the Democrats in both Houses of the New Jersey Legislature have their way, the state’s 2015 budget will at last introduce a statewide “millionaires’ tax.” The proposed tax, which is meant to cover the cost of a scheduled pension payment, would create a new temporary tax bracket for those earning more than $1 million. For just the next three years, these top earners would owe 10.75 percent of their income above $1 million to the state – a jump up from the current top marginal rate of 8.97 percent.
If this plan seems familiar, it’s because it has been proposed several times before – and failed. Governor Christie vetoed the tax in 2010, 2011, and most recently in 2012. Exactly two years later, he appears poised to do the same.
While they appear politically popular, millionaires taxes are poor tax policy. They target a narrow base with high rates, reduce competitiveness, and distort earning incentives. Two-thirds of New Jersey businesses file as individuals under the tax code, and would therefore be subject to the newly escalated rate – introducing higher costs that would ultimately impact lower and middle-income residents in the form of lower wages and increased prices for goods and services. What’s more, the temporary nature of the current proposal undermines the principle of stability and curbs long-term planning potential.
Christie and other opponents of a millionaires’ tax are quick to lean on the argument that steep taxes on income drive higher earners out of New Jersey, toward more tax-friendly states such as Florida or neighboring Pennsylvania. Indeed, this is a legitimate concern: the top 1 percent of New Jerseyans foot 40 percent of the state’s total income tax bill. And any threat on this stream of revenue is a threat on the public services, roads, pensions, and institutions it currently funds. But the real debate over increasing the progressivity of the state’s income tax shouldn’t be about rich people relocating; it should be about growth.
In general, higher taxes have been shown to negatively affect economic growth, but highly progressive personal income taxes are particularly harmful for productivity and growth. New Jersey currently ranks 49th among all states in our State Business Climate Index – followed only by its neighbor, New York, which recently passed a set of beneficial reforms sure to improve its climate in the coming years. The millionaires’ tax would only further deteriorate New Jersey’s competitiveness, and only California and Hawaii would be left with higher top marginal tax rates on income. Although there is no easy fix to the Garden State’s budget problems, a temporary hike in taxes for individuals and businesses is not the sensible long term solution.
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