The Tax Proposal That Refuses to Die: New Jersey’s Millionaire’s Tax

On June 3, New Jersey Governor Phil Murphy (D) renewed his plea to expand the state’s so-called millionaire’s tax to apply to all income above $1 million, down from the current $5 million threshold. This time, he also advocated a one-time $125 property tax credit to New Jersey owners and renters making between $10,000 and $250,000 per year, estimated to be 46 percent of tax filers.

Despite that sweetener, both Democratic and Republican leadership in the state legislature were unenthused. The state has already received more revenue than projected due to the Tax Cuts and Jobs Act’s (TCJA) base-broadening provisions and has the third-highest top marginal rates in the country at 10.75 percent, the rate Gov. Murphy now wishes to extend to more taxpayers. (The next-highest rate in New Jersey, imposed on income above $500,000, is 8.97 percent).

The millionaire’s tax is a legislative zombie, killed and reanimated repeatedly by Garden State politicians. New Jersey was the first state to pass a true millionaire’s tax in 2004 when then-Gov. Jim McGreevey (D) approved an 8.97 percent income tax rate on incomes over $1 million. In 2009, then-Governor Jon Corzine (D) increased the rate to 10.75 percent for one year.

In 2010, Democrats in the legislature wanted to codify that rate and passed a bill to do so. Then-Governor Chris Christie (R) vetoed the bill about two minutes after it was passed. In 2011, he vetoed it again, so Democrats tried to put the tax hike to the voters as a legislatively-referred constitutional amendment. They failed to get it on the ballot.

In 2012, Democrats passed the same increase again. Governor Christie vetoed it. Advocates of the tax appear to have taken the year off in 2013. In 2014, however, they were back and passed the 10.75 percent top rate again. Governor Christie vetoed it again. At this point, he would have been wise to automate the process because in 2015, Democrats passed it again. Governor Christie vetoed it again, calling the state legislators “deaf and blind as to taxes.”

At this point, it appears the Democrats settled on waiting out Gov. Christie. In July 2018, they created a new tax bracket on incomes over $5 million and set the rate at 10.75 percent. However, Gov. Murphy campaigned on instituting the 10.75 percent rate strictly as a millionaire’s tax, not a five-millionaire’s tax. New Jersey Senate President Steve Sweeney (D), who was also senate president during Gov. Christie’s tenure, was on board with the governor’s plan until passage of the TCJA.

Governor Murphy remained committed to the idea and proposed the millionaire’s tax in his budget address in March of this year. He reinvigorated the proposal with the $125 property tax credit on June 3. Now, with unexpectedly high state tax revenue because of the TCJA, Sweeney and Assembly Speaker Craig Coughlin (D) both oppose the millionaire’s tax because it is unnecessary to balance the budget. Sweeney went so far as to call Gov. Murphy’s proposal a “gimmick.”

The $125 tax credit would be small comfort to New Jersey property taxpayers. New Jersey has the nation’s highest property taxes by a significant margin, with an average effective rate of 2.13 percent on the market value of owner-occupied housing, more than twice the national average of 1.05 percent. That $125 tax credit would comprise just 1.4 percent of the $8,767 average annual property tax bill in New Jersey, and constitutes one-time relief in exchange for new income tax revenues in perpetuity.

A permanent rate increase coupled with a one-time tax credit is inherently imbalanced, but that is not the only concern. As we wrote in March, “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.” New Jersey currently has seven tax brackets and a labyrinthine tax code. Taxes on high earners are notoriously volatile because of the heavy reliance on capital gains and other impermanent revenue streams, and because high earners are not only the most incentivized but also the best equipped to move out of state for tax purposes. New Jersey already leads the nation in net outbound migration.

Given the legislative leadership’s disapproval, prospects for Gov. Murphy’s proposal do not appear much better than past attempts. But the mere fact that this tax proposal refuses to die has an adverse impact on the state. New Jersey’s tax code is already uncompetitive, and an expanded millionaire’s tax—which would fall on individuals and pass-through businesses alike—would only make things worse.