On November 1st, New Jersey residents will start paying considerably higher gas taxes, with the rate rising from 14.5 to 37.5 cents per gallon (cpg) as part of a broader 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. deal negotiated between Governor Chris Christie (R) and Democratic leadership in the state legislature. The tax increase hasn’t even gone into effect yet and already, two Republican state senators have filed legislation to repeal the deal. But while the gas tax increase is the most immediate and highly visible aspect of the bargain on taxes, it is only one component. The gas tax hike is paired with a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rate reduction, an increase in 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. and the retirement tax exemption, and the phaseout of the estate tax.
Right now, New Jersey has the second-lowest motor fuel tax in the nation (14.5 cpg). Only oil-rich Alaska is lower, at 12.25 cpg. In just over a week, it will have the seventh highest, just a hair under Connecticut’s 37.51 cpg. The rate, however, has the potential to fluctuate over the years, based not on gasoline costs or even inflation indexingInflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in marginal dollars, rather than rates, slowly lose value. , but rather on consumption. The law caps the revenue from the gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. increase at the amount that 23 cents (or 12.85 percent per gallon) would have produced during the 2016 fiscal year. If consumption rises, the rate will decline slightly. If consumption falls, it will rise. Thus, the tax will bring in a consistent $1.23 billion in new revenue each year, with rates adjusting to keep collections constant.
Gas taxes can be relatively good taxes, particularly when the revenue they raise is dedicated to transportation infrastructure, as the tax then represents something approaching a user-pays model. There is certainly a strong argument for funding roads and bridges using gas taxes as opposed to relying on general revenue, and, therefore, for ensuring that gas tax revenue actually flows to transportation projects. On that score, New Jersey voters will have the opportunity to decide this November whether to dedicate all money from the gas tax exclusively to transportation projects.
As offsets to the gas tax increase, the recently enacted tax package also raises the amount of retirement and pension income that is excluded from income taxation. Currently, married couples filing jointly do not owe income tax on the first $20,000 a year in retirement income. This threshold is now set to increase by $20,000 a year through 2020, after which it will continue to stand at $100,000. Single taxpayers will see the exemption rise from $15,000 to $75,000 over that period. Coupled with a veterans’ exclusion, this will result in a $83 million to $113 million tax reduction in fiscal year 2018, rising to $110 million to $157 million by fiscal year 2022.
The state’s earned income tax credit, which currently stands at 30 percent of the federal level, will increase to 35 percent, at a cost of $70.5 million per year by fiscal year 2022. The state sales tax, meanwhile, will decrease from 7 percent to 6.875 percent on January 1, 2017, and decline further to 6.625 percent a year thereafter, a tax cut of $655 million a year by fiscal year 2022.
Last but not least, the tax reform package phases out New Jersey’s estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. over two years, by raising the exclusion from $675,000 to $2 million as of January 1, 2017, and then repealing the estate tax outright as of January 1, 2018 (a tax cut of $562 million a year by fiscal year 2022). The state will continue to impose an inheritance tax; it is currently one of only two states to impose both an estate and an inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. , which has a particularly strong adverse effect on family-owned businesses.
Between fiscal years 2017 and 2022, the tax package will result in an estimated $800 million to $1 billion in additional taxes, though the tax package represents a tax cut in aggregate in the out years. In fiscal year 2017, the nonpartisan Office of Legislative Services estimates that the tax cut components of the plan will bring in $544.4 million in additional revenue, as few of the offsets will have phased in. By fiscal year 2019, the tax cut component will reduce revenues by $1.07 billion to $1.11 billion per year, while the increase in the gas tax will bring in $1.23 billion, for a slight revenue boost. In subsequent years, however, the cuts will be larger than the new gas tax revenue. By fiscal year 2022, the tax cuts will total an estimated $1.40 billion to $1.44 billion, above the consistent $1.23 billion brought in by the gas tax increase, resulting in a modest revenue reduction.
Revenue Estimates, Fiscal Years 2017-2022
|
Year |
Low-End Estimate |
High-End Estimate |
|
FY 2017 |
$544.4 million |
$544.4 million |
|
FY 2018 |
$555.2 million |
$585.2 million |
|
FY 2019 |
$124.5 million |
$159.5 million |
|
FY 2020 |
($63.2 million) |
($23.2 million) |
|
FY 2021 |
($146.9 million) |
($101.9 million) |
|
FY 2022 |
($214.4 million) |
($168.1 million) |
The price at the pump may be the most obvious and immediate consequence of the legislation, but the overall effect is much broader.
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