10/07/2020 | Press release | Distributed by Public on 10/07/2020 07:50
The budget deal between Governor Phil Murphy and lawmakers will make New Jersey more equitable by raising taxes on the wealthiest families and profitable corporations, providing targeted cash assistance, and expanding the state earned income tax credit (EITC) for working families - and it also will raise hundreds of millions of dollars a year to fund schools, health care, and other priorities.
The centerpiece is a 'millionaires' tax' that raises the top income tax rate to 10.75 percent on income over $1 million. This will reduce economic inequities in the state, which is the ninth-most unequal in terms of income, and thereby reduce racial inequities in income and wealth. Nationally, white families are three times likelier than Black and Latinx families to be in the highest-income 1 percent. New Jersey's tax code offsets inequality somewhat: the top 1 percent of households pay a larger share of their income in state and local taxes than the poorest 20 percent, on average. But middle-income families pay the largest share, so a millionaires' tax would bring the system into better balance.
New Jersey enacted its first so-called millionaires' tax in 2004, creating an 8.97 percent top rate on income over $500,000. In 2009 it raised the top rate to 10.75 percent for one year. New Jersey restored the 10.75 percent top rate in 2018, but only on income above $5 million. Under the new law, that rate will apply to income above $1 million.
The new tax is estimated to raise more than $400 million per year, which the state could use for investments in public schools, quality local services, and property tax relief. (The budget deal also directs some of the revenue, starting next year, to a $500 rebate for some low- to middle-income taxpayers, subject to annual appropriations by the legislature.) As our analysis shows, raising taxes on high incomes to support public investments can boost a state's productivity in the long run, such as by raising family incomes and improving workers' skills through high-quality education. And higher rates at the top don't harm short-term economic growth, evidence suggests.
Some opponents claimed that, rather than raise much new revenue, the millionaires' tax instead will prompt many wealthy taxpayers to leave New Jersey. But mainstream experts consistently find that millionaires are no likelier than other taxpayers to relocate - and when they do, it's rarely due to taxes. Too few millionaires left New Jersey after it adopted its 2004 millionaires' tax to offset much of the policy's revenue gains, studies found. And the number of high-income New Jerseyans has consistently grown, rising to 2.4 percent of tax filers in 2017 from 1.3 percent in 2004, according to New Jersey Policy Perspective. (In an interesting twist, one very wealthy taxpayer whose move to Florida a few years back became a favorite anecdote of millionaires' tax opponents moved back to New Jersey and its higher income taxes this year.)
With state and local revenues badly damaged by the COVID-19 recession and many states already cutting education and other core services, New Jersey's tax reform provides an instructive example for other states. As nearly 100 New Jersey economists and economic policy experts noted in a letter to leading policymakers and a companion op-ed this year, raising new revenues - particularly from top earners or profitable corporations - is a much sounder response to the recession-driven state revenue decline than cutting programs.
In addition to the millionaires' tax, New Jersey's budget deal:
By raising revenues on the wealthiest families and profitable corporations, expanding tax credits for working families, and improving cash assistance, New Jersey is advancing a strong, antiracist response to COVID-19 and the recession. Other states should follow suit. When their legislative sessions begin next year, they should make their tax codes more equitable and fund an economic recovery instead of adopting austere budgets that worsen hardship, particularly among communities of color.