A phaseout out of New Jersey’s estate tax is hitting revenue collections faster than forecasters originally projected. With serious budget talks now underway in Trenton, that could tempt lawmakers to consider reversing — at least in part — the full repeal of the tax that went into effect this year.
The Department of Treasury justfor all major tax sources last week, showing a slight uptick in overall revenue thanks largely to a booming income tax.
But the projections for New Jersey’s estate and inheritance taxes showed a drop of more than $100 million compared to the original forecasts for fiscal year 2018. Analysts have largely attributed the lag to the repeal of the estate tax.
Amid the accelerated drop-off, a proposal has already been put forward by left-leaning interest groups to reinstate an estate tax in New Jersey to generate some $500 million in revenue. While they’ve yet to weigh in publicly, the idea could have some appeal for majority Democrats who so far have been resisting Gov. Phil Murphy’s call for other tax hikes, including a sales-tax increase. But any serious effort to restore the estate tax will undoubtedly draw resistance from Republican lawmakers who were strong advocates of the repeal as a way to fight back against New Jersey’s reputation for being a tax-hungry state.
“New Jersey has to stay on a consistent message that we’re trying to get our house back in order,” Sen. Steve Oroho (R-Sussex) said yesterday.
Until this year, New Jersey was one of the few states that levied both estate and inheritance taxes, and it remains one only of six states that still have an inheritance tax on the books, according to the Washington, D.C.-based Tax Foundation.
While an estate tax is levied on someone’s assets when they die — and, generally only if they are worth a certain amount — the inheritance tax is levied on those, other than a direct relative or charity, that receive an inheritance from an individual after their death. In fact, some have argued that New Jersey got rid of the wrong tax in a package ofthat were enacted in 2016 by the Republican Christie and lawmakers; that’s’ because the inheritance tax is paid regardless of income, while the estate tax was more progressive since it was only levied on estates worth more than $675,000.
New Jersey’s estate tax was phased out over the last two years, with the full repeal completed on January 1, 2018. But it usually takes months or even up to a year for estates to complete the tax-filing process, creating a lag in the actual collections.
According to Treasury’s latest tax-collection figures, the tax is on pace to generate $246 million in fiscal 2018, which ends on June 30. Meanwhile, the inheritance tax, which is unchanged, is on course to generate $357 million in fiscal 2018.
But in theinto law last summer, the state was counting on the two taxes to generate a combined $746 million. The forecast was downgraded earlier this year as analysts started to track the more rapid decline in estate-tax revenue, and the collections projected for fiscal 2019 are now less than $460 million.
The proposal to restore an estate tax with a $1 million threshold was part of a broaderand combat growing income inequality that was voiced last week by the Better Choices for New Jersey coalition, which includes groups representing organized labor, environmentalists, and advocates for the poor, among others.
The idea is based on areleased earlier this year by the progressive think tank New Jersey Policy Perspective, which is a member of the coalition. The think tank’s analysts estimated only about 5 percent of the 70,000 who die annually in New Jersey had estates that were large enough to be subject to the estate tax when the threshold was set at $675,000. They also pointed out the same group is now benefitting from the federal tax changes that were enacted late last year by President Donald Trump, including a significant lifting of the federal estate-tax threshold.
“Restoring the state estate tax with a threshold of $1 million would capture most of the dollars but very few of the estates that formerly were assessed,” the NJPP report said.
Though not mentioned in the report, resetting an estate-tax threshold of $1 million would also echoto establish a millionaires tax in New Jersey to help fund increased investment in areas like K-12 education and public-employee pensions, and with Senate President Steve Sweeney’s call for a rate to be levied only on businesses earning over $1 million.
While Sweeney (D-Gloucester) and other lawmakers have yet to embrace the governor’s proposal for a millionaires tax, it’s the sales-tax hike that seems to have the strongest resistance right now, even among majority Democrats.
On paper, a revenue-collection estimate of around $500 million from a $1 million estate-tax threshold would nearly replace the $581 million Murphy, a Democrat, is seeking to raise by moving the sales-tax back to 7 percent from 6.625 percent. A restored estate tax would also generate more revenue for the budget’s general fund, which has been strained by a series of fiscal-policy changes in recent years as revenue from the income tax, the state’s largest tax source, is dedicated to funding property tax relief.
But re-establishing an estate tax with a $1 million threshold would also put the state at a competitive disadvantage with its neighbors, an issue that business-lobbying groups often emphasize. Pennsylvania and Delaware don’t levy an estate tax at all, while Connecticut’s threshold is $2.6 million, and New York’s is over $5 million.
Oroho, a certified financial planner who serves on the Budget and Appropriations Committee, warned it could also threaten to erode the state’s healthy income-tax collections. While reliable data is not yet available, he suspects at least part of the income-tax uptick could be the result of fewer residents in the highest tax brackets deciding not to leave New Jersey to avoid the estate tax.
“New Jersey has been chasing capital away for a long time,” Oroho said. “If we just do less worse, not as a bad a job, we’ll be in much better shape.”