Lesniak Urges Income Tax Hike, Estate Tax Cut For Wealthy

Mark J. Magyar | June 12, 2014 | Politics
New Jersey would have third-highest millionaire’s tax, but would still rank below combined NYC/New York State

State Sen. Raymond J. Lesniak
Two days after Gov. Chris Christie chided Democrats for failing to come up with any budget alternatives, state Sen. Raymond Lesniak (D-Union) yesterday unveiled an ambitious proposal to raise income taxes on New Jerseyans earning over $350,000, eliminate the estate tax, and generate the $850 million needed to put the state back on track to pay off its unfunded pension liability.

Christie already has vetoed three previous attempts by Democrats to reimpose higher income tax rates on wealthier New Jerseyans and vowed this spring to do so again. For Christie, Lesniak’s insertion of a $350 million estate tax repeal as a sweetener for Republicans does not change the fact that the $1.2 billion income tax hike that is its centerpiece is the most ambitious “millionaire’s tax” proposed so far.

Lesniak’s proposal would permanently restore former Democratic Gov. Jon Corzine’s 2009 top rate of 10.75 percent for millionaires and a 10.25 percent rate on earnings over $500,000. And while Corzine’s 8 percent tax bracket applied only to income over $400,000, Lesniak’s 8 percent bracket would kick in at $350,000.

While more than a dozen states have raised income tax rates in recent years, Lesniak’s plan would vault New Jersey past Oregon, Minnesota, Iowa, and Vermont into third place behind only California and Hawaii in income taxes on the wealthy — although New Jersey’s tax rate would still be lower than the combined New York City and New York State taxes paid by those working in Gotham, a NJ Spotlight analysis showed.

New income tax chart

Nevertheless, the legislation proposed by Lesniak — who is not only one of the state’s most powerful Democratic Party leaders, but also one of the state’s most thoughtful and creative lawmakers — is an important step in the state’s current fiscal crisis both for what it does and does not do.

Lesniak’s plan does not do anything to address the $900 million cut in this year’s pension payment that Christie made by executive order to plug the hole in the current Fiscal Year 2014 budget created by April’s plummet in state income tax revenues.

Christie’s unilateral cut is the subject of a lawsuit by the state’s public employee unions that is scheduled to be heard by Superior Court Judge Mary Jacobson on June 25 — just five days before the constitutional deadline for enactment of a balanced budget.

But Lesniak’s failure to offer any alternative to that cut is part of a tacit admission by Democrats that, as Christie put it, “There is no Plan B” for balancing the current year deficit other than cutting or pushing off the pension payment. The $500 million in school aid and higher education aid payments that could have been pushed off a month ago have already gone out, leaving the pension cut as the only option.

Even union leaders concede privately that it would be difficult for Jacobson to order the state to make the full third-year $1.6 billion payment owed in FY14 under legislation passed in 2010 obligating the state to ramp up to full actuarially required funding of the pension system by FY18 — not with just five days to go before the budget deadline and no money left in the Treasury coffers.

However, what Lesniak’s plan does is provide a concrete budget alternative for union leaders to point to when they file a second lawsuit on or after July 1 challenging Christie’s decision to cut $1.5 billion from the fourth-year $2.24 billion pension payment that was supposed to have been made in FY15 under the same legislation.

While passage of the Lesniak bill would not provide the full $1.5 billion needed to get the pension payments back on schedule, the $850 million it would generate – when added to the $681 million for pensions already in the FY15 budget bill — would be almost enough to fund the third-year payment that was supposed to have been made in FY14.

That would be enough to put the state back on track to make a $2.3 billion to $2.5 billion payment in FY16 and complete the ramp-up to actuarially required funding in FY19 — a year later than the FY18 budget date set in the 2010 bill, but a reasonable compromise for a judge looking to require the governor and Legislature to live up to their obligation under the 2010 pension law.

Passage of the Lesniak bill or a similar measure would give Democratic legislators the opportunity to make political points by pushing once again for passage of a millionaire’s tax — which enjoys the support of a majority of New Jerseyans in state polls — and to argue that Christie is more worried about keeping his “no new taxes” pledge for Republican presidential primary voters than he is about solving the state’s fiscal problems.

For Senate President Stephen Sweeney (D-Gloucester), the frontrunner for the Democratic gubernatorial nomination in 2017, posting the Lesniak bill to fund next year’s pension payment provides an opportunity to continue to repair relations with the state’s public employee unions.

The public sector unions, which are a critical voting bloc in Democratic primaries, were so furious over Sweeney’s sponsorship of the 2011 pension law cutting cost-of-living increases and requiring public employees to pay more for their pensions and healthcare benefits that they blocked the state AFL-CIO’s endorsement of the Ironworkers Union leader for reelection that year.

Perhaps most important in the long run as legislators from both parties begin to seriously discuss tax reform is the fact that Lesniak is saying publicly what Democrats have been saying privately: New Jersey’s estate tax, which is levied in addition to the federal tax on estates worth more than $675,000, may indeed be driving wealthy retirees to leave the state, as New Jersey Chamber of Commerce President Tom Bracken has been maintaining for years.

“Economic studies indicate that the major factor in the decision of wealthy families to leave a state is the estate tax, not the income tax,” Lesniak said in announcing his plan. “This compromise should alleviate concerns that a millionaire’s tax will drive wealthy families out of the state.”

Bracken and New Jersey business leaders would agree with the first half of Lesniak’s statement, but not the second, and will fight the imposition of higher income tax rates on those making more than $350,000 as fervently as labor leaders and progressives will battle for it.

They will argue that Lesniak’s bill in reality is also a business tax hike because such a high percentage of New Jersey’s small businesses are registered as “S” corporations and pay taxes on their business income through their personal income taxes.

To Lesniak, however, it is clear that the state needs additional revenues to cope with the combined $2.75 billion budget deficit for FY14 and FY15 and to cover the pension promises it made to public employees — whose pension plans have a $51 billion unfunded liability primarily because of the failure of state government to make the necessary pension payments for the past 20 years.

“Without additional revenues, the state is facing a train wreck at the end of June that could only be duplicated by Congress. No one wants that to happen,” Lesniak said. “Public and private workers all need to have their pension income secure. Our proposal will help the governor and legislators fulfill that obligation.”

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