In what’s become one of the more predictable events in Trenton in recent years, Democratic legislative leaders say they are once again readying a proposal to institute a millionaire’s tax to bring in more revenue so the state can live up to all of its funding promises, including for school aid, property tax relief and the public-employee pension system.
But Gov. Chris Christie, a Republican exploring a run for president in 2016, is vowing to block such a tax just as he has multiple times in the past. He says New Jersey’s income tax rates are already too high and that increasing taxes on the state’s wealthiest residents will force more of them to relocate to lower-tax states – taking with them the valuable income-tax revenue they produce each year for the state budget.
Others, including the New Jersey Business and Industry Association, say instituting a millionaire’s tax would also punish small-business owners here who pay business taxes through their personal income tax returns.
What is a millionaire’s tax? The millionaire’s tax legislation that lawmakers have sent to Christie on four separate occasions since he took office in early 2010 – drawing a veto each time — attempted to increase the gross income-tax rate that New Jersey levies on earnings over $1 million. Right now, the state’s highest marginal tax rate of 8.97 percent is charged on every dollar someone earns over $500,000.
The Democratic legislation would have established a new rate of 10.75 percent for every dollar earned over $1 million.
That means under New Jersey’s progressive income-tax structure, someone making more than $1 million would continue to pay at the 8.97 percent rate on earnings between $500,001 and $1 million, but would be taxed using the new rate of 10.75 percent on every dollar they make over the $1 million threshold.
By setting the rate at $1 million, Democratic leaders have said that threshold is high enough to capture primarily only the state’s wealthiest residents, and not the small business owners who file tax returns as S corporations in a way that also includes business income needed to pay employee salaries and other costs.
Doesn’t New Jersey already have a millionaire’s tax? The last time New Jersey permanently increased its top-end income tax rate was in 2004 during the administration of Gov. Jim McGreevey, a Democrat. That’s when the 8.97 percent rate was first established. At the time, the increase was billed as a tax-hike for millionaires, using the general logic that someone who earns more than $500,000 annually is likely to have a net worth of at least $1 million.
But the tax hike implemented by McGreevey was not a true millionaire’s tax since it didn’t create a special bracket solely for earnings over $1 million.
New Jersey did create a special marginal rate of 10.75 percent for earnings over $1 million for the 2009 tax year. But it was a one-year move — drafted by former Democratic Gov. Jon Corzine in the depths of the last recession — that was aimed at staving off steeper budget cuts as the state was losing revenue to the broader economic woes.
That same year other temporary income-tax rates were also established, including a 10.25 percent rate levied on earnings between $500,001 and $1 million, and an 8 percent rate on earnings between $400,001 and $500,000. Those rates were allowed to “sunset” before Christie took office in January 2010, though he is often incorrectly blamed for not extending them.
Christie has repeatedly said during town hall-style events that the state’s top-end “millionaire’s” rate applies to those making over $400,000, an apparent mistaken reference to what happened temporarily before he took office for the 2009 tax year.
How much revenue would a millionaire’s tax bring in? New Jersey has an estimated 17,000 millionaires. Christie has said enacting a 10.75 percent income tax rate on their earnings over $1 million would generate no more than $500 million in additional revenues.
Last year, however, legislative analysts projected as much as $615 million would be raised during the first year of such an increase. To put that in context, instituting a millionaire’s tax would mean adding about 5 percent to the roughly $13 billion in revenue the state is planning to generate this year from its income tax.
[related]Looked at another way, the revenue would equal not quite 40 percent of the $1.57 billion in additional funds for the pension system that a state Superior Court judge has ordered Christie and lawmakers to come up with before the current fiscal year ends on June 30. Christie has appealed that ruling to the state Supreme Court and initial arguments are scheduled for Wednesday.
The reason the tax-policy change wouldn’t have a larger impact is rooted in how the state levies income taxes. Unlike a flat-tax rate, New Jersey’s income-tax rates are structured progressively, meaning the higher marginal rates are only levied on earnings above each threshold, not on someone’s full earnings. So for someone earning $2 million, the 10.75 percent rate, if enacted, would not be charged on their full earnings, but only on their earnings between $1,000,001 and $2 million. They would still be taxed at 8.97 percent on earnings between $500,001 and $1 million, and at the other lower rates of the tax tables going all the way down the brackets.
A good analysis of this approach to income taxes was prepared in 2010 by the liberal think tank New Jersey Policy Perspective after Christie made his tax returns for the 2009 tax year available to the public. That analysis found that although Christie and his wife, Mary Pat, reported earnings of more than $540,000, they paid an effective tax rate of 6.2 percent.
Could Christie go for it this year? If leaders in the Democratic-controlled Legislature once again win approval for a millionaire’s tax, Christie is likely to reject it for the fifth time since 2010. But one wild card that’s in play this year is the ongoing litigation over the pension payments, which Christie pledged to increase in 2010 and 2011 benefits-reform laws but has since gone back on his promise amid state budget woes. A judge could force the state to honor the higher payments, which could compel Christie to accept the Democrats’ proposal – and perhaps sell it on the presidential campaign trail as being forced upon him by “activist judges.”