Opinion: Income Inequality and Policy in New Jersey

Recent reports about the Garden State’s ‘inequality problem’ should be taken with a sizable grain of salt

Andrew Sidamon-Eristoff, Charles Steindel, and Roger S. Cohen
You’ve probably read the dramatic headlines: A recent study by the Washington-based Center on Budget and Policy Priorities (CBPP) has concluded that New Jersey is the seventh “most unequal” state in union. And you may have wondered: Is that true? What does it mean? What should we do about it?

Before you join the latest round of New Jersey bashing, let’s take a careful look behind the numbers and their policy implications. The answers may surprise you or at least better inform your understanding of this serious yet incredibly complex national issue.

Some background. The CPBB’s report, “How State Tax Policies Can Stop Increasing Inequality and Start Reducing It,” starts by ranking the various states according the ratio of average income for the top 5 percent of households to the bottom 20 percent, using Census Bureau data. According to this measure, New Jersey ranks seventh most unequal. The report then incorporates analysis from the Institute on Taxation and Economic Policy regarding the incidence or allocation of state-tax burdens by income class to make recommendations as to how states can adopt policies to reduce their income inequalities.

Before moving to the policy recommendations, let’s examine New Jersey’s CPBB inequality ranking. Yes, it appears reasonable, given the methodology used. However, it may be of some contextual interest to note that the CPBB’s methodology results in rankings that evidence a striking correlation to the number of billionaires residing in a state. According to Forbes Magazine, New Jersey had 8 billionaires at the time the data was collected. New York had 93, California had 124, and Connecticut had 12 — all important competitor states ranked as more unequal than New Jersey. This begs an obviously specious question: Is New Jersey’s problem that it is home to too many billionaires? If so, readers may take comfort in knowing that, per press accounts, at least one taxpaying New Jersey billionaire moved to Florida since that time.

Even accepting the CPBB methodology as a valid way to compute inequality, state-by-state rankings create a somewhat misleading comparative picture. Note that New York ranked first, and California second: In other words, a great many Americans live in states that are more “unequal” than New Jersey. Moreover, the computed differences are statistically dubious. The CPBB’s inequality measure for New Jersey was reported to be 15.61, compared to the national figure of 14.81. Given the limitations of the reliability of the data used — the two decimal points remind us of the old joke that economists reveal they have a sense of humor by reporting statistics to that pretended degree of precision — objective observers must conclude that inequality in New Jersey is on a par with the nation. Something to concern us? Yes. Something that is truly out of the ordinary? No.

Let’s move on. Assuming that New Jersey ranks as relatively unequal, what to do? The CPBB report recommends a range of measures designed to make any state tax system more progressive, such as:

  • levying higher rates on high-income taxpayers or capping itemized deductions;
  • establishing or expanding taxes on inherited wealth, such as estate taxes;
  • strengthening taxes on corporations, such as by eliminating costly tax breaks, establishing strong minimum taxes, or adopting “combined reporting” (a reform that nullifies three of the most common state corporate tax shelters);
  • broadening the sales tax base to include more services purchased by wealthy individuals;
  • boosting incomes among low- and moderate-wage working families by enacting state earned income tax credits (EITCs);
  • maintaining an overall tax system that raises sufficient revenue to pay for the building blocks of shared prosperity, such as education and access to healthcare.
  • The clear implication for the concerned New Jersey resident is that New Jersey’s inequality ranking would improve if we adopted these policies. There are two problems with this approach.

    The first problem is that New Jersey was, at the time the data was collected, already a poster child for many if not most of these suggested policies. New Jersey has one of the highest and most progressive income taxes in the country. Until just a few weeks ago, New Jersey’s estate tax was among the nation’s most progressive. New Jersey’s sales tax exempts clothing and food — items that loom disproportionately large in the budgets of the poor — and, under the state’s UEZ program, sales tax rates in New Jersey’s poorest communities are half that in the rest of the state. New Jersey has a relatively high corporate income tax rate, and has enacted “add-back” statutes to crack down on corporate tax shelters. Just recently, New Jersey boosted its already-generous state earned income-tax credit (EITC) from 20 percent to 30 percent of the federal credit. Lower-income New Jersey residents have, compared to those in many other states, excellent access to healthcare, and the state spends about $3,000 per public school pupil more than Massachusetts, the highest-ranking public school system in the country.

    A second problem is that state tax policy changes would in fact have little or no impact on the CPBB’s inequality rankings. How could this be so? As its statement on methodology acknowledges, the CPBB report’s rankings use a measure of income that is net of federal taxes, not state taxes or benefits.

    In plain language, this means that a state could adopt all the CPBB’s recommendations tenfold and its rank would not be affected, at least not immediately. (We agree that programs such as improved public education may reduce inequality, but only in the long run.) That, dear reader, reveals the stunning irony embedded in the CPBB report’s grandiose title: state tax policies don’t directly affect the report’s measure of inequality.

    Inequality is a serious issue of national scope that deserves careful analysis. The sad truth is that an arbitrary and sensationalized ranking of states with some commentary about state tax systems does little to advance this analysis or the identification of solutions at either a state or national level.