Tax reform is becoming a hot topic in Washington, D.C., as President Donald Trump is looking for Congress to cut both corporate and personal income-tax rates. Similarly, the future of New Jersey tax policy is also expected to become a key issue in Trenton once the state welcomes its next governor early next year.
Democrats who control New Jersey’s Legislature signaled several months ago as they were hashing out a new state budget with Gov. Chris Christie that they would be pushing once again for a millionaires tax to bring in more funding for local school districts once the term-limited Republican governor leaves office in January 2018.
And if Democratic gubernatorial candidate Phil Murphy ends up winning the gubernatorial election in November — something that the latest public-opinion polls suggest is likely — legislative leaders should find a willing partner. Murphy’s own fiscal platform includes a call for enacting a higher levy on the state’s wealthiest residents, among other tax-policy changes.
But even if Murphy’s opponent, Republican Kim Guadagno, ends up pulling off an upset, she’s also talking about tax reform. The centerpiece of her economic agenda is a more than $1 billion “circuit breaker” property-tax relief initiative.
Trump promised lower taxes while running for president last year, and administration officials first put forward a sketch of their plans in late April, when they said Trump would like to see a new tax code that features fewer income brackets and lower rates levied on both personal income and corporate tax revenue. Although most of the finer details have yet to be announced, administration officials have also suggested many popular income-tax deductions that directly impact New Jersey, such as those allowed for state and local taxes, could be eliminated as part of the broader reform effort.
But it remains to be seen whether Trump will find enough support among Republicans in the Congress to enact his full tax-reform proposal, or if he will instead choose to work on a bipartisan plan that could draw at least some votes from minority Democrats.
Back in Trenton, the looming debate over tax policy is not likely to be centered on cutting anyone’s tax rates, but instead on increasing those levied on the income being earned by the state’s wealthiest residents.
Democrats have tried on numerous occasions to reinstate a surcharge on income over $1 million that was in place for one year nearly a decade ago during the tenure of former Gov. Jon Corzine. But Christie, a two-term Republican, has vetoed their efforts to reinstate the surcharge every single time.
With Christie’s tenure now due to end in a matter of months, legislative leaders announced in June that they would be relaunching the push for a millionaires tax when a new governor takes office in early 2018 as part of a broader effort to increase state aid for local school districts, which have been underfunded by up to $2 billion annually during Christie’s two terms.
Murphy, a former Goldman Sachs executive and foreign ambassador under President Barack Obama, has also made increasing aid to local schools a top priority, and if he ends up winning this year’s gubernatorial election, he’s pledging to adopt a slate of tax-policy changes that includes creating a new top-end income tax rate of 10.75 percent. Analysts from the nonpartisan Office of Legislative Services have estimated such a rate, which would be levied only on earnings above $1 million, could generate roughly $600 million in new revenue.
Among Murphy’s other tax-policy proposals, which NJ Spotlight detailed in May, is a revision of the state’s corporate-income tax-filing regulations to prevent multistate companies from reporting New Jersey-based profits in states with lower tax burdens. Legislative analysts project that change could net nearly $300 million.
Another $300 million could be raised under Murphy’s call for legalizing and taxing marijuana, according to industry experts, and Murphy also supports changing the way hedge-fund profits are taxed in New Jersey, which analysts project could raise at least $100 million in new revenue.
While Murphy’s fiscal platform has drawn strong criticism from Guadagno — who has adopted a firm “no new taxes” position — his plan to raise more revenue from the small percentage of New Jersey residents who make more than $1 million annually is not as dramatic a change as those proposed in a new report released by New Jersey Policy Perspective, a liberal think tank based in Trenton.
Citing data collected by the Institute on Taxation and Economic Policy, the NJPP report makes the case that New Jersey’s current tax structure forces lower-income residents to contribute a more significant portion of their overall earnings to state and local government than the state’s higher-income residents.
New tax structure
The report recommends increasing income-tax rates on the top 5 percent of New Jersey’s income earners to generate more equity. It also proposes a number of new income-tax rates, including hiking from 6.37 percent to 7 percent the rate on earnings between $250,000 and $500,000; increasing from 8.97 percent to 9 percent the rate on earnings between $500,000 and $1 million; and creating a new rate of 10.75 percent for earnings between $1 million and $2.5 million. A new rate of 11 percent would also be created for earnings over $2.5 million, a top-end rate that would still fall below California’s 13.3 percent rate on earnings over $1 million, according to NJPP.
Such changes would ensure New Jersey, which has experienced a number of credit-rating downgrades in recent years as revenues have fallen short of obligations, would be able to properly fund investments in education and infrastructure that benefit the overall state economy, said Sheila Reynertson, a NJPP senior policy analyst who wrote the report.
“This proposal alone will not solve the state’s fiscal crisis, but it is a substantial yet sensible step in the right direction,” Reynertson said.
Murphy’s campaign declined to comment on NJPP’s report yesterday, but Guadagno’s pointed immediately to a recent decision by Alexion Pharmaceuticals to leave Connecticut, a state where high taxes have been blamed by some for causing other corporations to announce their departures in recent years, including Aetna and General Electric.
“If you want to see what a disaster any kind of tax increase would be for New Jersey, look no further than Connecticut,” said Ricky Diaz, a spokesman for Guadagno’s campaign.