It hasn’t been talked about much in recent weeks, but state Senate President Steve Sweeney’s proposal to raise taxes on the highest-earning corporations in New Jersey is still on the table. And although state legislators have expressed a lack of enthusiasm for raising taxes this year — as advocated by Gov. Phil Murphy — they could end up adopting it if they want to accept Murphy’s plans for higher spending.
Sweeney (D-Gloucester) talked about the current state of play on the state budget during an interview with NJ Spotlight yesterday, and he made it clear that tax hikes of any kind remain a “last resort” for him and many other lawmakers; concerns are still running high about how a recent overhaul of the federal tax code could impact New Jersey residents.
But the Senate leader also detailed several reasons why he believes companies that are receiving a windfall from the federal tax changes — including a significantly reduced corporate-tax rate — are in a better position to absorb a tax increase than the state’s millionaires, which is a group Murphy is targeting with an income-tax hike.
“I’m trying to take the burden off of the middle-class people of this state, and when I say that, it’s ironic, because we’re arguing against a millionaires tax,” Sweeney said during the interview in his office in the State House. “But when the millionaires move out, the responsibility gets spread amongst the middle class, and they’re the ones that can’t move.”
Sweeney’s comments came just one day after Murphy, a first-term Democrat, doubled-down on his call to establish a 10.75 percent income-tax rate for earnings over $1 million in a speech that highlighted the passing of his first 100 days in office. Murphy also used the milestone to renew his pitch for the restoration of a 7 percent sales-tax rate in New Jersey as his fiscal year 2019 budget plan calls for increased spending on core priorities like K-12 education, public-worker pensions, and mass transit.
Wide gap on taxes
But Murphy’s speech, and Sweeney’s comments yesterday, demonstrate there’s still a wide gap on taxes among lawmakers — some of whom have to run for reelection next year — and the governor. And there’s just two months to go before a new budget must be adopted that incorporates whatever changes to the tax code end up being agreed to.
Meanwhile, as the governor’s tax proposals have still not been embraced by Assembly Speaker Craig Coughlin (D-Middlesex) either, there’s been some suggestion that Murphy’s supporters may be willing to push back against the reluctant legislative leaders by airing television ads in key districts. Sweeney had a quick response for that yesterday.
“Bring it on,” he said. “This is not about raising taxes. This is time for us to work on fixes.”
Sweeney first floated the idea of establishing a new corporate-tax rate for businesses earning over $1 million in net annual income in New Jersey a little more than a month ago. He argued that the state could generate more than $650 million by increasing New Jersey’s current top-end corporate rate from 9 percent to 12 percent. The proposal was put forward just a week before Murphy released his $37.4 billion budget for fiscal 2019, and Sweeney said he offered up the idea in a spirit of compromise, since Murphy had been pushing for a millionaires tax hike since last year’s gubernatorial campaign and was widely expected to include it in his budget plan, which he did.
Willing to compromise
“I threw out an option, and I wasn’t even crazy about that. But I was trying to show that I was willing and open to compromise,” Sweeney said yesterday.
For his part, Murphy initially said the corporate-tax proposal had “some appeal,” but he hasn’t talked more seriously about it in the weeks since he released his budget, which also calls for the 7 percent sales-tax rate, an increase Sweeney and other lawmakers also have major concerns about. Meanwhile, Sweeney caused some confusion about his corporate-tax proposal’s prospects after speaking unenthusiastically about the issue during a radio interview late last month.
To be sure, Sweeney said yesterday that he remains unconvinced that the state will have to enact new tax hikes, even as lawmakers from both parties seemed to have embraced several big-ticket spending items that are in Murphy’s budget proposal, including a $700 pension-contribution increase, nearly $284 million more for K-12 education, and an additional $242 million for New Jersey Transit. In fact, between natural revenue growth, possible savings that could be realized in other areas, and a proposal to close some corporate loopholes, Sweeney is still refusing to concede the point fully to Murphy.
“When I say last resort, it’s not fair to say completely ‘no’ to something, but I’m telling you, it’s a last resort,” Sweeney said yesterday.
The Senate leader also talked openly about the merits of his corporate-tax proposal compared to the millionaires tax. For starters, the higher corporate rate would be paid by many out-of-state companies — maybe up to half of the more than 2,000 companies earning more than $1 million annually in New Jersey — because of the way the state taxes businesses that sell products and services in New Jersey, even if they are not located here. A good example of that is a big-box retailer that has locations throughout the state but does not maintain its corporate headquarters here.
Taxing rich corporations or rich people
By contrast, Murphy’s millionaire’s tax would hit primarily only New Jersey residents. Meanwhile, companies that would face the higher corporate rate under Sweeney’s proposal could also still fully deduct that cost from their federal taxes. But New Jersey’s highest income-earners can no longer write off a good portion of their state income taxes thanks to a $10,000 cap that was placed on the federal deduction for state and local taxes that are known as SALT.
“Half the tax is coming from out of state, and it’s coming from companies that are doing absolutely nothing (for the windfall) — and they can deduct it,” Sweeney said.
The revenue from the establishment of a new top-end corporate rate could also help alleviate concerns about the volatility and inflexibility of the state’s current revenue stream that were discussed at length by members of Murphy’s own administration during budget-committee hearings earlier this week. During those hearings, several Republicans noted a millionaires tax would only exacerbate those concerns.
But Sweeney himself is a past advocate for a millionaires tax, and his position this year marks a complete reversal from his prior support. The explanation for the change of heart offered by Sweeney yesterday relates to the temptation that he believes many of New Jersey’s highest earners now face thanks to the new cap on the SALT deduction — even before the state’s income-tax rate could be increased.
“No one worked harder to pass a millionaire’s tax than me until now,” he said. “We know the circumstances have changed and that is not an attractive option right now.”