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New Jersey’s Tax System Ranked among Fairest in the Country

Report by left-leaning institute cites progressive income-tax structure and fact that Garden State doesn’t overly rely on sales tax

Taxes cut-out

Across the nation, state and local tax systems seem to be contributing to income inequality, but in New Jersey that doesn’t appear to be the case.

A report on the fairness of state and local tax policy that was released yesterday by the Washington, D.C.-based Institute on Taxation and Economic Policy ranked New Jersey among the U.S. states with the most equitable tax systems.

The left-leaning organization credited New Jersey for having a progressive income-tax structure that levies higher tax rates on those who earn the most income. It also noted the state doesn’t rely too heavily on revenue from the sales tax, which is generally considered to be a regressive tax, although that is offset to some degree in New Jersey due to exemptions on items like food and clothing.

The ITEP report also placed New Jersey among the handful of states where the top 1 percent of earners pay a higher effective tax rate than the bottom 20 percent, standing in contrast with the nation as a whole. But analysts from New Jersey Policy Perspective, a progressive think tank based in Trenton, noted there’s still some work to do since the report found middle-income earners in New Jersey pay a slightly higher effective state and local tax rate than those at the very top.

Most states’ tax policies widen rich-poor gap

In all, the ITEP analysis determined that state and local tax policies are making income inequality — which is the gap between the very rich and the poor — worse in all but five states and the District of Columbia. New Jersey is in the latter group, along with California, Delaware, Minnesota and Vermont.

“Thoughtful, progressive tax policy decisions permitted these six jurisdictions to make their tax systems somewhat more equitable for those with the least ability to pay taxes,” the report said.

New Jersey's total tax take: Click to expand/collapse

Looking more closely at New Jersey, the report found those with family incomes that put them in the lowest 20 percent of all earners statewide — a group that earned less than $23,800 annually — were levied an effective state and local tax rate of 8.7 percent. Meanwhile, the top 1 percent of income earners in New Jersey — those earning $897,300 or more — paid an effective state and local tax rate of 9.8 percent.

At the national level, that trend is reversed: The bottom 20 percent of earners paid an effective state and local tax rate of 11.4 percent, according to the report, while the top 1 percent nationally paid an effective rate of 7.4 percent. The ITEP analysis suggests the lower effective state and local tax rates paid by the nation’s wealthiest residents leaves them with more pre-tax income to spend on day-to-day living expenses and to save for their futures than low- and middle-income residents.

“This indicates that the income inequality that existed before the levying of state and local taxes has been made worse by those taxes,” the report said. “On the other hand, states with slightly progressive tax structures have positive tax inequality indexes.”

Critics on the right

To reach its conclusions, the report compared a wide range of state and local taxes, including income, sales and property taxes. ITEP also considered things like income-tax exemptions and credits and taxes on inheritances and estates as part of its analysis, which critics on the right consider to be incomplete since it doesn’t take into account which groups benefit the most from state and local government spending.

The ITEP report also factored in new tax policies that have been put in place at the state and local level as of last month, including those enacted over the summer in New Jersey by Gov. Phil Murphy and the Democrat-controlled state Legislature. They included the creation of a new income-tax rate for earnings over $5 million and an expansion of the Earned Income Tax Credit for the state’s lowest wage earners.

Tax policy was among the most heated topics of debate in the run up to the adoption of the latest state budget in early July, as lawmakers fought with Murphy, a first-term Democrat, over proposed hikes of the income, sales and corporate taxes. (The end result was the higher income tax for earnings over $5 million and the establishment of a higher corporate rate for companies with more than $1 million in annual profits.)

Those debates are expected to resume this winter as the state is facing increased costs, including those related to public-employee pensions, and the phaseout of several one-time revenue sources that were used to keep this year’s spending in balance — a requirement of the state constitution. Murphy has also yet to back down from his goal of increasing the sales tax.

But middle-income earners pay highest rates

And, while the ITEP analysis found New Jersey’s highest earners pay state and local taxes at a higher rate than those at the very bottom, it also determined the highest effective rates are carried by a group of middle-income earners who make $74,800 to $132,000 annually. That group’s effective state and local tax rate is 10.7 percent, according to the report. The same group was found to be paying the highest percentage of their annual income to cover property taxes, at 5.8 percent.

Meanwhile, U.S. Census data still groups New Jersey in the half of U.S. states with rates of higher income inequality than the other half, as measured by the Gini index.

Sheila Reynertson
Sheila Reynertson of New Jersey Policy Perspective

Sheila Reynertson, a senior policy analyst at NJPP, said New Jersey’s overall tax code “remains unfair” since it doesn’t generate enough revenue to adequately invest in assets or fully fund programs that are used to address poverty.

“Governor Murphy’s first budget was a step in the right direction, but broader reforms must be pursued to tackle income inequality and ensure the state’s wealthiest residents are paying their fair share,” she said.

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