Research & Commentary: Millionaire Tax Is Still a Bad Idea for New Jersey
In this Research & Commentary, Matthew Glans examines millionaire taxes and the potential revival of a major tax hike in New Jersey.
The recent election of Phil Murphy to the New Jersey governorship has revived the legislature’s effort to increase the state’s personal income tax on higher-income New Jerseyans. The proposed tax increase is being referred to as a “millionaire tax,” and would increase taxes on income earned that’s greater than $1 million from a rate of 8.97 percent to 10.75 percent. The anticipated increase of $600 million in tax revenue would be used to boost funding for New Jersey’s public schools.
New Jersey can ill afford a major tax hike. The state is already amongst the worst nationwide for having a high tax burden, ranking near the top in several state tax categories. According to the Tax Foundation, New Jersey has the worst state business tax climate of the 50 states, the third-highest overall state and local tax burden, the highest property taxes, and the fifth-highest top rate for personal income taxes. Relying on a fluctuating tax with a small base, such as the millionaire tax, can result in larger budget deficits than what would be experienced with broader and flatter tax systems.
Millionaire taxes are an unreliable source of revenue. Scott Hodge of the Tax Foundation notes millionaire status is both temporary and fluid. Many taxpayers achieve millionaire status only once in their lifetime. In addition, the number of millionaires fluctuates based on the business cycle. Before the recent recession, between 2002 and 2007, the number of millionaire tax returns more than doubled to a record 392,220; as a result of the recession, the number fell by 40 percent between 2007 and 2009.
Higher taxes drive wealthy taxpayers out of the city, taking their income, capital, and tax revenues with them. In 2009, Maryland created a millionaire tax projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year, the number of people in the state reporting incomes of $1 million or more fell by one-third. Maryland took in $100 million less from millionaire earners than the previous year, and the state allowed the tax to expire in 2010.
New Jersey has already seen its tax system drive away higher-income residents. According to Bloomberg, higher-income escapees include Omega Advisors Chairman Leon Cooperman and Appaloosa Management founder David Tepper, billionaires who recently moved to Florida, a state with no income tax.
The current federal tax reform plan could complicate the matter even further. An end to the state and local tax deduction, which is commonly used by New Jerseyans to pay their sky-high state taxes, would expose New Jersey taxpayers to the full brunt of the state tax rate for the first time, increasing their overall state tax burden. NJ.com estimates the effect for a standard top earner would be an income tax hike of about 3.5 percent.
While income taxes are often sold to the people as a tax on the rich, they never remain that way. Income taxes always expand over time to cover increasingly more taxpayers, due to government’s insatiable need for tax revenue, which it uses to fuel out-of-control spending. Instead of increasing taxes on higher earners, New Jersey’s elected officials should focus on making the city a more attractive place for businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.
The documents cited below examine millionaire taxes and their history of failing to shore up budgets and increase revenue.
Federal Tax Reform Might Push New Jersey to Reform Tax System
In this article, Joseph Bishop-Henchman of the Tax Foundation writes about how the current federal tax reform proposals, which eliminate the state and local tax deduction, could affect effective tax rates in New Jersey. Bishop-Henchman says New Jersey would be hit hard by the proposed changes.
One Rich Guy Moves, New Jersey Budget in Peril
Scott Drenkard of the Tax Foundation discusses how overtaxing the wealthy can drive high-earning residents from a state, thereby having a significant negative effect on a state’s budget.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Taxing the Rich Will Bankrupt Your State
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
Trend #1: “Millionaires’ Taxes”
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.
Should We Raise Taxes on the Rich?
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.
Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.
The U.S. Tax System: Who Really Pays?
Writing for the Manhattan Institute, Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.
Seven Myths About Taxing the Rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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