Research & Commentary: Millionaire Tax Would Unbalance New Jersey’s Budget
In this Research & Commentary, Matthew Glans examines a proposed millionaire tax in New Jersey and how these taxes affect both the state's budget and economy.
Despite overwhelming evidence showing the detrimental effects of high personal income tax rates, New Jersey Gov. Phil Murphy (D) has on multiple occasions proposed new taxes that would target high-income New Jerseyans with so-called “millionaire taxes.”
In June 2019, Murphy introduced the latest version of his millionaire tax, which would set a new rate of 10.75 percent on every dollar earned above $1 million. The new millionaire tax would apply to about 18,000 in-state residents and 19,000 out-of-state residents, generating an estimated $500 million in revenues.
To sell this hike to taxpayers, Murphy has included an additional one-time $125 income tax credit for state residents when they file their 2019 gross income tax returns. The tax credit would be limited to homeowners and renters earning $10,000 to $250,000 per year in gross income.
One-time tax gimmicks aside, New Jersey can ill afford a major tax hike. The state already has one of the highest tax burdens in the country. According to the Tax Foundation, New Jersey has the worst state business tax climate, the highest personal income tax burden, and the third highest property taxes. Relying on a fluctuating tax with a small base, such as the millionaire tax, would most likely result in larger budget deficits compared to what would occur should New Jersey create a broader, flatter tax system.
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, from 2002 to 2007, the number of millionaire tax returns more than doubled nationwide, to a record 392,220. After the recession, from 2007 to 2009, the number fell by 40 percent.
Moreover, higher taxes drive wealthy taxpayers out of the state, taking their income, capital, and tax revenues with them. In 2009, Maryland imposed a millionaire tax projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year, . Maryland took in $100 million less from millionaire earners than the previous year. No wonder 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 runaways include Omega Advisors Chairman Leon Cooperman and Appaloosa Management founder David Tepper, billionaires who recently moved to Florida, a state with no income tax.
Although income taxes are often sold to the people as a tax on the rich, they almost never remain as such. Income taxes nearly 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 the Garden State’s most productive residents, New Jersey’s elected officials should focus on making the state 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.”
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.
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