Keeping New Jersey’s Tax Structure Competitive

By Assemblyman Declan O’Scanlon, Republican Budget Officer

It’s a simple question loaded with political appeal: “With so many people hurting, and income disparities rising, shouldn’t we ask New Jersey’s millionaires to a ‘fair share’ in taxes?”   

OK. What’s a “fair” share?  If the current share of state income tax paid by the top 1% of New Jersey’s taxpayers — about 37 percent — isn’t high enough, what is?  Would 80 percent be fair?  90 percent?  Taxpayers earning $1 million pay an effective tax rate this is about four times what taxpayers earning $100,000 pay.  When and how will we know when we’ve achieved “fairness”? 

Unfortunately, intense partisanship feeding on visceral emotions has made it virtually impossible to have a rational conversation about taxes in America.  As a senior member of the State Assembly’s Budget Committee, I think those of us in positions of leadership have a responsibility to do more than stoke emotions, and instead adopt tax policies that generate the revenue needed to support the State’s budget priorities on a fair and sustainable basis. 

Piling taxes on the “rich” may be great politics, but it’s lousy public policy.  New Jersey already has a “progressive” income tax system which, thanks to high-income households receiving a greater proportion of their income from investments and capital gains, has made our revenue base highly volatile.  Additionally increasing our relative reliance on high-income taxpayers will increase volatility, making it more difficult to engage in prudent long-term financial planning. 

Most experts believe increased volatility is a problem because fiscal stability is a condition precedent to sound policymaking.  Wild fluctuations in revenues fuel an inefficient boom-and-bust approach to budget-making that mismanages popular expectations. The impact of emergent budget cuts on New Jersey residents is regressive – those at middle and lower income levels experience the pain of budget cuts disproportionately since they more often benefit from state programs. 

Some editorialists have suggested Governor Cuomo’s recent decision to embrace higher rates for high income New Yorkers should serve as an example for New Jersey.  Perhaps they should read the fine print.  New York’s “tax increase” is no such thing.  New York’s current high rate is 8.97%, the same as New Jersey’s.  Instead of letting the rate go down to 6.85%, as scheduled, Cuomo is saying he’ll let the rate fall to 8.82% for taxpayers at $2 million or more, but let the rate fall to 6.85% for taxpayers between $300,000 and $2 million.  Everyone in New York will get a tax cut, but folks above $2 million will get less of a tax cut than they had expected.  If that’s the standard of “fairness,” maybe the editorialists are right and we should follow New York’s example!  Here’s the critical point: the top marginal rate in New York will soon fall below the top rate in New Jersey; that’s not good news for our competitive position. 

New Jersey Treasury’s Chief Economist’s review of national IRS data confirmed a statistical connection between tax increases enacted under former Governor McGreevy and an increase of affluent taxpayers who moved out of, or never moved into, New Jersey.  The Chief Economist also conducted a survey confirming a significant proportion of tax advisors had discussed moving out of New Jersey with their relatively affluent clients.  Contrary to the often inaccurate summaries in the popular press, the study and the separate survey were modest in scope and merely confirmed what we already know: yes, Virginia, taxes matter.

Are they the only competitive consideration? Absolutely not. Infrastructure, regulations, climate, educational levels and other factors play a major role.  But there’s no denying taxes figure into investment and location decisions. 

Instead of asking “what’s fair?” we should be asking “what’s in our long-term self-interest?”  I suggest it’s in New Jersey’s self-interest to pursue policies that support sustainable and growing revenue collections over time.  Although New Jersey cannot expect to compete globally on the basis of low taxes alone, we should avoid negative “outlier” status and with it the kind of reputation that once prevented New Jersey from getting into the starting blocks when companies and leaders make site selections.

Posted: December 16th, 2011 | Author: | Filed under: Declan O'Scanlon, Economy, New Jersey State Budget, NJ State Legislature | Tags: , , , | 1 Comment »

One Comment on “Keeping New Jersey’s Tax Structure Competitive”

  1. Gene Baldassari said at 1:58 pm on December 16th, 2011:

    The argument begins with the false presumption that it is possible to create “good” or “fair” taxes.

    In reality, nothing can make them good.

    All taxes are destructive to an economy and to an individual’s natural right of ownership.

    What is best in our self interest?

    The argument should begin with the premise that we do not need taxes. But that is politically impossible at this time (a small government would be able to raise everything through transaction fees).

    However, if we MUST have taxes, they should NEVER be based on income.

    Income taxes create the worst possible economic distortion of all taxes and wind up cursing us with a resulting economy that is much worse than most other taxes systems might cause.

    Instead of arguing how to “improve” the income tax, the argument should center on reducing government spending and giving the money back to it’s rightful owners. Then there would be no need to tax more income (ala tax the rich). And that would be in our best interest because a prerequisite for job creators is to have an income that is high enough to pay others.

    The best way to extract a higher share of money from the “rich” is through the Fair Tax (HR 25) (Federal Tax) and a corresponding state version.

    “Rich” people, who spend more money than the non-rich (?), would not be able to evade or avoid paying more taxes with Fair Tax because they spend more money and would pay higher sales taxes. There would be no possibility of deductions that can zero out taxes. And everyone would contribute to paying a share of taxes proportionate to their spending (which is an indirect function of income).

    There is nothing that can be done improve the income tax other than eliminate it.
    As long as we continue this insanity with the income tax we will never solve the problems that come with taxation.

    If we continue with the income tax, we will never avoid the “tax the rich” argument. That is because “Rich” people will always hire lawyers, lobbyists, and politicians who will distort the system in their favor. At the same time, the non-productive will always demand more money to be stolen from the productive sector to avoid having to pay their own taxes.

    I hope this argument properly adjusts the direction of the NJ Legislature.