BEYOND THE NUMBERS
New Jersey Governor Phil Murphy has proposed shoring up his state’s finances with a new millionaires’ tax — a proven tool to raise revenues for vital investments, such as good public schools, while basing state tax codes more on the ability to pay. But legislative leaders have unveiled their own budget proposal that fails to include the governor’s tax plan, and instead relies on more optimistic revenue projections and dips into the governor’s rainy day fund.
Revising the budget to include a millionaires’ tax should be a top priority. It would help reduce economic and racial inequities in New Jersey, which has the ninth-highest income inequality among states. With white families three times likelier than Black and Latinx families to be in the top 1 percent nationwide, income inequality hardens longstanding wealth disparities by race. New Jersey’s tax code offsets inequality somewhat, with the top 1 percent of households paying a greater share of their income, on average, to state and local taxes than the poorest 20 percent. But middle-income families in New Jersey pay the largest share, so a millionaires’ tax would bring the system into better balance.
New Jersey lawmakers enacted the state’s first millionaires’ tax in 2004, creating an 8.97 percent top marginal rate on income over $500,000. In 2009, they temporarily bumped the top rate up to 10.75 percent for one year. They restored that top rate of 10.75 percent last year, but only to income above $5 million. The governor’s proposal applies that same rate to all income above $1 million.
The plan would raise over $500 million each year to invest in public schools, quality local services, and property tax relief, according to the governor’s office. As our recent report showed, taxes on high incomes that make public investments possible can boost a state’s productivity in the long run, such as by increasing family incomes and raising skills through high-quality education. Higher rates at the top also don’t harm short-term economic growth, evidence suggests.
In six of eight states (including Washington, D.C.) that enacted millionaires’ taxes since 2000, private-sector economic growth has met or exceeded that of neighboring states since those states enacted their tax increases. Seven of the eight states have had per capita personal income growth at least as strong as nearby states, and five of the eight have added jobs at least as quickly as their neighbors.
While New Jersey’s results were more mixed — it kept pace on income growth but lagged on job and economic growth — that was almost assuredly for reasons other than state tax levels. Tax differences between states, including differences in personal income tax rates, only minimally affect state economic growth, research generally finds. “The vast majority of the academic studies that examined the relationship between state and local taxes and economic growth found little or no effect,” the authors of a comprehensive literature review concluded.
Similar to Connecticut, whose economy struggled in recent years, New Jersey’s mixed economic record over the past decade likely stems from non-tax factors including its reliance on an outdated economic growth model, its high concentration of investors and financial companies that complicated its recovery from the Great Recession, and the fact that lawmakers had to devote most new revenues to addressing past fiscal mistakes, rather than to new pro-growth investments. Former Governor Chris Christie also deeply cut taxes and underinvested in schools, public transportation, and higher education, which exacerbated New Jersey’s other issues in the first years after the Great Recession hit.
Some opponents of the millionaires’ tax claim that expanding it could prompt many wealthy taxpayers to leave New Jersey. They argue, furthermore, that the combination of a higher millionaires’ tax and the 2017 federal tax law’s $10,000 cap on the deduction for state and local taxes (SALT) could make it especially likely that wealthy taxpayers will leave.
But mainstream experts consistently find that millionaires are no likelier than other taxpayers to relocate — and when they do, it’s rarely due to taxes.
Millionaires who moved in the aftermath of New Jersey’s 2004 millionaires’ tax were not nearly numerous enough to sizably reduce the policy’s revenue gains, studies found. In fact, the number of high-income New Jerseyans has consistently grown, rising to 2.2 percent of tax filers in 2015 from 0.4 percent in 1994.
Moreover, since the 2017 tax law provided such large tax breaks for those at the top, most households affected by the SALT cap and millionaires’ tax still received net tax cuts – often very large ones. New Jersey households that would be subject to the governor’s proposal received an average tax cut of roughly $27,300 from the federal law in 2018, according to the Institute on Taxation and Economic Policy. That more than exceeds the additional tax payment of about $15,100 a year they would owe, on average, under a millionaires’ tax (see chart).