Amid N.J. budget turmoil, 'millionaire's tax' argument flares up again

Posted: June 02, 2014

As he faces an estimated $2.7 billion revenue gap in the state budget over the next two years, Gov. Christie has vowed to oppose an idea Democrats have resurrected to bolster the state's coffers: a "millionaire's tax."

Christie, who has proposed to fill the shortfall by slashing planned payments into the state pension system, has pledged to not raise income taxes - arguing that a hike would drive the highest-income earners out of the state.

In New Jersey, "the top 10 income taxpayers pay more than the bottom two million filers," Christie said at a recent event in Washington. "If those 10 people get up and walk out . . . and go hang with [Gov.] Rick Scott in Florida, I'm losing the equivalent in revenue to what the bottom two million filers pay.

"That's why I'm not raising taxes," Christie said.

Raising the income tax on the state's wealthiest has long been a nonstarter for the Republican governor, who has vetoed previous millionaire's tax proposals. But that opposition hasn't stopped Democrats, including Senate President Stephen Sweeney of Gloucester, from proclaiming their support for the tax increase.

"This fight has just started," Sweeney said at a recent rally in Trenton in response to Christie's announcement of the pension cuts, pledging to "make sure a millionaire's tax gets done."

Sweeney has not introduced a bill in the Legislature. "We are still determining the best course of action regarding the budget," said his spokesman, Chris Donnelly.

Unions intend to go to court to challenge Christie's plan to cut the pension payments - a move the governor undertook in the current fiscal year by executive order.

If Christie's action is upheld, the revenue shortfall over both years could be filled without requiring a tax increase.

Still, New Jersey's fiscal condition has spurred discussion about its revenue sources and the merits of raising the income tax - including in light of the $800 million current-year revenue shortfall that opened up in April after state officials said they had underestimated the effects of a federal tax policy change in 2013.

To Christie's treasurer, the shortfall - now pegged at $1 billion - revealed the risks in the state's reliance on high-income earners.

"We simply can't continue to expect sustainable revenues with a top-heavy system such as we have today," Treasurer Andrew Sidamon-Eristoff said at a legislative hearing in May.

'Vast amount'

New Jersey can account for the income tax's volatility, however, by carrying adequate budget reserves, said Michael Mazerov, a state-taxation specialist at the Center on Budget and Policy Priorities in Washington.

Despite Christie's warnings that wealthy residents would flee to avoid a tax increase, "if the state needs additional revenue - which it does - adding a bracket at the top is going to raise a vast amount of revenue compared to what's going to be lost," Mazerov said.

New Jersey residents who make more than $500,000 a year are in the state's top income tax bracket, taxed at a rate of 8.97 percent. That bracket, put in place in 2004 under Democratic Gov. Jim McGreevey, was described at the time as a "millionaire's tax." It raised the income-tax rate on the state's highest earners by 2.6 percentage points.

Democratic Gov. Jon S. Corzine also raised income taxes - for one year - in 2009, taxing people making more than $1 million at 10.75 percent and also raising rates for those making more than $400,000.

Christie vetoed an extension of that temporary top tax rate after taking office in 2010.

A study published in the National Tax Journal in 2011 by sociologists at Princeton and Stanford Universities who reviewed New Jersey tax returns determined that the 2004 tax increase had "minimal impact" in the form of migration of millionaires, resulting in a loss after three years of 69.7 millionaires and $16.4 million in tax revenue - compared with $1 billion a year in revenue gained.

A 2011 study by economists at the New Jersey Department of Treasury, reviewing IRS migration data and extrapolating for New Jersey, estimated a loss of $150 million a year in tax revenue - "a substantive portion" of the $1 billion gained, the study said.

While the findings don't reveal losses "anywhere close to eclipsing the immediate revenue gain from an income tax increase," the Treasury study said, migration due to the tax increase would likely affect other state revenue sources, including corporate, sales, and property taxes.

Mazerov, who wrote a report released last month that found state taxes had a "negligible" impact on people moving from state to state, said a variety of factors played into interstate migration - including retirement and housing costs.

While there may be a tipping point in terms of how high states can raise taxes before losses outweigh the gains, Mazerov said, New Jersey likely hasn't hit it.

"California has the highest top income-tax rate, over 13 percent, and I haven't seen any evidence that Google, Facebook, or Twitter are having trouble getting people to come work for them there," he said.

Migration is a less important factor than a tax increase's impact on economic growth, said Scott Drenkard, an economist at the Tax Foundation.

A report by the foundation in 2012 said that of 26 studies on taxes and economic growth produced since 1983, 23 found "a negative impact of taxes on growth."

"I'd rather see us, instead of talking about revenue in state coffers, start talking about economic growth," Drenkard said.

'Mixed'

New Jersey's top income-tax bracket is higher than in any state in the Northeast, according to the foundation.

That raises the question of whether a tax increase would prompt businesses and residents to choose to locate elsewhere, said Joseph Seneca, an economics professor at Rutgers University and former chairman of the New Jersey Council of Economic Advisers.

Though "the literature on this is mixed," Seneca said, "to be tagged as having one of the highest marginal income-tax rates in the country is not necessarily a good position to be in."


mhanna@phillynews.com

609-989-8990

@maddiehanna

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