NJ Millionaires Tax: Here Are The Arguments For And Against The Controversial Tax Hike
Gov. Phil Murphy’s proposal to raise taxes on New Jersey’s wealthiest residents has inspired a raft of opposition from business leaders and many fellow Democrats, even as the governor’s allies step up pressure on lawmakers to embrace a so-called “millionaires tax.”
The tension between the two camps was on full display during a town hall at Camden County College on Monday night where a public employee-heavy crowd erupted in chants of “Millionaires tax!” while Senate President Stephen Sweeney, a foe of the idea, was instead making the case for rollbacks to pension and health benefits for public workers.
The money to be raised from a higher tax rate on income over $1 million — $447 million — is relatively small compared to Murphy’s $38.6 billion budget proposal, but the issue has become a stand-in for a larger political battle over how to deal with New Jersey’s deteriorating fiscal health.
Here are the arguments for and against a millionaires tax, which will likely feature in negotiations between Murphy and lawmakers as they approach a June 30 deadline for finalizing a new state budget.
Central to Murphy’s proposal is promoting what he calls “tax fairness,” or asking wealthy residents and big corporations to pay more toward programs that will help the middle class and working families in an era of worsening income inequality.
Murphy sought the same policy last year, but he was forced to retreat during last-minute budget wrangling. He settled instead for a “multimillionaires tax” that raised the marginal tax rate on each dollar earned over $5 million from 8.97 percent to 10.75 percent.
The governor now wants to expand that higher rate to take effect on each dollar earned over $1 million, affecting about 18,000 state residents and 19,000 non-state residents, according to estimates from the Treasury Department. A joint Rutgers-Eagleton/Fairleigh Dickinson University poll released earlier this month said more than 70 percent of residents support the proposal.
Under Murphy’s plan, the $477 million raised from the new rate would help New Jersey pour more than $200 million in new money into public schools, avoid NJ Transit fare hikes, boost the state’s pension payment by more than a half-billion dollars and build modestly on programs such as universal pre-kindergarten and tuition-free community college — all while adding to the state’s surplus, a key factor in how ratings agencies weigh a state's creditworthiness.
Overreliance on millionaires
But opponents point out that New Jersey already has one of the most progressive income tax structures in the country, meaning the state’s biggest earners, comprising less than 3 percent of taxpayers, account for more than 40 percent of income tax revenues. Making New Jersey even more dependent on high-earners is unwise, these critics say.
A recent report from Wall Street credit-rating agency Moody’s suggests why. During the financial crisis a decade ago, states with a high dependence on income taxes saw large declines in revenue from those taxes. New Jersey, for example, experienced an 18-percent drop in collections from its income tax, the state’s largest source of revenue.
Further raising taxes on the wealthy is risky when another recession is widely believed to be around the corner, Moody’s implied.
“A similar decline in income at a time when income taxes on the highest earners make up a larger share of these states’ total revenue could present California, Connecticut, New Jersey and New York with new budgetary pressure,” the report said.
The specter of millionaire flight
New Jersey’s heavy reliance on high-earners has fueled another argument against a millionaires tax, stated most clearly by former Gov. Chris Christie during his first budget address as governor, in 2010: “If you tax them, they will leave.”
The effect and scale of outmigration has been fiercely debated in recent years, with the New Jersey Business & Industry Association, or NJBIA, depicting an “exodus” that has cost the state millions of residents and billions in lost economic activity.
However, since New Jersey last raised its top marginal tax rate in 2004, from 6.37 percent to 8.97 percent, the number of tax returns with income over $1 million has more than doubled, according to the state Division of Taxation.
And an ambitious 2016 study by Stanford sociologists and U.S. Treasury Department economists — it examined every federal tax return with more than $1 million in reported income filed in every state from 1999 to 2011 — concluded that millionaire tax flight is occurring, but at such low rates that it has little socioeconomic impact.
“For high-income people deciding where to live, taxes are really just not a major consideration,” Cristobal Young, an author of the study who has since moved to Cornell University, said in an interview. More important factors are family, social and job considerations, his research found.
“If New Jersey is concerned about migration out of the state, they really need to be looking at low-income individuals,” Young said. “Those are the people who are moving out of state. Those are the people who can’t afford to live in New Jersey because of very high cost of housing.”
Uncompetitive for business
But the argument made by the NJBIA and other business organizations extends beyond the phenomenon of outmigration. They say that a millionaires tax will be yet another strike against New Jersey in its attempt to attract top talent and new businesses.
Businesses in New Jersey already feel beset-upon after Murphy has worked with Democratic lawmakers to enact a higher corporate business tax, new sick leave requirements, expanded family leave and a $15 minimum wage — all policies that business groups say will increase the cost of doing business in New Jersey.
A millionaires tax could affect some of the more than 4,000 small businesses whose owners pay taxes on business income through their personal tax returns and make New Jersey less attractive to high-earning executives looking at new places to set up shop, said Michele Siekerka, NJBIA president and CEO.
“You’re going from being the highest to extreme outlier,” Siekerka said, referring to the fact that New Jersey already has the highest marginal income tax rate in the region. “The cumulative impact of these policies must be paid attention to.”
Reform first, tax second
Sweeney was long a champion of a millionaires tax under Christie, but he reversed his position after the 2017 federal tax overhaul imposed a cap on state and local tax deductions. That had the effect of raising the effective tax rate on many of New Jersey’s wealthiest residents because they could no longer write off all their state and local taxes on their federal tax returns.
To Sweeney, D-Gloucester, the debate over a millionaires tax is secondary to the more pressing conversation about getting the state’s spending under control. Sweeney has spent recent weeks touting the recommendations of a “Path to Progress” report he spearheaded last year that sought to address some of New Jersey’s thorniest structural problems, from the high costs of public education to ballooning debt and a severely underfunded pension system.
Two of the report's most controversial recommendations call for shifting public workers from what is now the equivalent of a platinum-level plan on the Affordable Care Act exchange to a gold-level plan while also converting new and recent hires to a so-called hybrid plan that allows only a portion of their salary to be pensionable.
In Sweeney’s view, raising taxes without fixing the underlying structural problems is counterproductive. Murphy, however, is a fierce ally of public-sector unions and has refused to publicly endorse any proposal that would cut their pension or health benefits. Instead, his administration has worked with the unions to identify hundreds of millions of dollars in health care savings, an approach he says is more effective than legislating cuts.
In their positions, Murphy, Sweeney and Assembly Speaker Craig Coughlin, D-Middlesex, all have the power to block a proposal they don’t like. On the other hand, they can’t get anything done without each other.
It remains to be seen whether one argument about the millionaires tax wins out over the others, or whether the many ways of looking at the issue leads to a political standoff that could shut down state government and deepen the divides between various factions of the Democratic Party.