New Jersey Governor Seeks Income Tax Hike

Published August 1, 2009

New Jersey’s tax revenue problems continue to grow and further complicate Gov. Jon Corzine’s effort to balance the state’s budget, leading him to call for an income tax hike on high earners.

Income tax collections for the critical month of April suggested revenues for fiscal years 2009 and 2010 would be more than $2 billion less than the Corzine administration’s revenue projection issued in March.

April’s income tax receipts fell an astounding 40 percent ($800 million) from the previous year.

‘Problems Related to Income Tax’

“New Jersey’s fiscal problems are directly related to its income tax policy,” said Jim Leonard, senior vice president of the New Jersey Chamber of Commerce.
“First, the comparatively high top rate enacted in 2004 contributed to the anemic growth that characterized New Jersey’s economy even before the recession,” Leonard said. “Second, the progressivity of the income tax also makes New Jersey highly reliant on a volatile revenue source” as high income earners are affected by the economic downturn.

Leonard said the recession “is an object lesson in the dangers of this tax structure. The economic downturn has significantly reduced the taxable income of those paying a lion’s share of New Jersey’s income tax revenues; 40 percent of the tax is paid by only 1 percent of the filers. Consequently, the bad economy caused income tax revenues to drop precipitously.”

He said the New Jersey government “knows how to adjust spending in one direction only—upward. Because government is largely incapable of cutting spending, its typical response to a bad economy is to increase taxes. It’s a vicious cycle. Hiking the income tax rate on high-income earners again will make the problem more acute.”

Big Shortfall

Corzine, a Democrat, proposes raising the income tax rate on households earning more than $500,000, from 8.97 to 10.25 percent. That would take New Jersey’s top income tax rate from the fifth- to second-highest in the nation. The Corzine administration says the tax hike will raise another $780 million.

The legislature’s nonpartisan professional staff estimated the total revenue shortfall for the current budget exceeded $1.2 billion. That meant even if the budget’s entire initially projected $700 million surplus were depleted, spending would have to be reduced by another $500 million.

State Senator Steve Oroho (R-Sussex County), a member of the Senate Budget Committee, worried Corzine would cancel the state’s budgeted contribution to its public employee pension systems.

Pension Funds Threatened

“Governor Corzine already has indicated that he won’t be making the full $1.1 billion pension contribution that was approved in the current budget. That amount represented less than one half of the actuary’s recommended [contribution] for this fiscal year,” Oroho said.

“The large revenue shortfall makes the pension contribution a tempting place from which to steal funds. The pension systems already are drastically underfunded, so canceling this year’s payment will make a bad problem even worse. The payments we skip today eventually will have to be paid with interest,” Oroho added. “Unfortunately, ignoring our pension obligation has become the norm rather than the exception.”

Legislative staff also concluded revenues for the FY10 budget would be $800 million less than the Corzine administration’s initial projection.

Should the administration concur with that estimate, Corzine and the legislature will have to make adjustments to the FY10 budget. Under New Jersey’s constitution, the governor determines the revenues on which the budget is based.

Small Group, Big Impact

Jon Aneson, a leader in the New Jersey Restaurant Association, said, “The political establishment knows too well that it’s easy to increase taxes when those affected are small in number. The problem is that this small group can have a significant impact on the economy. When forced to choose between the tax consumers and tax producers, Gov. Corzine usually protects government. That preference ensures that there are fewer tax producers.

“New Jersey’s growth of high-income earners already lags behind most of the country. Gov. Corzine’s proposed income tax hike ignores this reality and imperils both New Jersey’s economy and those who must rely on government services,” Aneson said.

Gregg Edwards ([email protected]) is president of the Center for Policy Research of New Jersey.