In a recent address, New Jersey Gov. Phil Murphy (D) outlined his budget and tax plan, which included how Murphy plans to fund his ambitious education and transportation projects by imposing $1.6 billion in new tax increases.
Murphy’s plan would affect many areas of New Jersey’s economy, but at the heart of the tax hike plan is a “millionaire tax” that would increase taxes on incomes greater than $1 million, raising the rate from 8.97 percent to 10.75 percent, the third-highest rate in the country. The anticipated increase is projected to add $600 million in new tax revenues, which would be used to boost funding for New Jersey’s public schools.
Millionaire taxes are an unreliable source of revenue. Scott Hodge of the Tax Foundation notes millionaire status is temporary and fluid. Many taxpayers achieve millionaire status only once in their lifetime. In addition, the number of millionaires fluctuates based on the business cycle. Before the 2008 recession, between 2002 and 2007, the number of millionaire tax returns more than doubled, to a record 392,220. However, as a result of the recession, the number fell by 40 percent from 2007 to 2009.
In addition to the millionaire tax, Murphy proposes new taxes on ride-sharing services such as Uber and Lyft, as well as home-sharing sites such as Airbnb. This would hinder growing industries that have provided income and jobs for thousands of New Jerseyans.
Further, to capture additional tax revenues, Murphy proposes the creation of a 25 percent excise tax on legal marijuana sales, which would be added on top of the state’s existing sales tax. This would add a new sin tax to a state already heavily reliant on sin tax revenue, a notoriously unreliable tax source.
Finally, Murphy’s plan would raise taxes on capital gains profits by treating these gains as income. It is important for states to avoid policies that hinder capital formation and investment in their markets, something that nearly always occurs when capital gains tax rates increase. Further, elevating investment costs during a period of economic recovery is not good tax policy and will ultimately harm all of New Jersey’s economy by driving investment elsewhere.
New Jersey can ill afford these major tax hikes. The state is already amongst the worst nationwide for having a high tax burden, ranking near the top in several state tax categories. According to the Tax Foundation, New Jersey has the worst state business tax climate of the 50 states, the third-highest overall state and local tax burden, the highest property taxes, and the fifth-highest top rate for personal income taxes.
Higher taxes drive wealthy taxpayers out of the state, taking their income, capital, and tax revenues with them. In 2009, Maryland created a millionaire tax projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year, the number of people in the state reporting incomes of $1 million or more fell by one-third. Maryland took in $100 million less from millionaire earners than the previous year, and the state allowed the tax to expire in 2010.
New Jersey has already seen its tax system drive away higher-income residents. According to Bloomberg, higher-income escapees include Omega Advisors Chairman Leon Cooperman and Appaloosa Management founder David Tepper, billionaires who recently moved to Florida, a state with no income tax.
Instead of increasing taxes on higher earners and entrepreneurs and relying on sin taxes, New Jersey’s elected officials should focus on making the state a more attractive place for businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.
The documents cited below examine millionaire taxes, capital gains taxes, and sin taxes in greater detail.
One Rich Guy Moves, New Jersey Budget in Peril
Scott Drenkard of the Tax Foundation discusses how overtaxing the wealthy can drive high-earning residents from a state, thereby having a significant negative effect on a state’s budget.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Taxing the Rich Will Bankrupt Your State
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
Trend #1: “Millionaires’ Taxes”
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.
Should We Raise Taxes on the Rich?
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.
The Effect of the Capital Gains Tax Rate on Economic Activity and Total Tax Revenue
This study by the Institute for Research on the Economics of Taxation identifies how taxpayers and investors react to capital gains tax rates: “The tax treatment of capital gains and dividends greatly affects the quantity of capital created and employed. The quantity of capital affects the productivity, wages, and employment of labor. Output and incomes are lower at higher levels of taxation of capital. Raising the tax rate on capital by increasing the tax rate on dividends and capital gains from current levels would shrink national income across the board.”
Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.
The U.S. Tax System: Who Really Pays?
Writing for the Manhattan Institute, Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.
Regressive Effects: Causes and Consequences of Selective Consumption Taxation
In this study authored for the Mercatus Center at George Mason University, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas examine selective consumption taxes. The authors argue they do little to change individual behavior and are extremely regressive, placing an unnecessary burden on the poor. “The study concludes that selective consumption taxes are both ineffective and regressive, and that improving education and increasing the availability of healthier goods may be better steps than raising taxes on those who can least afford them,” the authors wrote.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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