Fresh off his successful efforts to drastically increase individual and corporate income tax rates in 2018, Gov. Phil Murphy is back for another round of tax hikes. In his newly unveiled budget, Murphy recommends lowering the tax bracket eligible for the highest tax rate from $5 million to $1 million. Garden State taxpayers have forked over enough money to the state treasury over the past few years and are long overdue for real tax relief. Continuing to target this small but statistically-significant group of taxpayers will not make New Jersey prosperous again, but could very well cause many more taxpayers to flee to other states, particularly those with more favorable tax climates.
Prior to last year’s tax increase, New Jersey levied a top marginal rate of 8.97 percent on income over $500,000. However, in order to plug a budget deficit and finance new spending, like “free college for all”, Murphy and the Legislature agreed to add another tax bracket to the tax code: a 10.75 percent rate on earned income over $5 million. This “ultra-millionaire’s tax” is estimated to apply to about 6,700 individuals and small businesses and projected to raise $300 million annually, according to the Office of Legislative Services.
Now, Governor Murphy wants to work his way down the income ladder and subject any earned income over $1 million to the 10.75 percent rate. If his budget is approved by lawmakers, about 37,000 taxpayers would be subject to this higher rate, including thousands of small businesses who file as individuals. His budget estimates this would raise an additional $447 million annually - straight from the pockets of hardworking taxpayers and small business owners. Since two-thirds of New Jersey businesses file as individuals, many small businesses would be exposed to a higher rate. Taxes act as an added cost, and businesses are likely to pass on new costs onto consumers, many of whom would be lower and middle-income, in the form of stagnant wages and increased prices for goods and services.
Lawmakers should be sensitive to the potential budgetary impacts, as the top 1 percent of New Jerseyans account for 40 percent of the state’s total income tax revenue. To put the negative scenario in perspective, a report commissioned by former Governor Christie found the tax loss from losing a single $1 million earner is equal to 59 taxpayers earning $50,000, and if one single filer earning $1 billion emigrates, it takes 70,618 single taxpayers earning $50,000 to replace the lost revenue. Driving these taxpayers out of state will leave less money for services that many lower and middle-income residents rely on.
New Jersey’s punishing tax system has forced out hundreds of thousands of taxpayers and more than $20 billion in taxable income to other states. With the recent capping to the State and Local Tax deduction within federal tax reform, policymakers should wary of any new tax increases as taxpayers will have to shoulder more of the burden associated with New Jersey’s high tax climate. Garden State taxpayers need real tax relief. Unfortunately, yet unsurprisingly, Governor Murphy’s budget delivers quite the opposite message two years in a row.