This article fist appeared in City Journal.
New Jersey governor Chris Christie’s recently unveiled budget has been alternately hailed and condemned for imposing spending cuts on the economically ailing state, but one item that’s not actually in the proposed budget has proved the biggest flashpoint: the so-called “millionaire’s tax” surcharge on incomes of $400,000 or more. Former governor Jon Corzine enacted the tax on a one-year timeline to replenish the state’s chronically empty coffers and bolster depleted revenues. By allowing it to expire, Christie has touched off a charged but vital debate about the kind of state New Jersey is—and the kind it should be.
The death of the millionaire’s tax has provoked howls of outrage from New Jersey Democrats. State Senate president Stephen Sweeney complained that while Christie’s budget forces lean times on the state, “the only people that got a break are the higher-income people.” Sweeney has threatened that the Democrat-controlled state legislature would block the budget unless the tax is reinstated. The New Jersey Star Ledger was equally incensed, raging that “the governor can’t possibly justify deep tax cuts for the state’s wealthiest families while he’s imposing these spending cuts.” The paper charged that by refusing to tax the rich more, the governor was engaging in “class warfare.” With the goading of politicians and the media, New Jersey residents have also warmed to the idea that the rich are not sharing in the sacrifice that tough times demand. Despite having a broadly favorable view of their new governor and little appetite for additional tax hikes, they oppose eliminating the tax on high earners.
Christie’s critics would seem to have a strong case: Why should the rich get a tax break, especially when the governor is asking the state to tighten its collective belt? The fiscal reality is more complicated. For one thing, many of those hit by the millionaire tax aren’t really millionaires, but small businesses. Of the 63,480 income tax returns filed for incomes of $400,000 and more in 2008, over half had some small-business income, according to the New Jersey Division of Taxation. Moreover, New Jersey’s wealthy already face one of the heaviest tax burdens in the country. According to the latest figures, the top 1 percent of income earners pays 45 percent of state income taxes, the consequence of a highly progressive tax structure that will put New Jersey into a sixth-place tie this year with New York for the nation’s highest top marginal income-tax rate. With the sunset of the millionaire’s tax surcharge, New Jersey returns to the still-high rate established in the original “millionaire’s tax”: passed in 2004 by then governor Jim McGreevey, it considers individuals making $500,000 or more as millionaires, raising their tax rate to 8.97 percent. New Jersey also has the second-highest sales tax rate; the sixth-highest corporate tax rate; and the highest property taxes in the nation. Overall, as Christie points out, New Jersey collects more state and local taxes as a percentage of income than any other state. Affluent residents, of course, pay the largest share.
And their tax burden is likely to increase even without the millionaire’s tax. With President Obama set to let the Bush tax cuts expire this year, Tax Foundation staff economist Mark Robyn points out that New Jerseyans earning over $500,000 annually could face a 50 percent marginal tax rate—that is, each dollar earned past the $500,000 threshold will be taxed at nearly 50 percent. As Robyn suggests, that “increases the likelihood that high-income New Jersey residents will seek out states with a lower tax rate.”
Evidence suggests this tax-driven exodus is already underway. Several studies have documented that New Jersey’s tax burden is driving wealth—as well as the jobs, job opportunities, and revenues it creates—from the state. The most recent is a February study conducted by the Center on Wealth and Philanthropy at Boston College, which found that New Jersey lost more than $70 billion in wealth between 2004 and 2008 as wealthy households departed for lower-tax states like Pennsylvania and Florida. An October 2007 Rutgers University study on income by public policy professors James Hughes and John Seneca made similar findings. Examining Census Bureau and Internal Revenue Service data, they found that by 2005 New Jersey had lost nearly $8 billion in gross income since the start of the decade. As a result of the income loss and the associated drop in consumer spending, the authors estimate, the state lost nearly 39,000 jobs, $2.76 billion in gross domestic product, and $85.4 million in state sales- and income-tax revenues. Their study didn’t offer a sole explanation for the vanished income, but Professor Seneca says that high taxes are one probable cause. “Certainly, if you talk to tax accountants and estate advisors, the anecdotes are numerous that the general tax structure is a factor,” he says.
In fleeing for more tax-friendly locales, high-income earners have left New Jersey with some unwelcome distinctions. The state now ranks fifth-highest in the country in outward migration, with 450,000 residents moving out since the beginning of the decade and 400,000 moving in—a net loss of 50,000. Even that doesn’t convey the full impact of capital flight, because those who leave tend to be wealthier—and pay more in income taxes—than the new residents, who are often immigrants. Rutgers’ James Hughes, dean of the school’s Edward J. Bloustein School of Planning and Public Policy, points to a telling economic indicator. New Jersey ranks in the top three states in the nation in providing business for leading moving companies like Van Lines and Mayflower, but those companies don’t do nearly as much business with those moving into the state. “That suggests that the people who are leaving are wealthier while those moving in have nothing to move in,” Hughes observes. Combine the outflow of wealth with the spending of the state’s perennially profligate legislature, and it’s not hard to see why New Jersey is facing a $10.7 billion budget deficit this year.
That bleak economic outlook may explain why Democrats have not moved to reinstate the millionaire’s tax, even as they’ve decried the Christie administration for failing to do so. “When Democrats criticize Christie for not renewing the millionaire’s tax, they are in essence blaming themselves,” says Joseph Malone, the Republican budget officer in the state assembly. “Democrats have the majority in the state assembly and the state senate, so if they want to raise this tax somebody should step up and move forward with the legislation. They are blaming Christie for something they and the Corzine administration wouldn’t do.”
Republicans have mostly cheered Christie’s refusal to raise taxes, but some object to various aspects of his budget and what they might mean for the state’s financial future. The biggest concern: the budget eliminates $848 million in property tax rebates while cutting aid to schools and municipalities. That could force districts to make up for the lost revenue by raising property taxes. Paul Mulshine, the lone conservative columnist at the Star Ledger, warns that “local property taxes will skyrocket under the Christie budget.” Democrats could also capitalize on the aid cuts to offer voters a stark choice: pay more in taxes or raise them on the rich.
That is not necessarily a winning argument, however. As City Journal’s Steven Malanga points out, even in the absence of state aid, New Jersey school districts are already flush with cash. New Jersey’s education spending per pupil is 60 percent above the national average, and state schools have been on a costly spending spree since 2001, hiring thousands of new teachers even as enrollment has grown by a modest 3 percent. Amid the ongoing fiscal crisis, taxpayers are unlikely to be receptive to suggestions that they bankroll the schools’ already-bloated budgets by paying more in property taxes. Meanwhile, Governor Christie has tried to prevent the possibility of a property tax hike. To that end, he has called for a constitutional amendment to limit property-tax rate increases to 2.5 percent per year and promised to back municipalities in contract negotiations with unions.
Others worry that Christie’s budget could lay the groundwork for a tax hike on the rich because it doesn’t do enough to shrink the size of government. The most vocal conservative critic in this regard has been Steve Lonegan, the fiery former mayor of Bogota, New Jersey, who lost out to Christie in last year’s gubernatorial primary. “New Jersey already has an enormously progressive tax code in the country and the Democrats want to make it worse,” says Lonegan, now head of the New Jersey chapter of the free-market grassroots group Americans for Prosperity. “That said, I’m very concerned that Christie’s budget is creating a political environment in which Democrats will offer taxes on the wealthy as the only solution.” As an example, Lonegan notes that, despite promises to cut spending, Christie’s budget actually increases several government welfare programs. The governor supports expanding Medicaid enrollment for children up to 350 percent of the federal poverty level, and he has proposed expanding food stamps to 185 percent of the poverty level. “We can’t be putting more people on the dole when we should be putting them to work,” Lonegan protests. More broadly, he worries that the failure to cut government entitlements “gives Democrats the leverage they need to raise taxes on the high income earners we desperately need to build this state.”
Republicans in the state legislature seem confident that it won’t come to that. Assemblyman Malone dismisses the Democrats’ carping about the millionaire’s tax as little more than “political rhetoric.” In private discussions, he says, his Democratic colleagues admit that another tax on the rich will jeopardize the revenues the state needs to regain its financial footing. “Unless there’s a 100 percent reversal in revenues, the starting point for the budget is that there is no additional money,” says Malone, who notes that the past year alone saw a 12 percent decline in revenues—the worst in state history. “Democrats don’t want this turmoil, and I don’t think there’s anybody who doesn’t understand the depth of the financial crisis we face in the state.” Matt Rooney, founder of the conservative New Jersey politics blog Save Jersey, agrees. No matter what they may say in public, Democrats are unlikely to oppose the budget because it doesn’t contain a tax increase. “Dire circumstances and public opinion have Democrats over a barrel,” Rooney says. “The uncomfortable truth is that many Democrats do know better.”
If that’s indeed the truth, then the squabbling over the millionaire’s tax and the amped-up charges of “class warfare” are nothing more than a noisy political sideshow. After years of financial mismanagement, this is a hopeful sign that the state is not condemned to repeat the past.