Until this week, New Jersey was one of just nine states refusing to publish a tax expenditure report – i.e. a listing and measurement of the special tax breaks offered in the state.  Such reports greatly enhance the transparency of state budgets by allowing policymakers and the public to see how the tax system is being used to accomplish various policy objectives. 

Now, with Governor Jon Corzine’s signing of A. 2139 this past Tuesday, New Jersey will finally begin to make use of this extremely valuable tool.  Beginning with Governor-elect Chris Christie’s FY2011 budget, to be released in March, the New Jersey Governor’s budget proposal now must include a tax expenditure report.  The report must be updated each year, and is required to include quite a few very useful pieces of information.

The report must, among other things:

(1) List each state tax expenditure and its objective;
(2) Estimate the revenue lost as a result of the expenditure (for the previous, current, and upcoming fiscal years);
(3) Analyze the groups of persons, corporations, and other entities benefiting from the expenditure;
(4) Evaluate the effect of the expenditure on tax fairness;
(5) Discuss the associated administrative costs;
(6) Determine whether each tax expenditure has been effective in achieving its purpose.

The last criterion listed above is of particular importance.  Evaluations of tax expenditure effectiveness are extremely valuable since these programs so often escape scrutiny in the ordinary budgeting and policy processes.  Such evaluation can be quite daunting, however, and the Governor’s upcoming tax expenditure report should be carefully scrutinized in order to ensure that these evaluations are sufficiently rigorous.  One example of the types of criteria that could be used in a rigorous tax expenditure evaluation can be found in the study mandated by the “tax extenders” package that recently passed the U.S. House of Representatives.  For more on the importance of tax expenditure evaluations, and the components of a useful evaluation, see CTJ’s November 2009 report, Judging Tax Expenditures.

Ultimately, New Jersey’s addition to the list of states releasing tax expenditure reports means that only eight states now fail to produce such a report.  Those states are: Alabama, Alaska, Georgia, Indiana, Nevada, New Mexico, South Dakota, and Wyoming.  Each of these states should follow New Jersey’s lead.

This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

New Jersey gubernatorial hopeful Chris Christie has promised the following if elected: property tax cuts, across-the-board income tax cuts, corporate tax cuts, and tax cuts for small businesses.  Like a true politician, Christie has chosen to avoid upsetting any specific voters by refusing to outline the unavoidably severe cuts in state services that would be required to finance his tax-cutting spree.  Instead, he has simply stated that everything, aside from police funding, should be on the table.  Like most states, New Jersey will be staring down a large budget gap for the foreseeable future (projected at about $6 billion or more for FY11).  Closing this gap alone (without raising taxes) would require a 20% cut in the state budget.  Piling Christie’s tax cuts on top of that gap would raise that percentage significantly.

Somewhat encouragingly, voters are beginning to question Christie’s ability to deliver tax cuts during these dire budgetary times.  In an attempt to side-step these growing questions at a recent gubernatorial debate, Christie compared his current situation to the one he faced as a U.S. attorney:  “When I said I was going to combat public corruption, no one asked me exactly how [I was] going to do it … They said, ‘Do it. Let’s see if you can.’”  But you can’t blame the voters for being just a bit skeptical.  The fact is, if Christie explained “how” he was going to do it, he’d probably lose more than a few votes.

In addition to the general fund fantasies Christie seems to be concocting, he also has some interesting ideas regarding transportation funding.  In discussing the state’s deteriorating transportation infrastructure, Independent candidate Christopher Daggett admitted that gas tax increases or toll increases will be needed.  When Christie attempted to bash this idea, Daggett fired back, “It’s easy to criticize when you have no plan of your own. The tooth fairy’s not going to solve this problem.”

In addition to taking a realistic position on transportation, Daggett should also be commended for his willingness to offer specifics regarding his property tax plan.  In order to pay for a 25% cut in property taxes, Daggett has proposed expanding the state’s sales tax to include services.  Such a move would modernize an outdated tax, and would ensure the sales tax’s long-run sustainability.

Finally, while incumbent Jon Corzine has been relatively tight-lipped regarding his future plans for the state’s tax system, he has shown some real leadership by refusing to take the childish no-tax pledge that many observers have been attempting to force onto him.  Moreover, it’s important not to forget that Corzine has already shown an ability to make the tough choices in his decision to take a balanced approach (both raising taxes and cutting spending) during the most recent round of budget negotiations.

With the start of fiscal year 2010 generally only a little more than a month away and with the overall fiscal picture continuing to look rather bleak, two more states have gotten serious about using progressive income tax increases to generate much needed revenue. In Oregon this past week, Democratic legislators -- who control both chambers of the statehouse -- unveiled a plan to raise $800 million over the FY09-11 biennium. One of the principal features of the plan is the creation of two new income tax brackets -- one for couples with incomes over $250,000 (or for single filers with incomes above $125,000) and another for filers with incomes greater than $500,000. The rates for these brackets would be 10.8 percent and 11 percent respectively. (At present, the top rate in Oregon is 9 percent). Similarly, in New Jersey, Governor Jon Corzine, in the wake of particularly poor April revenue collections, has revised his earlier budget plan. He now proposes to raise the tax rate for millionaires to 9.47 percent and to create an additional bracket for filers with incomes between $400,000 and $500,000. While the income tax aspects of the Governor's proposal have won support from progressives, his recommendation that the state suspend its current property tax rebates for everyone except the elderly and the disabled has been less favorably received.

In the wake of the worst fiscal crisis in decades, several states -- most notably, New York and Hawaii -- have recently adopted income tax increases targeted at upper-income individuals and families. As the Center on Budget and Policy Priorities has documented, they may well be joined by several other states in the coming months as more lawmakers realize that this is the most responsible way to address budget shortfalls.

Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota. Yet, as ITEP observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (New York, New Jersey, and Connecticut) saw an upturn in the number of affluent taxpayers over the ten year period from 1997 to 2006. Guess it's hard to find the equivalent of Per Se or Le Bernardin in Sioux Falls!

The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report. For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers. Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions. Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions. Shockingly, the CBPP found that nine states publish no tax expenditure report at all. Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue. All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.

In continuing our effort to highlight states where progressive revenue-raising options are gaining support, this week the attention shifts to New Jersey where the Governor has proposed a budget that wisely relies on revenues from wealthier taxpayers who are most able to afford to pay during these difficult times.

Rather than only slashing services, the Governor has proposed a temporary income tax rate increase on earnings over $500,000, a suspension of the property tax deduction for better-off New Jersey residents, and the extension of a temporary surcharge on corporations. Like many proposals circulating in states across the country, the Governor's budget also includes increases in alcohol and cigarette taxes.

Overall, it's encouraging that yet another state appears ready to acknowledge that taxes on high-income earners are among the least harmful ways to escape current state budgetary nightmares. See past stories from Iowa, Missouri, Alabama, New York, and Wisconsin for more examples.

Last week New Jersey residents got word that current fiscal year tax collections are down and the state budget shortfall may reach $1.2 billion. The future doesn't look much brighter, as the shortfall for fiscal year 2010 is expected to more than quadruple to an astonishing $5 billion.

Late last month, we discussed Governor Jon Corzine's rather unimpressive stimulus package. It includes proposals like the introduction of the "single sales factor" and eliminating the state's "throw out rule." Together, these proposals could allow many large New Jersey companies that do business across several states to avoid tax liability.

To be fair, other components of Corzine's stimulus package, like giving more money to food banks and increasing aid to residents in need of heating assistance, would help those hardest hit by these tough economic times. But the Governor did little to distinguish between helping people and boosting corporate profits when he said, during a recent briefing, "Everything that we talked about in the stimulus program I think is more important today than it was before."

For some more commonsense, responsible policy alternatives, read Mary Forsberg's report from New Jersey Policy Perspective, What's the Rush? Costly Tax Changes Need More Deliberation. We second Mary's suggestions about the need to carefully consider a variety of reform options including combined reporting, corporate disclosure, and publishing a tax expenditure report. We urge the Governor and others to follow Mary's advice before quickly and perhaps carelessly pushing through the aspects of the Governor's stimulus that amount to poorly targeted tax cuts.

Governor Jon Corzine recently revealed his economic stimulus plan, saying that the crisis on Wall Street will uniquely impact his state. "Economists predict New Jersey could lose tens of thousands of Wall Street jobs," he said, adding "our casino revenues are in decline, thousands of construction and manufacturing jobs have already been lost, auto and retail sales are down while inventories climb."

The Governor's proposal includes both short- and long-term strategies. The short term strategies include ensuring more seniors have access to property tax cuts, investing in public infrastructure, and expanding heating assistance.

The Governor's long-term strategies are more suspect. Among them is a proposal to change the state's formula for calculating business taxes to consider only sales made in the state (in other words, moving towards a single sales factor (SSF) approach). Unfortunately, the SSF is a huge revenue-loser in states that have already adopted it and results in a corporate tax structure that is less fair, as explained in ITEP's policy brief.

The Governor also proposes to "remove certain tax provisions that penalize New Jersey companies" including the "throw out rule." As another ITEP policy brief explains, many states have a "throwback rule" or, in the case of New Jersey, a "throw out rule" that prevents companies from shifting portions of their taxable income out of state. Every state that levies a corporate income tax must determine, for each corporation doing business within its borders, how much of the company's profit they can tax. Whether sales are in-state or out-of-state is one factor used to make this determination (and it's the only factor used in single sales factor states). In the absence of a throwback/throw out rule, some corporate sales fall between the cracks, and cannot be taxed by any state. (This can happen because, for example, a company stretches its operations so that its sales are recorded in a state that does not have a corporate tax or a state where it doesn't meet the requirements to be subject to the corporate tax).

This phenomenon is called "nowhere income." The "throwback/throw out" rule simply says that state of origin (the state that is the home of the company making those sales) can tax this income.

Mary Forsberg at New Jersey Policy Perspective wisely cautions policymakers to get the facts and not act hastily to adopt tax changes that could have long-lasting ramifications.

Why would the state even consider changes that would mainly help corporations avoid paying state taxes? It's true that New Jersey has more corporate CEOs, stockbrokers and hedge fund managers who are affected by the stock crash than most other states, but the state government seems to think this means all New Jersey residents belong to this wealthy elite. A surprising amount of attention has been given to how members of this elite are "feeling the pinch" as one recent article put it. A paper actually sent a reporter to Moorland Farms for the 88th annual Far Hills Race last Saturday to find wealthy attendees complaining that they have to cut back on dining at expensive restaurants and traveling over the holidays. Hopefully, tax policy changes will not be geared solely towards benefiting this group.

Ironically, in the Governor's address to a joint session of the Legislature he said, "It's our time to be courageous. Let's do what is right for the people and prosperity of New Jersey." Let's hope the Governor takes a step back and has the courage to do less for corporations and more for those hardest hit by his state's fiscal woes.

When New Jersey enacted a new top income tax rate of nearly 9% on incomes of over $500,000, opponents of progressive tax policy issued dire warnings that the state's wealthiest residents would flee the state, with detrimental effects both on productivity and tax revenues. Needless to say, those fears proved to be baseless, as a new report out of Princeton University shows that out-migration by wealthy New Jerseyans has been nothing more than a "small side-effect" of the tax hike -- a policy that raises over $1 billion annually for the state. In fact, as a result of strong income growth among the more fortunate members of society in recent years, the number of New Jersey residents with incomes over $500,000 actually increased by 70% between 2002 and 2006.

You can read the report here. For more information, check out New Jersey Policy Perspective, one of the key groups involved in the original passage of this progressive policy.

The Center on Budget and Policy Priorities has put out a critical appraisal of the Tax Foundation's latest rankings of states by their relative state and local tax levels. Due to some methodological changes and recently revised data, some states underwent huge shifts in their ranking (changes of 10 to 15 places were not uncommon) which are not explained by the minor shifts in tax policy that may have taken place within the states. They've revised downward their estimates of the overall state and local tax burden by a full percentage point since 2007. They also no longer call 2007 a "25-year high" in state and local tax burdens, now considering the year lower tax than the mid-90s.

If history is any indication, the Tax Foundation's inconsistent methodology and reliance on early projections without hard data will lead to further rankings revisions in the future. The problem is that when state and national media pick up a juicy story along the lines of, "Your taxes are too high," they don't report the numbers as estimates or tentative. They report them as fact and don't report it when figures for previous years are revised. This is problematic because if politicians take the numbers at face-value, they may overreact to the almost certainly flawed numbers that indicate an enormous shift like, "New Jersey edged out New York to become the highest taxed state in 2008" after being ranked 10^th for two previous years.

But because the numbers used to derive this conclusion are so preliminary and based on a shifting methodology, no responsible policy analyst would confidently claim that New Jersey has higher taxes than New York, Connecticut, or other similarly ranked states. The media don't mention the cautionary details that the Tax Foundation includes in its final report and methodology but excludes in its press releases. Its website even contains a sensational headline that glosses over the limitations of their study.

There are also several more fundamental problems with the Tax Foundation's ranking scheme. The Tax Foundation attempts to determine the combined tax impact from all states on a given state's residents. This is different from how most organizations would identify an average tax load, by simply dividing total state and local tax receipts by total income within a state. This is an important distinction because states generally cannot influence tax policy in other states. Also, while the Census Bureau takes two years or more to compile the official data for a given fiscal year, Tax Foundation relies on proxies (such as dividend income to estimate capital gains) to obtain data for a fiscal year that has barely ended. Using such fly-by-night estimates as a basis for ranking states against one another is so unreliable as to provide almost meaningless numbers.

Of course, the most fundamental criticism of the Tax Foundation report is that it lumps all of a state's residents, from the very poorest to the wealthiest, together in one group for purposes of measuring tax levels. As an excellent Birmingham News editorial reminds us, calling Alabama a "low tax" state conceals the harsh reality that it is among the highest-tax states in the nation in its effect on low-income families. As the editorial points out, "[Our tax fairness ranking] is the ranking that most needs to change. "

New Jersey's recent budget agreement is somewhat less disheartening with fewer cuts and more aid. Garden State lawmakers plan to only raise taxes on public utilities, a move that would disproportionately affect the poor as energy costs soar. New Jersey, already the nation's fourth-most indebted state, plans to rely on borrowing to channel as much as $3.5 billion toward school construction in the state's poorest cities following a state Supreme Court Order. Legislators opted to cut state aid to help hospitals treat uninsured patients, reduce funding to nursing homes and deny a funding increase (in the face of a rising cost-of-living) for nonprofits that care for the poor and disabled. State funding will also be reduced for municipalities and colleges. Retirement incentives for state workers were increased. But while salary costs will now fall, retirement benefit costs will rise later. Benefits for newly hired government workers and teachers were slashed. On the positive side, households with incomes over $150,000 will no longer receive property tax rebates.

New Jersey lawmakers expressed little sympathy for their plans to choke hospitals and nursing homes. Assemblywoman Joan Quigley, D-Bergen, claimed that "the pain in this budget is being shared pretty equally by everyone." But it is quite obvious that the primary burden of the budget cuts will fall to the poor, disabled, elderly and teachers.

Earlier this week, legislators in Minnesota overrode Governor Tim Pawlenty's veto and enacted a $6.6 billion transportation plan, one of the key elements of which is a 8.5 cent per gallon increase in the state's gas tax. While higher gas taxes tend to fall harder on low-income individuals and families, the plan does include a refundable low-income tax credit of up to $25 per family to help mitigate the regressive impact of the larger levy. Other states considering proposals to raise their gas taxes to meet transportation funding shortfalls would do well to follow Minnesota's lead and provide similar credits.

A gas tax increase that will soon be before the Nebraska Legislature may also be worth emulating in some respects. A bill there would effectively increase the state's gas tax by 3 cents per gallon. But it is the means by which that increase would be accomplished that is notable. The bill would reduce the existing gas tax by 8 cents per gallon and instead impose a tax equal to 5 percent of the wholesale price of gas. Using what amounts to a sales tax on gasoline rather than an excise tax is preferable since it ensures that state revenues are more responsive to economic growth.

Lastly, raising the gas tax wasn't envisioned in New Jersey Governor Jon Corzine's transportation or budget plans, but, in a new report, New Jersey Policy Perspective (NJPP) argues that it ought to be part of any comprehensive approach to improving state finances. In observing that the New Jersey gas tax has been raised just once since 1972, the NJPP highlights one of the key flaws with excise taxes like the gas tax... they fail to grow with inflation, the economy, or personal income. NJPP points out that a 20 cent increase in the Garden State gas tax would mean $1 billion in new state revenue, a portion of which could be used to lessen the impact of such a change on low-income residents or to support mass transit improvements for all.

Many anti-poverty advocates advise low-income families not to resort to Refund Anticipation Loans (RALs) when filing their taxes. RALs allow filers to get their tax refund quickly by borrowing against that refund. According to the Center for Responsible Lending (CRL) these cash advances come at a steep price, with interest rates ranging from about 40% to over 700%. CRL says that in 2003 over 12 million people took advantage of an RAL, which translates to over a billion dollars in fees for tax preparation companies.

Of course, many teetering on the edge of poverty may genuinely need extra cash as soon as possible to pay bills or to deal with some emergency. Acknowledging this, New Jersey Citizen Action has followed the lead of the city of San Antonio and offers alternative refund anticipation loans with lower fees. Governor Corzine recently signed legislation that allowed nonprofit organizations like New Jersey Citizen Action to offer free tax preparation services and loans. The legislation also "prohibits tax preparers from requiring clients to take refund-anticipation loans and requires preparers to provide itemized statements of charges related to the loans and other services."

New Jersey

New Jersey Governor Jon Corzine has put forward an ambitious proposal of his own to help reduce the state's debt burden and to make needed public infrastructure investments. He has called for a 50 percent increase in tolls on the Garden State Parkway and other major roads every four years. Corzine also wants to create a new entity that would manage those roads and that would have the authority to issue as much as $38 billion in bonds backed by the revenue generated by such toll increases. While higher tolls may be a necessary component of any long term budget plan in the Garden State, New Jersey Policy Perspective's Jon Shure points out that they ought to be considered with an eye towards improving the overall fairness of state fiscal policy.