Tax Justice Digest stories about New Jersey
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
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 (
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.
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.
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.
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.
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 10th 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
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.
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
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
