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Friday, July 02, 2004

New Jersey's new tax on "millionaires" 

New Jersey's governor James E. McGreevey signed the bill enacting a new "millionaire's" income tax surcharge on Tuesday, which puts New Jersey's top personal income tax rate at almost 10%. You need the scare quotes, because the bill actually imposes its higher marginal rates on families whose incomes exceed $500,000 per year. I suppose, though, that "semi-millionaires" tax makes for a more confusing headline, since a lot of people in this state may not know what "semi" means.

The increase is so substantial that it effectively nullifies more than half the reduction in federal tax marginal rates conferred by the Bush tax cuts, a point the governor makes in more subtle terms on his web site. In New Jersey, at least, the Bush tax cuts amount to a transfer of funds from the federal government to the state. This is not progress, insofar as New Jersey is so inefficiently run that it constitutes the most persuasive argument for the elimination of states.

According to the governer, the new tax will hit only 28,000 families in New Jersey, even as it raises $800 million. That comes to about $30,000 per family, if their income were distributed evenly, which of course it isn't. The proceeds are not going to alleviate the state's serious fiscal problems, though, which can only be addressed by restructuring New Jersey's government. Instead, McGreevey's handing it back in nickels and dimes in the form of property tax rebates, including a big wad for "senior citizens" -- the most pampered demographic in the American polity -- and families with incomes between $125,000 and $200,000. So we're taxing people who earn an enormous amount of money to give a property tax rebate to people who do not contribute economically (I say let them move to Florida) or those who only earn a lot of money. This is the buying of votes, pure and simple.

Beyond the sheer cynicism of the legislation, this tax will probably weaken the state's fiscal situation, rather than improve it. High income people are extremely adept at deferring their income, or moving it to another jurisdiction. If you are a corporate executive you can almost always defer the realization of stock option gains, for example, or spread them out over a couple of years to keep your income below the magic $500,000 level, when you otherwise might have exercised earlier. More significantly, a great many high income people are small business owners who may "earn" these incomes under the tax law but who also invest marginal dollars back into their businesses. Will they move their businesses to Pennsylvania, or invest those marginal dollars elsewhere? Almost certainly.

Also, small businessmen are uniquely able to avoid (or evade) income taxes. It is not difficult to create expenses, shift income, and otherwise hide the ball from the tax man, especially the state tax man. A lot of the revenue that McGreevey expects will therefore evaporate or never materialize, but his commitment to rebate the property taxes will remain.

Mark my words, the state's fiscal situation will deteriorate in advance of the election in 2005. Which, of course, would hurt McGreevey grievously if the New Jersey Republicans could ever get their act together to field an attractive candidate. Since the odds of that are roughly equal to the chances that all the oxygen molecules in my office will randomly migrate to one corner, I'm not holding my breath.

This, by the way, is not the first time that the McGreevey administration has restructured state tax law to discourage employment in the state. New Jersey has twice now suspended the use of corporate "net operating losses" to shelter the taxes of newly profitable companies -- in New Jersey, if you earn a nickel this year you pay the full corporate tax on that nickel, even if you have been losing money hand over fist since your company's inception. It is hard to imagine a policy that is more discouraging to the formation of new ventures.

New Jersey's also decided to use employment within the state as one of the bases for "apportioning" the income of corporations that do business in the state. If you are a corporation that does business in multiple states -- an aspiration of pretty much every business that matters -- the law allocates your income to New Jersey (as opposed to other states in which you do business) based in part on the number of people that you employ here. As a result, New Jersey companies have every reason to locate new jobs in jurisdictions with lower corporate taxes than New Jersey, since it will lower the proportion of their income taxed at New Jersey's higher rates. Lost jobs, lost income, lost tax revenues.

Fools.

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