State Revenue Problems--New Jersey

Recently, I blogged on Angry Bear and A Taxing Matter about Michigan's fiscal crisis, brought about in large part by the financial meltdown and consequent business and job losses.  I suggested that Michigan should move away from its flat income tax to adopt a progressive rate, peaking at less than 8% for multimillionaires. 

The progressive rate is wise for three reasons: 

• tax revenues are needed because budgets simply can't be cut enough (especially during a recession when additional services for the vulnerable are needed) and it is in fact, possible to milk a producing cow and not possible to squeeze blood from a rock (the feasibility rationale);
• those at the top of the income distribution have a greater ability to pay the revenues needed, and have less use for each additional dollar they earn than those at the bottom (the ability to pay rationale); and
• those at the top of the income distribution receive most of the benefits of the state that are funded by taxes (the benefits received rationale).

New Jersey has adopted, at least as a temporary one-year change, the proposal for making income tax more progressive.  It's budget stop-gap measure calls for a one-year increase in the state income tax applicable to those making more than $400,000 a year (about 61,000 New Jersey residents) and limitation on the property tax deduction based on income (a $5000 cap for those earning between 150 and 250 thousand, and a zero allowance for those earning above 250 thousand).  The income ceiling for those eligible for New Jersey's property tax rebate program will continue to decline, to $75,000 from last year's $150,000.  Other taxes will go up--lottery winnings above $10,000 will be taxed; cigarettes, wine and liquor will be more expensive.  See, e.g., Chen, New Jersey passes Budget Fueled by $1 Billion in Tax Increases, NY Times, Jun 26, 2009.

The result is that the burden will mainly be borne by those making more than $82,000, and will be about $3000 more for families making half a million a year with $20,000 in annual property taxes.  And New Jersey won't be making the cuts to education and health care that other states are.

Comments

[Nom Deplume, J.D., LL.M.]

There you go again. As Margaret Thatcher once wisely observed, "the problem with socialism is that you eventually run out of other people's money."

Recall the case of Maryland, which lost millionaires after it raised its taxes on the highest earners. Liberals attempted to debunk this by pointing out that the millionaires probably lost money in the market and that was why they did not appear. Yet the reporting years in question were before the market drop off.

Like Maryland, New Jersey has a tax compact with a neighboring state, Pennsylvania. With tax hikes of 25 and 20% on earnings over 500K and 1MM respectively, it doesn't take a rocket scientist (let alone a knuckledragging conservative like me) to see where that money will go. In Maryland, notably in the DC area, most of the wealthy reside in Virginia. In fact, the DC area has the highest percentage concentration of millionaires in the nation. Many probably lived in Maryland and worked in DC (and would be taxed in MD). So where did they go? Why to VA, of course. And where will millionaires in NJ go? If they work in NJ, they will go to PA. Ed Rendell has already announced a tax hike in order to, in part, cash in on that trend.

Will the liberals decide that, once the revenue doesn't appear in Trenton, that there was no real tax expatriation and the decline is due to market forces? I sure hope so. In fact, repeat after me: "Tax expatriation is a myth. No need to investigate. Tax expatriation is a myth. No need to investigate." And make sure they hear you in Trenton.

[LindaMBeale]

Nomdeplume seems to like sarcasm. Personally, I find it a poor substitute for facts and judgment.

I said in my original post that some would probably expatriate. So the sarcasm is at the least misplaced, and most likely rather gauche.

The problem is that you are assuming you "know" that taxes cause expatriation and you imply that you are certain that the trend is significant enough to make raising taxes progressively a no-brainer for the start. On the other hand, I am assuming that taxes "may" cause some expatriation but that the net result will be a better position for the state, even if some of the greedy wealthy do move to a neighboring state.

And I have offered a variety of reasons for expatriation NOT to happen in many cases. First, for those of us who can choose where we want to live, there are many reasons beyond taxes for that choice. Because rich people do not feel the impact of slightly higher taxes as much as poorer people due to the marginal utility of the dollar (and we are generally talking about very little money, comparatively speaking, for the upper class, it simply won't be worth it for many of them to move. Second, even if taxes are a reason for moving, it is harder in times of recession to find the "correct" taxing jurisdiction to which to move that satisfies other demands as well. Rich people may not want to move to tax haven states that offer very little in the kinds of services and amenities (good schools, museums, libraries, cultural life) to which they are accustomed. And neighboring jurisdictions, to which it would be easy to move, may recognize the trend towards more progressive taxation can benefit them when/if wealthy people move there resulting--as you yourself indicate in the case of Pennsylvania--in diminishing choices for reducing taxes by expatriation. (A good thing, in my view. We've had a race to the bottom among the states for far too long, so one benefit of the Great Recession is the states' dawning recognition that the race was a loser for them from the beginning.)Third, some rich people do recognize their obligation to pay more. Hopefully, in this time of crisis cause primarily by the greed of the rich, that recognition will increase and the greedy demands that the rich get to keep the riches that are due in large part to the institutions of state will decline. Fourth, as states enter fiscal crisis mode, they generally will not be able to cut spending to the bone without sacrificing the kinds of services that keep rich people in the state anyway. And they have little choice but to target taxes on those that have the wherewithal to pay them. As more states recognize that they can't indulge in "borrow and tax cut" policies that the GOP has pushed in the past, more states will make their taxes more progressive and there will be fewer states to which to expatriate.

If states have a choice of raising taxes on the rich or cutting many essential services so much that they are sacrificing the ability to offer human and physical infrastructure maintenance and renewal that is essential to having an active, stable economy, they are better off, in my opinion, raising taxes on the rich.