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It was 40 years ago, July first, that New Jersey started to have a sales tax-making this one of the most recent states to enact one. That tax has done a lot of good, especially for the higher education system in the early years, which was one of the main reasons Governor Hughes wanted the tax after he failed to get the Legislature to support an income tax.
New Jersey has come a long way in 40 years, but in many areas we are in danger of backsliding. We've forgotten the importance of paying our bills and of planning for the future. The result is the chaos surrounding budget crunch-time once again this year. We don't take in enough money to meet our needs and if we don't change that quickly, then it will be left to those whose response would be to indiscriminately slash spending, regardless of need.
As this anniversary-which of course is also the state budget deadline-approaches, NJPP felt it would be appropriate to take a hard look at the sales tax. As the title of the report says, "you're 40; now get to work." This tax could be doing more for us. You could say we've let it get old and lazy. It taxes the transactions of a generation ago, instead of recognizing that this is a service economy where people spend on a host of things that didn't exist when the sales tax came to be-the Internet, dating services, tanning salons and cable TV, just to name a few.
And the sales tax is riddled with inconsistency. Laundry detergent is taxed; taking your clothes to the cleaners isn't; renting a car is taxed; hiring a limo and driver is not; going to a baseball game is taxed; playing golf or joining a country club isn't; a Snickers bar is taxable; Kit-Kats aren't. A lot of these are worse than just quirky. They unfairly shift the sales tax burden more to lower income people.
The sales tax is often, and properly, derided for taking a larger share of a poor person's income than a rich person's. We need to acknowledge that. But it doesn't mean the sales tax should be off the table, because there are ways to ease this burden. We should raise the state income tax threshold, as Governor Corzine has proposed. We should expand the state Earned Income Tax Credit, which today is the only one in the nation to cut the working poor off when household income reaches a paltry $20,000. And, we should consider a system of credits so low income people can get back the few hundred dollars a year they might spend on sales tax.
The way we address this issue now-through blanket exemptions-is another failing of the sales tax. It is good policy for a poor family not to have to pay tax when they buy, say, baby shoes. But this also means a billionaire avoids $24 in easily affordable tax on a $400 pair of shoes, and that fur coats can be bought tax-free.
The sales tax could do more to help solve New Jersey's short- and long-term financial problems. So we need to examine it, comprehensively, and make changes.
This report lays out a range of options that could bring in as much as $6 billion a year in new revenue. Proposals include: no longer treating similar items differently, and recognizing that services are an integral part of today's sales tax base; imposing sales tax on clothes above a certain value, so furs and other luxury items are taxable; levying sales tax on motor fuels and imposing a luxury tax on cars costing over $35,000 that get less than 20 miles per gallon; and making the overall tax system fairer.
We can't afford for the full revenue potential of the sales tax to go unrealized. That's especially true as the state faces a budget gap and under-funding of essential programs, but also is an important consideration for the future. And while it might be tempting to broaden the base and lower the rate, the reality is that New Jersey's current financial situation and the need to address the state's longstanding structural deficit make that unwise. Over the long term, significantly broadening the sales tax base and maintaining the current rate at 6% is better policy for funding state services.
Some say it would be too hard, politically, to do these things. But all the easy stuff has already been tried. That's why we're in this mess. If New Jersey is to be a first-class state, it needs a modern, productive, fair tax system. The reforms outlined in our report would help make that happen.
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