TRENTON-Having earned its keep, and more, for 30 years, New Jersey's state income must remain an important part of the state's overall revenue structure in ways that make it fairer and more productive. Those are major findings of a New Jersey Policy Perspective report that proposes to raise more than $1 billion a year in additional revenues from a tax that over the years has proven not only to be dependable, but more closely based on people's ability to pay than other state and local levies.

If It Ain't Broke...New Jersey's Income Tax Makes Dollars and Sense was written by NJPP Research Director Mary E. Forsberg. It responds to many arguments made against the income tax, pointing out that the tax accurately effects the growing concentration of income in New Jersey and that it is competitive against neighboring states.

"What's happening at the federal level can't be allowed to happen in New Jersey," said NJPP President Jon Shure. "The state income tax is the only thing making a dent in an overall tax system that comes down too hard on low- and middle-income people. It can do even more."

New Jersey's personal income tax is better crafted than those in most states, the report says. And the underlying premises are sound: Those who earn substantially more should continue to contribute more. The few exemptions and deductions allowed fit with standards of simplicity and fairness by permitting fewer ways to "game" the system.

The report makes these policy recommendations:

• Raise the tax threshold for married filing joint returns to $30,000 from $20,000 and for singles to $15,000 from $10,000. This would cost the state less than $200 million, but eliminate any state income tax for more than 400,000 New Jersey households.
• Increase the lowest tax bracket to 1.75 percent, and add a new bracket of 7.67 percent on income between $250,000 and $500,000. This would add at least $400 million in new revenue and would increase tax equity among higher income earners. The financial circumstances of households with annual incomes of $150,000 are sufficiently different from those making $500,000 that it is appropriate to tax them at different rates.
• Eliminate the tax exemption for 401K retirement account contributions. This would generate up to $500 million and would eliminate an inequity in the way the state treats retirement savings. Those making contributions to 401(k) retirement plans in New Jersey can exclude the amount from their taxable wages, but no deduction from taxable wages is allowed for contributions made to SEP IRAs, Simple IRAs, ROTH IRAs, Federal 457 plans, 403(b) plans, Traditional IRAs, Keoghs and 414(h) plans. Equity in taxation requires that all taxpayers in similar circumstances be treated alike. Taxpayers would continue to get a federal deduction so there is still incentive to save for retirement.
• The state income tax should not be used to make payments to corporations under the Business Employment Incentive Program. Income taxes are constitutionally dedicated for property tax relief. But BEIP gives to many businesses that move to New Jersey cash grants that amount to between 10 and 80 percent of what the company withheld from its employees' pay for New Jersey Gross Income Tax. This has meant a net loss to the state treasury of more than $375 million in income tax for a program whose efficacy in attracting businesses to the state has yet to be proved. In 2006, the cost of this program is estimated to be more than $150 million.
• Local governments in New Jersey should not be given the authority to levy income taxes. Doing so would promote potentially detrimental competition, rather than cooperation. And since the ability and willingness to pay local income taxes would exacerbate the differences between wealthier and poorer municipalities, school districts and counties, such a course would be a step backward that would replicate the inequities of New Jersey's historical over-reliance on property taxation.
• The state should assume financial responsibility for, and take control of, more government functions that are currently performed at the local level. New Jersey's income tax is the appropriate financing mechanism for this.

In its farsighted 1988 report, the bipartisan State and Local Expenditure and Revenue Policy Commission (SLERP) recommended that the state assume responsibility for the county court system and the county prosecutors' offices. Savings from the state assumption of county court costs have helped alleviate property tax pressures resulting from court costs; since 2005 four countries have received a total of $16 million to offset the costs of their county prosecutor. More such actions should take place, in an unprecedented restructuring of how New Jersey provides services. The goal should be a streamlined system where the current scheme of rebates to property taxpayers is replaced by state-level service delivery and lower property taxes from the start: reform, not just relief.

A first step should be to move property tax collection and certain assessment functions now performed by municipalities to the state level. Property tax collection can be more efficiently done by the state. And, assessing certain properties by state assessors would improve consistency.

If It Ain't Broke provides extensive evidence to rebut the contention that it is unfair for a relative few households to pay most of the tax. Just over 9 percent of households-those making $150,000 or more-paid about 63 percent of all income tax collected by the state in 2004. This is proof that the tax is working, not that it isn't. A tax based on ability to pay should operate just as the state income tax does. "Progressivity is a virtue, not a vice," the report says. And, it notes, only for the highest income people in New Jersey does the state income tax take a higher percentage than do property or sales taxes. Further, the people paying the most also are getting the biggest cuts in their federal income tax.

The report also offers a comparison of who pays how much income tax in neighboring states:

RELATIVE TAX OWED

The report concludes that, "The time has come for New Jersey to better balance its tax system by relying more on the one tax that is based on ability to pay. Year after year, New Jersey is at or near the top of the nation in median household income, yet even as income grows more concentrated in the hands of a relative few households, the state clings to its property tax tradition. New Jersey's tax system should reflect reality, not flout it."

TAX REFORM

WORK & WAGES

BUDGET & FISCAL POLICY

TRANSIT ISSUES

ECONOMIC DEVELOPMENT

VOTING & GOVT REFORM

© 2008 New Jersey Policy Perspective