Above was my first response to Senate President Sweeney’s plan to drop his 7-year support of a millionaire’s tax and call instead for an increase in the corporate tax. As I thought about it I developed a more nuanced view.
Sweeney argued that the combination of a truncated state and local tax deduction combined with a 10.75 personal income tax rate on income above $1 million would hammer taxpayers. Yes, but it hammers only those whose income is over $1 million, and the higher rate is applied only to dollars over the income of one million. In effect it has no negative impact on the working class, middle class and even those whose income is as high as $999,999. It will only affect a few thousand individuals, and it serves to reduce income inequality.
The new federal tax law will give a huge boost to the wealthy while the typical American family get a tax cut of $1,182, so the wealthy can afford to pay more. As Business Insider points out, repealing the estate tax and the alternative minimum tax (AMT) are just two ways in which rich New Jerseyans could benefit. Higher income taxpayers will get the largest tax cuts. Private school tuition could be paid through a 529 plan. They could reduce their taxes by donating to charities. Finally with retaining the “carried interest” provision, “Hedge fund guys,” as Trump called them and other fund managers will still have access to a loophole that allows them to pay a lower tax rate on investment profits. A sweet dea.
There are some quite wealthy individuals within Sweeney’s district such as George Norcross who exerts strong influence on local and state politics and is closely associated with Sweeney. Norcoss’s wealth in 2016 was estimated as $249 million. On his federal income tax he will no longer be able to deduct more than $10,000 on State & Local taxes – a relatively small loss for him. On his state tax under Murphy’s plan he actually gains a small advantage of being able to deduct $5,000 more in property tax as the level is raised from $10,000 to $15,000. He will pay more state tax on his income above $1 million, and that is probably his sticking point. Nonetheless in his new federal taxes for 2018 he gains all the advantages mentioned above including a lower tax rate for himself and a much lower tax rate for his corporate entities. Between the lower federal taxes and the higher NJ taxes he still will have a significant net gain.
Where the issue raised in Murphy’s new tax proposals is more problematic is with the super-rich (billionaires), particularly in terms of those who are hedge fund managers or who operate through a corporate entity that can be easily moved from New Jersey to another state. In 2015 the hedge-fund multi-billionaire David Tepper, after living in New Jersey for 20 years declared himself a resident of Florida where along with 6 other states there is no income tax. According to Institutional Investor’s Alpha, he earned more than $6 billion from 2012 to 2015 so his move to Florida could have cost New Jersey hundreds of millions of dollars in lost payments.
In New Jersey the top 1 percent pay about 40% of the state’s taxes so a handful of billionaires or even a single individual like Mr. Tepper can have a devastating impact on state revenues and budgets. With Murphy’s proposed increase in the millionaire’s tax combined with his proposal to end the state’s carried interest rate, the super-rich, have reason to be concerned and could easily transfer their corporation to New York, Florida or another state where carried interest is low and/or there is no state incomes tax.
It is unhealthy for New Jersey to have to rely on just a handful of super-rich to bring in the necessary tax funds. Hopefully with a stronger economy under Murphy in time there will be a larger share from those below the super-rich category. In the meantime we do have to be sensitive toward those who contribute heavily and can easily move out of state.
Another general principle is that in these matters it is better if the laws are federal rather state-oriented. The federal law allows carried interest deduction and it allows e-commerce to be taxed only when the firm has a nexus in that state. Murphy is proposing not only to do away with the carried interest but also create a law that all e-commerce sales into New Jersey be taxed. It puts New Jersey in a less favorable position because NY, for example, does not have these disadvantages.
The Republicans naturally disapprove of the millionaire’s tax, and Republican Assemblyman Jon Brammick calls it “Florio Two” – a reference to the governor who raised taxes his first year and lost his re-election. Indeed with Murphy’s several proposed tax increases he may be taking a step too far in the mind of New Jerseyans who already feel over-taxed. Even President Gordon MacInnes of NJPP, a voice for progressives, says, “I think Sen. Sweeney’s note of caution is sensible. What was proposed [by Murphy] might have to be changed.” A higher state tax on corporations, which are already receiving a huge federal tax reduction from a top rate of 35% down to 21%, and so far have little of this saving trickle down to employees, might be more beneficial and a relatively small price for NJ corporations to pay.
In this era when multiple communities are at odds with each other and each side has separate, deeply entrenched convictions, it is all to easy for us progressives to take a knee-jerk reaction in favor of a perceived progressive approach. Sweeney has said he wants to study the matter more, Murphy has time to take his plan on the road, and the public will have a chance to weigh in. Regardless of the final outcome both sides might agree that the state is facing increasing, expensive bills it needs to pay. Nonetheless, sometimes we need to stop, listen carefully to what the opposition says, realize our first impression might have been wrong and take a more nuanced approach.