New Jersey is adding a wealth tax on its millionaires in an effort to “fight the financial realities exacerbated by the ongoing COVID-19 pandemic,” and it could be finalized as soon as October.
Democratic Governor Phil Murphy announced the millionaire tax last week as part of the Garden State’s revised Fiscal Year 2021 budget, saying it will raise the state’s gross income tax rate on income between $1 million and $5 million per year.
Under the plan, the tax rate will increase from the current 8.97% to 10.75% for every dollar earned between $1 million and $5 million annually, bringing it in line with the rate for income earned over $5 million annually and back to the rate paid in 2010. Previously, the 10.75% rate had applied only to those earning more than $5 million.
The Murphy administration estimates that the tax increase could bring in $390 million in revenue in fiscal year 2021, with 16,491 New Jersey residents and 19,128 nonresident taxpayers paying the higher rate.
“In this unprecedented time, when so many middle-class families and others have sacrificed a great deal, now is the time to ensure that the wealthiest among us are also called to make a modest sacrifice by paying pennies on the dollar more for any income over $1 million,” Governor Murphy said.
Murphy and legislators also announced a tax cut that will pay an up to $500 rebate to approximately 800,000 New Jersey families. The cut is for families with incomes under $150,000 per couple—or $75,000 for a single individual—with at least one dependent child. The rebate will be automatically distributed to eligible taxpayers in the summer of 2021.
Exodus of wealthy residents?
While New Jersey’s Democratic lawmakers say the tax will “undo years of tax inequities” and help make up for shortfalls caused by the pandemic, state Republicans warn it will cause wealthy residents to leave the state.
A similar idea has been floated by neighboring New York legislators, but New York Governor Andrew Cuomo opposes the idea over the same concern.
He’s not alone. Anthony Scaramucci, the founder and Managing Partner of SkyBridge Capital who briefly served in the Trump White House, even brought it up during his remarks at last Friday’s Top Advisor by Participant Outcomes (TAPO) awards session.
“Don’t overly disrupt people or create too many incentives for them to do things that you don’t want them to do. If you’re going to raise taxes in New Jersey, incrementally people will leave New Jersey,” Scaramucci said. “I don’t think it makes sense, but that’s Governor Murphy’s choice and his legislature.”
A 2004 “Millionaires Tax” in New Jersey caused 20,000 residents to leave the state, costing $2.5 billion in lost tax revenue, according to former Governor Chris Christie’s administration as cited by Fox Business. Yet a 2014 study by Stanford University evaluating the same 2004 N.J. tax increase contradicted that and concluded it had not chased affluent residents out of the state.
Increasing taxes on the rich to help cover COVID-caused deficits while not chasing them away is a tough balance to achieve.
Back in August, a group of lawmakers in California proposed a state wealth tax with a goal of addressing a big budget deficit because of the health and economic crisis brought on by the coronavirus.
The tax rate would be 0.4% of net worth, excluding directly held real estate, that exceeds $30 million for single and joint filers and $15 million for married filing separately. The increase would hit about 30,400 California residents and raise an estimated $7.5 billion for the general fund.
California is also considering a millionaire tax proposed in a bill that was introduced in July. Per the San Francisco Chronicle, that bill would add surcharges of 1% to incomes (joint or single) between roughly $1 million and $2 million, 3% on income between $2 million and $5 million, and 3.5% on income greater than $5 million, bringing the top rate to 16.8%.
California’s top rate today, at 13.3%, is already the highest in the nation. Hawaii at 11% and New Jersey’s 10.75% are the only other states to max out in the double digits.
The L.A. Times notes that in 2018, the top 1% of California taxpayers, with 24% of earnings, kicked in 46% or nearly half the state income tax.
Already leaning heavily on its richest citizens, if new wealth taxes tempt them to leave for states with lower or even no state income tax rates like Texas, Florida and Nevada, who will be left to pick up the tab?
And in New Jersey, a state which would love to take in companies exiting New York City as work-from-home grows deeper roots, the millionaire tax could disincentive those relocations in addition to chasing away some existing millionaires.