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Exodus on the Parkway: Regent Atlantic’s Report Into Why Wealth Leaves New Jersey.

Author: James F. McDonough

Date: March 25, 2014

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The financial advisory firm Regent Atlantic as to why wealthy people leave New Jersey to reside in other states.

The report is entitled Exodus on the Parkway: Are Taxes Driving Wealthy Residents Out of New Jersey?(the “Report”).  The Report draws on objective statistical information and is free of the hyperbole that often accompanies such discussions.

The Report notes that the State of New Jersey (the “State”) obtains 39% of its revenue from its gross income tax. There are states that have no personal income tax, notably Florida and Nevada. The highest marginal rate is 8.97% and it is easy to understand how attractive this annual savings is to an upper bracket taxpayer. The Report states that between 2004 and 2008, $70 billion of wealth left New Jersey and $5.5 billion of wealth departed in 2010.  This trend shifts the tax burden to those persons remaining in the State.

The Report notes the disparity between the operation of federal income tax rules as compared to New Jersey Gross Income Tax (GIT) rules. There are two significant differences.  First, that State loss carry-forwards are limited to income from categories that are more narrowly drawn.  A client had carryover losses from a business that she was unable to offset against gain on the disposition of real property for GIT. Although netting resulted in no federal income tax, the State tax was in six figures. Second, State loss carry forwards rules are more restrictive than in the federal system.

A second difference is between the federal estate tax and the New Jersey estate tax and is more widely known. The federal estate tax exemption in 2014 is $5,340,000 per person, while the New Jersey exemption remains at $675,000.  Although an estate may be at the cusp of the federal exemption with no federal estate tax payable; New Jersey demands approximately $430,000 in New Jersey estate tax. It is no wonder wealthy people choose to leave the State and establish domicile in more favorable tax climates.

More importantly is that the assets of state residents falling below the $5,340,000 level are subject to State death tax. New Jersey demands (approximately) $34,000 in tax on a $1.0 million taxable estate; $64,000 in tax on $1.5 million; and nearly $100,000 in tax on $2.0 million. It is easy to see why residents not subject to federal estate tax move to other states with more favorable death tax regimes.  It appears that this group, although in the second tier of wealth, has even more reason to leave the State.

There is also a State Inheritance Tax and an estate pays inheritance tax if that tax is more than the New Jersey Estate Tax. A $1,000,000 estate left to a Class D beneficiary could pay $150,000 (15%).  Clearly collateral relatives are not favored in this scheme.

The deficit in state pension funding suggests that tax cuts will not be forthcoming any time soon. Former state employees are living longer and are thus receiving pension payments over a longer period and State contributions have not kept pace.

CNBC ranks the State as 34th best in which to start a business.  I fear for the State’s future.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

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