The recent tax reform proposal from New Jersey State Senator, Raymond Lesniak, would create an income tax hike for residents over $350,000, but would also remove the estate tax.
According to the NJ Spotlight, the income tax hike plan is estimated to generate more than $850 million in tax revenue, enabling the state to pay down its $83 billion unfunded pension liability.
The proposed plan for the income tax hike
After Governor Christie vetoed all previous income tax hikes, Lesniak’s reform bill would effectively cut the $350 million estate tax. However, the bill would simultaneously increase the income tax for high net worth residents to $1.2 billion, making it the largest income tax hike in New Jersey history. The state would also have the third highest income tax in the nation, but still rank behind New York and California.
The “millionaire tax” reform would increase the state income tax for residents making more than $350,000 from 6.37 percent to 8 percent. This includes rate hikes for individuals at $500,000 to 10.25 percent, and stiffer increases for residents with over $1 million to 10.75 percent.
According to the report, the state owes $2.75 billion to fulfill its budget deficit from 2014-2015, which includes $53 billion in unfunded pension liabilities. Senator Lesniak stated that New Jersey has not made pension payments for 20 years.
“Without additional revenues, the state is facing a train wreck at the end of June that could only be duplicated by Congress. No one wants that to happen,” Senator Lesniak argued. “Public and private workers all need to have their pension income secure. Our proposal will help the governor and legislators fulfill that obligation.”
The $850 million that the income tax hike plan would generate is sufficient to fund the third year of pension payments missed in 2014.
Problems with the proposal
Critics of the proposal argued that it does not address Governor Christie’s $900 million cut in pension payments from the 2014 budget. The debt accrued is the result of a significant drop in revenues from state income taxes in 2014, which raises concerns that further tax hikes would drive wealthy residents out of New Jersey.
Furthermore, critics point out that Lesniak’s plan falls short of fulfilling the $1.5 billion necessary to bring pension payments on schedule. Ultimately, without a solution to the pension crisis, there is no hope to balance the budget for 2015, which means that an additional pension cut is inevitable.
There is also criticism that the bill hurts small businesses in the state, because many of them pay taxes through personal income taxes to avoid the stiffer business tax rates.
The impact
Senator Lesniak noted that by eliminating the estate tax, he hopes to convince residents to stay in New Jersey. According to New Jersey Chamber of Commerce President, Tom Bracken, the New Jersey Estate tax, when levied against individuals with estates worth $675,000 or more, would save millions for high net worth retirees. It remains to be seen if wealthy residents would perceive the immediate annual burden of an income tax increase as acceptable.
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