ALBANY — Hoping to jumpstart a bandwagon effect, advocates of soak-the-rich tax hike proposals in New York state are hyping a tax increase in New Jersey as evidence that New York needs to do the same.
Political optics aside, the actual fiscal and economic implications for New York of New Jersey’s latest tax hike on millionaire earners can be summed up in a phrase deployed by Gov. Andrew Cuomo in other contexts: “zero, zilch, nada.”
After all, the argument against jacking up New York’s already high millionaire tax rate has never been premised on the assumption that targeted taxpayers would flee to, of all places, New Jersey — one of New York’s main rivals for the title of most highly taxed state in the country.
And there’s something missing from virtually all of the (mostly breathless) media coverage of the Trenton announcement: New Jersey officials are preparing to raise their already high tax rate on residents who have been hardest hit by the new federal cap on state and local tax (SALT) deductions.
The actual Jersey policy change is less dramatic than the hype — although you wouldn’t know it from the portentous lead in the New York Times story: “New Jersey officials agreed on Thursday to make the state one of the first to adopt a so-called millionaires tax to alleviate shortfalls caused by the pandemic, intensifying a national debate over whether to increase taxes on the rich to help address widening income gaps.”
In fact, although it isn’t mentioned until the ninth paragraph of the Times story, New Jersey’s top income tax rate is not increasing. Since 2018, it’s been pegged at 10.75% on incomes above $5 million, and it’s staying at 10.75%. The deal announced today by New Jersey Gov. Phil Murphy and legislative leaders will reduce the top bracket threshold, so the 10.75% rate will hit all taxable incomes starting at $1 million.
New Jersey currently hits taxable incomes between $500,000 to $5 million with a rate of 8.97%, a hair above New York’s statewide rate of 8.82% on incomes starting at $1 million. In addition to increasing the top bracket tax bill by 20% for households earning between $1 million and $5 million, the announced change translates into a $71,200 a year tax increase for all those earning taxable incomes above $5 million.
All else being equal, the new tax will create a stronger financial incentive for the targeted high earners to migrate from New Jersey — especially now that the federal SALT deduction is capped at an insignificant $10,000. This spells real trouble for New Jersey’s tax base, which like New York’s depends heavily on the highest earning 1% of state residents, who generated 36% of Jersey’s net income taxes in 2016.
Garden State politicians were reminded of the downside risk of high marginal income tax rates when Jersey lost one of its wealthiest residents, billionaire hedge funder David Tepper to Florida in 2016.
Murphy reportedly said the millionaire tax will raise $380 million. However, he’s also agreed to spend most of this on an annual rebate of up to $500 for families making under $150,000, which reportedly will reduce the net revenue gain to just $65 million.
In other words, despite the Times lead, the deal to hike the millionaire tax in Jersey will not, in fact, mainly serve “to alleviate shortfalls caused by the pandemic” but to alleviate political pressure on that state’s governor and lawmakers to be perceived on their left flank as raising taxes on the rich — while handing out a rebate to the Garden State’s middle class.
What’s it mean for New York?
Again, the political and fiscal implications of all this for the Empire State are nil.
As Budget Director Robert Mujica noted, “the overwhelming majority of billionaires and millionaires in this state live or work in New York City,” where the top rate is 12.7% — highest in the country after California’s 13.3% — not counting the added 4% unincorporated business tax many wealthy investment firm partners pay on their profit shares at the firm level even if they don’t live in the city.
The long list of low- and no-tax jurisdictions vying to attract New York’s high earners starts with Florida, and includes locales such as Nashville, Tennessee, which recently poached the headquarters of one of New York’s oldest money-management firms. In pure tax burden terms, New Jersey would be at the bottom of that list.
In fact, there is one silver lining for New York in this week’s New Jersey announcement: Murphy and legislative leaders also agreed to extend for four years a 2.5% corporate business surtax, which is tacked onto the state’s top corporate tax rate of 9%.
This will increase an existing corporate tax advantage for much of New York, where the tax rate is 6.5% (zero for upstate manufacturing corporations), and about 8% in the downstate metropolitan commuter transportation district. Then again, the same lawmakers pushing higher personal tax rates for income millionaires are also seeking to raise New York’s corporate tax.
(E.J. McMahon is a senior fellow at the Empire Center.)