Experts Weigh-in on Impact of Raising Taxes on High-wage Earners and Small Business Owners

By Scott Goldstein

What would happen to New Jersey’s high-wage earners and small business owners if the state increased income tax on those that make more than $300,000? They would flee to low-tax states like Florida and Pennsylvania, according to experts within the New Jersey Chamber of Commerce membership.

The experts are responding to a recent proposal by a coalition of special interest groups to raise the income tax as a way to help the state balance its budget for fiscal year 2010, which begins on July 1.

“When taxes are increased, we see businesses and high net worth individuals consider their options and many move their residency out of New Jersey,” said Howard Cohen, managing partner and CEO of the Edison-based accounting firm Amper, Politziner & Mattia. “People move to states like Florida, where they can live part of the year. And then the state loses their tax revenue altogether.”

He added, “It’s an easy answer to say tax the rich. But in the long-term, it will erode the tax base.”

To support this claim, a study from Ohio University has revealed that from 1998 to 2007 more than 1,100 people a day moved from the nine highest income-tax states, which includes New Jersey, and relocated mostly to the nine states with no income tax.

Since many high-income individuals are businesses owners, tax hikes also would damage the state’s efforts to retain and recruit companies, said William R. Hagaman Jr., partner at the New Brunswick-based accounting firm WithumSmith+Brown. “These are the people that bring jobs with them,” Hagaman said. “In the long-term, income tax increases chase both the wealthy and the jobs they provide out of the state to lower tax jurisdictions such as Pennsylvania and Florida.”

Further, income tax hikes would hurt owners of certain firms – like S Corps and Limited Liability Corporations – who pay income tax, instead of Corporation Business Taxes based on their business revenue. “This is money that business owners are re-investing into their firms,” said Joan Verplanck, president of the New Jersey Chamber of Commerce. “The income tax increase, in essence, becomes a business tax increase.”

The state should continue focusing on improving its business climate so the Garden State is in position to attract new companies and new jobs when the economy improves, said Gretchen Wilcox, president and CEO of Q10/Wilcox & Co., a Morristown-based mortgage-banking firm. “We can’t tax our way out of a recession,” Wilcox said. “That’s the wrong way to go.”  

New Jersey only has to look back to 2004 to witness first-hand the impact of raising taxes on high net worth individuals. That’s when the state increased taxes on those making more than $500,000 – the so-called “half millionaire tax.” The following two years, the state saw its growth rate of high-wage earners drop below the national average, according to Edmund J. McMahon, a budget expert at the Manhattan Institute. McMahon calculates that the Garden State would have had 4,300 more “half-millionaire” households by 2006 if it had not increased the tax.

“Wealthier groups have the most options as to where they are going to domicile themselves,” Hagaman added. “I know the governor is in a difficult position, but increasing the income taxes on the presumed wealthy is the worst thing you can do right now.”

In this recession, many of the state’s former high-wage earners have already been hit hard, added Verplanck “Has anyone noticed the economic downturn?” she asked. “And the number of casualties on Wall Street and in the financial services industry, which constitutes the lion’s share of our upper echelon of taxpayers? We may be taxing phantom income, since these are the taxpayers responsible for a significant part of this year’s state revenue shortfall.”


Scott Goldstein is the communications manager for the New Jersey Chamber of Commerce.


Additional resources:

Soak the Rich, Lose the Rich - Americans know how to use the moving van to escape high taxes (Wall Street Journal)

Chamber's 2004 Study Revisited: Potential Impact of the Half Millionaires Tax (PDF)