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State Chamber of Commerce Study: New Jersey Must Reduce Dependency on "Volatile" State Income Tax to Regain Fiscal Stability

201 Tax StudyNew Jersey State Revenues (2010-11, Amounts in Billions)

Report presents options to reduce top state income tax rates and change capital gains tax to make N.J. more competitive

To return to a stable and more manageable fiscal structure, New Jersey must reduce its dependency on its gross income tax - a source of revenue that fluctuates widely depending on the health of  the economy, according to a new report released today by the New Jersey Chamber of Commerce. The report presents options that would help New Jersey solve its systemic budget issues and help attract new capital investment.

The report, prepared by Capitol Matrix Consulting, a financial consulting firm based in Sacramento, Calif., states that a significant cause of New Jersey's fiscal challenges is its sharply increasing dependency on the gross income tax, the volatile nature of which makes it difficult for state leaders to forecast revenue and create responsible budgets for the long term. 

"New Jersey's governor and Legislature have teamed to make some great strides to improve the business climate in New Jersey," said Thomas A. Bracken, president and CEO of the New Jersey Chamber of Commerce. "But there are systemic causes of the state's fiscal difficulties that we need to look at. We commissioned this report to gain insight on some of these problems and to share options we hope will be seen as beneficial and bipartisan."

Bracken added, "Some of the options suggested in the report would not be supported by the Chamber, but we felt it was most helpful to offer an unvarnished look at everything the report says."

 

Causes of Volatile Revenue
 
The gross income tax currently accounts for about 36 percent of New Jersey's revenues, and its volatility can be attributed to the increased concentration of earnings among top earners, coupled with tax policies over the past two decades which increased the top income tax rates, according to the report.

The top 10 percent of filers paid 68.2 percent of the total income tax in 2009, compared to 41 percent of the total income tax in 1991.

The upward rate means the tax burden falls more heavily on a relatively small number of high-income taxpayers whose business and investment incomes have been subject to heavy fluctuations -- in some cases due to the cyclical nature of business and in other cases because of challenging economic times.

This in turn has made it extremely difficult for state leaders to forecast revenues and construct realistic budgets, resulting in abrupt changes in public services, structural budget deficits, debt increases and credit rating downgrades.

While many states relying on income tax have seen some level of fluctuation, the report concludes the magnitude of New Jersey's fluctuation is greater than most other states.

 

Options to Reduce Fiscal Volatility

To reduce volatility and bring more stability to New Jersey's fiscal structure, the report presents a combination of tax and budget reform options:
  

  • Reduce the progressivity of the gross income tax rate so it is no longer heavily reliant on the upper income earners. 
      
  • Reduce the tax rate for capital gains - now taxed as ordinary income in New Jersey - to mirror the federal government's policy. The reduction would reduce income volatility and make New Jersey's capital gains tax rates more competitive than neighboring states.
      
  • Rely more on alternative taxes or increase the base of the sales tax - more relatively stable sources of income.
      
  • Allow income averaging on the gross income tax which was allowed on federal tax returns before 1987.
      
  • Create and maintain larger budget reserves, especially during robust economic times to help cushion the effects of economic downturns.  Controls on spending these reserves would be needed.
      
  • Allocate proceeds from above-average revenue growth years to one-time expenditures such as payoffs of deferred pensions or buy-downs of outstanding debt.
      
  • Change the corporate tax structure to rely on gross sales receipts instead of profits

 

About Capitol Matrix Consulting

Capitol Matrix Consulting has extensive experience with fiscal and budget issues and has produced significant work in taxation, finance and economics, including the area of revenue volatility. One of the authors of the study, Brad Williams, was recognized by The Wall Street Journal as the most accurate forecaster of California's economy during the decade of the 1990's. 

For a copy of the full report, click here.