New Jersey Democrats’ deal last summer to raise taxes on income over $5 million provided only the briefest of reprieves from the debate over the millionaires tax in the Garden State.
Now, Gov. Phil Murphy’s proposed budget for next fiscal year has thrust the millionaires tax back into the spotlight with his plans to raise $447 million in new tax revenue from increased taxes on the rich.
Murphy contends it’s a matter of tax fairness and making the wealthiest pay their fair share. Right now, all income earned above $5 million is taxed at 10.75 percent. In his budget, Murphy proposed extending that rate to all income over $1 million.
But a new report from a Wall Street rating agency warns that revenue comes at a risk.
Moody’s Investors Service examined four of the wealthiest states — New Jersey, California, Connecticut and New York — and came to a conclusion Murphy might not want to hear.
The bottom line: relying on income taxes from the rich makes it hard to predict how much money the state will take in from year to year, which could cause budget shortfalls.
Income from high earners is also much more volatile than low-income earners, and it can prompt big losses during an economic downturn, the report said.
“Dependence on high income taxpayers to fund state government exposes these four states to swings in the income of their highest earners," the report said. "This can, in turn, drive volatility in taxes levied on that income and in state revenue in general.”
New Jersey is one of the wealthiest states in the U.S. About 1.4 percent of taxpayers here report at least $500,000 in annual income, according to the report. That 1.4 percent pays about 40 percent of the income taxes collected by the state.
Taxpayers with more than $1 million in income, in aggregate, lost 42 percent of their income in the 2001 recession and 48 percent in the 2007-2009 recession.
Those with income between $500,000 and $1 million saw a decline of 16 percent in the first recession of the past decade and 5 percent in the second one.
The state benefited during the boom years but lost big when those recessions hit. New Jersey saw a more than 18 percent drop from its peak income tax revenues during the Great Recession, according to Moody’s.
“A similar decline in income at a time when income taxes on the highest earners make up a larger share of these states’ total revenue could present California, Connecticut, New Jersey and New York with new budgetary pressure," the report said.
Jennifer Sciortino, a spokeswoman for the state treasurer, said the report "underscores the warning the governor issued just (this week) about the need to preserve our surplus in the event of an emergency or future economic downturn, a message we have repeatedly underscored since last year.”