Category Archives: income taxes

As A Matter Of Fact…Reality Check: Income Taxes Don’t Impede Economic Growth

by Jon Whiten | Published in NJPP Blog: As a Matter of Fact …

As Gov. Chris Christie prepares to unveil the specifics of his proposed 10-percent income tax cut at next week’s budget address, he’s working under a key tenet of conservative economics: that high tax rates harm economic growth.

There’s just one problem, according to a new national report by the Institute on Taxation and Economic Policy (ITEP): that tenet doesn’t match up with reality.

These claims are based largely on misleading analyses generated by Arthur Laffer, long-time spokesman of a supply-side economic theory that President George H. W. Bush once called “voodoo economics” because of its bizarre insistence that tax cuts very often lead to higher revenues. Recently, Laffer’s consulting firm has been very successful (with the help of the American Legislative Exchange Council, Americans for Prosperity, and the Wall Street Journal’s editorial page) in spreading the talking point that the nine states without personal income taxes have economies that far outperform those in the nine states with the highest top tax rates.

In reality, however, residents of “high rate” income tax states are actually experiencing economic conditions at least as good, if not better, than those living in states lacking a personal income tax.

The report pits the nine “high rate” states identified by Laffer (a list that includes New Jersey) against the nine states that don’t have a broad-based personal income tax in three categories: growth per capita, median family income and unemployment rate.

From 2001 to 2010, the “high rate” states have seen stronger growth per capita and less erosion of median family income, while the average unemployment rate has been the same as the un-taxed states.

The bottom line, according to ITEP?

“There is no reason for states to expect that reducing or repealing their income taxes will improve the performance of their economies.”

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Filed under As a Matter of Fact, blog, Gov. Chris Christie, income taxes, Institute on Taxation and Economic Policy (ITEP), New Jersey Policy Perspective

>AS a Matter Of Fact…Busting the myth: The real numbers show N.J. is not the most overtaxed state in the nation

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By Mary E. Forsberg and Deborah Howlett
June 26th, 2011

Perhaps you’ve heard a politician or two, in an accusatory tone, declare New Jersey has the highest taxes in the nation. It’s become a rallying cry for the current administration. It is repeated as an indisputable fact by the media. But mostly it just sounds right to people, perhaps because it so neatly fits the cynical narrative of government waste, fraud and abuse.
The thing is, it’s not true.

Consider this from a recent press release by the Connecticut House Republican Party:
“Connecticut residents already pay the highest taxes in America.”
Or this from the Buffalo News editorial page: “New York is the most overtaxed state in the nation.”
Nope. According to the Orange County chapter of the Lambda Alpha economics society, “California is the most overtaxed state in the nation,”
And from a conservative pundit in Chicago: “I live in Illinois … the most overtaxed state in the union.”
But wait. There’s another. The vice chair of the Maine Republican Party has said, “Maine is currently the most overtaxed state in America.”
They can’t all be right.
For the record, New Jersey ranks eighth among all states when state and local tax revenues are compared as a percentage of taxpayer’s personal income, according to an analysis using data from the U.S. Census and the U.S. Department of Commerce, Bureau of Economic Analysis. It’s the cleanest comparison of the tax “burden” in all 50 states. New Jersey’s ranking drops considerably once you get past property taxes and look only at state tax collections.
Simply comparing total revenue collected from taxes in each state would produce a wholly inaccurate comparison because poorer, less-populated states would always appear to tax less. Measuring as a percentage of personal income, or on a per capita basis, provides necessary
context and a more accurate comparison among states.
Consider the big three state revenue sources in New Jersey — income, corporate and sales taxes — and then size up property taxes.

Income tax


On a per capita basis, New Jersey ranks seventh among states for income tax revenues, according to U.S. Census data. As a percentage of personal income, New Jersey ranks 19th among states.
It’s important to understand New Jersey is consistently at the top of lists that rank states in terms of median income and millionaires (those with at least $1 million in investable or liquid assets) as a percentage of households.
With all that wealth, the state also has a progressive income tax that collects significant amounts of its revenue from the wealthiest in the state and virtually none from the poorest, such as married couples whose incomes are less than $20,000 ($10,000 for a single person).
The progressive aspect of New Jersey’s income tax has evolved since the state’s first 2 percent flat tax was enacted in 1976. Public opinion polls show a vast majority approve of raising rates levied on income that exceeds $1 million a year.
Other states also have local income taxes. Philadelphia, for example, levies a 3.928 percent wage tax on residents and a 3.4985 percent wage tax on nonresidents on top of the state’s 3.07 percent flat income tax. Cities in New Jersey are barred from imposing income taxes on workers.
Corporate Tax

Corporate taxes in New Jersey rank ninth as a percentage of personal income and sixth when measured per capita.
New Jersey took in a little more than $2 billion in fiscal year 2010 from corporations, or 7.5 percent of all revenue collected by the state. However, 93 percent of the 252,000 corporations subject to New Jersey’s corporate business tax paid the state less than $2,000 each. Corporate revenues for the year surpassed $24.6 billion.
Sales Tax

Comparing revenue from the sales tax puts New Jersey 19th on a per capita basis and 36th when measured as a percent of personal income.
The state sales tax is often cited as one of the highest in the nation because of its 7 percent rate. However, it is applied more narrowly than sales taxes are in many other states.
Food, clothing and gas are exempt, for example. Depending how one looks at it, that is a loss to the state or a savings to taxpayers of about $2.6 billion.
Nor does New Jersey allow cities or counties to collect local sales taxes, which many other states allow.
Montgomery, Ala., levies a 10 percent sales tax (4 percent state; 6 percent local) on everything sold, including food.
In Georgia, a 12 percent combined state and local sales tax is the norm in some areas of the state.
Property Taxes

What’s abundantly clear, however you slice the data, is that New Jersey ranks among the top one or two states in the nation when it comes to property taxes, which are the only real source of revenue for local government in the Garden State. Last year, property taxes produced $25 billion in revenues, exceeding revenue from the state’s three major taxes.
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In total, as a percentage of personal income, taxes in New Jersey rank about eighth among all the states. Considering it ranks near the top for median income and wealth, that designation hardly seems out of line.
But those are not the numbers pushed by anti-tax zealots. Groups such as the conservative Tax Foundation have cited New Jersey as having the highest tax burden in the nation, using a convoluted formula that doesn’t quite parse the intricacies of local tax laws.
For example, the Tax Foundation charges back to New Jersey the $2.6 billion in income taxes paid to New York by New Jersey residents who work in New York and must abide by New York tax laws, over which New Jersey has no control.
By the way, that $2.6 billion is not just a blip in the data. It is more than New Jersey collects from its corporation business tax, the state’s third-largest revenue source, and it is one of the largest income transfers from one state to another in the country.
All of this just points to the need to be careful when citing state rankings.
Some, such as the Tax Foundation’s, only obscure real facts because they allow politicians to cherry-pick data and use them to justify their political philosophy.
So the next time you hear someone say New Jersey is the most overtaxed state in the nation, look past the rhetoric and consider the real numbers behind the statement.

Check out the tax data tables here.

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Filed under corporate taxes, Debrorah Howlett, income taxes, New Jersey, New Jersey Policy Perspective, property taxes, sales tax, tax burden

>NJPP Monday Minute 12/20/10: Deficit be Damned: Everyone Gets a Tax Cut Next Year

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This Christmas, we’ll all be getting a gift from Congress – two more years of Bush-era tax cuts. Never mind that Congress is paying for them with a credit card; they’ll square up the $860 billion bill with the Obama Administration down the road.

The thing is, the biggest gifts went to the wealthiest taxpayers.

A recent analysis by Citizens for Tax Justice, a Washington-based public interest research and advocacy organization, estimates that the compromise plan agreed to between President Obama and Republicans in Congress would give 25 percent of the total value of the tax cuts to the wealthiest 1 percent of all Americans. The President had originally proposed not extending the tax cuts for those with income of more than $250,000 a year.

The CTJ analysis also estimates the impact of the compromise on a state-by-state basis. In New Jersey, that’s an average benefit of $443 for the poorest 20 percent of earners and an average benefit of $93,350 for the wealthiest 1 percent.

The compromise plan extends to everyone the current federal income tax rates for two years, cuts the estate tax to below the 2009 level and cuts Social Security payroll tax deductions for all workers by 2 percent.

Income Taxes
Federal income tax rates were lowered twice during the Bush administration, in 2001 and again in 2003. Although each act had its own legislative history and impact, the two are generally lumped together in terms of their effect on taxpayers and the economy. The two acts significantly lowered federal marginal income tax rates for nearly all taxpayers. Both were set to expire at the end of 2010.

The debate in Washington has centered on whether the tax cuts should be extended and who should benefit. The president’s plan favored lower and middle income families and allowed rates to rise on the wealthiest taxpayers. Congressional Republicans wanted the current tax rates made permanent for all.

Congressional Republicans prevailed-but only temporarily. The tax cuts were extended two more years, at which time they will be subject to another debate.

Estate Taxes
The debate on the estate tax centered on Obama’s effort to maintain estate taxes at the 2009 level, which exempts the first $3.5 million of an estate and taxes the remainder at a rate of 45 percent. The compromise exempts the first $5 million and taxes the remainder at 35 percent.

Payroll Taxes
The compromise includes a 2 percent payroll tax cut (from 6.2% to 4.2%) for all workers. That is significantly less than the president’s “Making Work Pay” proposal, which would have eliminated the 6.2 percent payroll tax on the first $6,450 ($12,900 for couples) in earnings. The impact of this 2 percent cut is greater on lower income earners because only the first $107,000 of income is subject to payroll taxes.

According to CTJ’s analysis, the top 1 percent of taxpayers in New Jersey with incomes averaging $1.8 million will receive over 30 percent of these benefits from the income tax and estate tax provisions. When payroll taxes are taken into consideration, lower and middle income earners fare better. While some of the tax cuts have boosted take-home pay for middle class families, the tax cuts for the wealthiest are poorly designed short-term stimulus and, more important, ineffective long-term economic policy. Increasing the take-home pay of low- and moderate-income families will lead to more spending and a boost in demand for necessary goods and services, which in turn creates more jobs. By contrast, tax cuts for the wealthy are more likely to be tucked away as savings, which is a relatively ineffective boost to the economy.

Many have argued that tax cuts for the wealthy increase the incentive to invest or create small business jobs, and that these benefits eventually trickle down to average families. But the economic record tells a different story. Of the 10 economic expansions since 1949, the expansion between 2001 and 2009 ranks last in terms of economic growth, national investment, employment and employee pay.

Economist Mark Zandi of Moody’s Analytics estimates (see Table 4 in the report) that every dollar spent making the Bush tax cuts permanent generates only 35 cents of economic activity (permanent corporate tax rate cuts yield only 32 cents). Comparatively speaking, a dollar spent on infrastructure (investing in a transit tunnel under the Hudson River, for example) yields $1.57 return on investment; a dollar spent to prevent layoffs of teachers or police or firefighters yields $1.41; and a dollar to temporarily increase food stamps yields $1.72.

It’s too bad the Obama compromise will only boost paychecks, instead of lifting the entire economy.

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Filed under Bush Tax Cuts, estate tax, income taxes, Monday Minute, Moody's, New Jersey Policy Perspective, payroll tax, President Obama, Social Security

>NJPP Monday Minute 11/29/10: Christie Family Income Taxes: When 10.25% really means 6.2%

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In New Jersey, opponents of progressive taxation, including Governor Christie, argue that tax rates are too high. Indeed, just a month before he filed his 2009 tax returns, the governor said he intends to lower income tax rates within two years in order to stimulate the economy and make New Jersey more competitive with neighboring states.

But a full understanding of the state’s tax structure shows that New Jersey is already quite competitive. And Governor Christie’s own 2009 New Jersey income tax return shows the truth often isn’t as simple as it seems. Even though their household income pushed them into the top bracket of 10.25%, the Christies actually paid just 6.2% of their family income to the state.

Much can be learned from an income tax return, which is why the average person’s return is generally not available for public scrutiny. Many politicians, however, make their returns public during their time in office to prove they are solid tax-paying citizens – just like the rest of us.

Such is the case with the governor. The governor has made his tax return available for public perusal. The document is quite useful in illustrating how New Jersey’s marginal income tax rates work.

In 2009, the Christie’s New Jersey taxable income was $540,792, including $527,069 in wages from Mrs. Christie’s part-time job at Cantor Fitzgerald, a Wall Street bank and brokerage firm. The governor, who resigned as U.S. Attorney to campaign, did not have a salary.

The Christies paid $33,619 in New Jersey income taxes. To most, that sounds like a substantial sum, but it amounted to 6.2% of their New Jersey taxable income, considerably less than one would expect them to pay given their 10.25% tax bracket.

How does this work? It’s all about the margins.

New Jersey taxes income at different rates as income increases. Many believe this is the more appropriate way to tax income than a flat tax rate on all income, but it can be confusing. Current rates for married couples range from 1.4% on income of less than $20,000 to 8.97% on income of more than $500,000. Married couples who earn less than $20,000 pay no income tax in New Jersey.

In 2009, New Jersey had slightly different brackets as a result of a temporary rate increase enacted by lawmakers. The top marginal income tax rate was 10.75% on income of more than $1 million; 10.25% on income between $500,000 and $1 million; and 8% on income over $400,000 but less than $500,000.

The 6.2% effective income tax the Christies paid to New Jersey is less than they would have paid to New York State if Mrs. Christie’s job were there; less than they would have paid if she had worked in Philadelphia; and about what they would have paid if they had lived in Georgia.

New Jersey, unlike some other states, does not allow for many deductions. As a result, the Christies could not lower their taxable income by the $36,866 in property taxes they paid in 2009 for their nearly 7,000-square-foot house valued at $1.8 million in Mendham.

Earlier this year, the Legislature passed legislation that would have maintained the higher income tax rates on the state’s richest residents and tied those increases to the property tax rebate program. But the governor vetoed the bills because he said income tax rates in New Jersey are too high. So, the rates for 2010 reverted back to the 2008 level when the top rate was 8.97% on income over $500,000.

In effect, the governor gave himself a $2,151 tax cut.

Rather than arguing over whether the current 8.97% top marginal rate on the richest people in the state is too high, the discussion we should be having in this state is whether it’s too much to ask the wealthiest families, those like the Christies who claim a net worth of $3.8 million, to pay 6.2% (or 5.8% under current tax rates) of their income to support public services in New Jersey.

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Filed under Gov. Chris Christie, income taxes, Monday Minute, New Jersey Policy Perspective

President Obama’s Weekly Address: 4/10/10 Relief for the Middle Class at Tax Time

As April 15th approaches, the President discusses several of the tax breaks for middle class families he has signed into law. Find out more about the Making Work Pay tax credit, breaks for first-time homebuyers, rewards for making your home more energy efficient and more through our Tax Savings Tool.

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Filed under income taxes, middle-class tax cuts, President Obama, tax saving tool, weekly address

NJPP Monday Minute 3/15/10 New Jersey’s Corporate Business Tax: Who Pays What?


PAST
Because New Jersey was one of the last states to enact state-wide sales (1966) and income (1976) taxes, corporate taxes have provided important support for public services for a long time. Among the first chartered businesses in New Jersey were commercial banks, insurance companies, canals and railroad corporations and a few telegraph companies. By the mid 19th century, most of New Jersey’s state revenue came from corporate taxes on a handful of railroad companies and, when the state needed money in 1884, it extended the railroad tax to other corporations. By 1900, New Jersey was known for its willingness to grant charters to monopolies when other states would not – and companies weren’t even required to be physically located in the state or to contribute to the state in any way other than to pay its tax. This happy relationship between the state and corporations ended when Delaware decided to offer the same deal but with a lower tax rate.

As the state income tax and sales tax have grown, the corporate business tax (CBT) has shrunk as a share of total state revenues – from 13 percent of the total in 1980 to 10 percent in 1990, to seven percent in 2000 and eight percent in 2005. Little is known in New Jersey about who pays these taxes. The last time such information was available was in March 2002. Times were bad then as they are now. Governor McGreevey had promised not to raise sales or income taxes but had made no such promises about the CBT to the business community. In his FY 2003 budget speech, he said, “Of the 50 companies with the largest payrolls in New Jersey, 30 of them paid only the minimum corporate tax: $200 dollars per year. That’s less tax than would be paid in income taxes by a single parent with a child, earning $25,000 dollars a year.”

PRESENT
That has changed – to a degree. New Jersey has replaced its $200 minimum tax with payments between $500 and $2,000 based on the corporation’s income. Stated tax rates for a corporation that does not pay the minimum tax also are based on income and range from 6.5 percent on net income of $50,000 or less, to 9 percent on income greater than $250,000.

The tax rate structure is the easy part to understand; the devil is in the details of the reporting structure and the increasing number of business tax credits that make it difficult to know whether New Jersey’s corporate business tax is working for everyone.

In 2008, corporations in New Jersey paid just over $3 billion in corporate business taxes, making it the state’s third largest state-level tax. Although the corporate business tax has long been the state’s third largest state source of revenue, its relative share of total taxes collected is small (9 percent) compared to the state sales (27 percent) and income (38 percent) tax collections.

Today, 47 states – all but Nevada, Washington and Wyoming – levy what could be considered a corporate income tax. Such taxes take various forms, making comparisons across state lines difficult. Some states like New Jersey tax net income; others tax gross profits and even the definitions of those terms vary from state to state. In addition, every state allows its own set of deductions, exemptions and tax credits. Although corporations must disclose their federal taxes paid in Securities and Exchange Commission reports, individual state tax information is not required. This makes analyzing proposals for changing state tax rules nearly impossible for anyone who does not work for the Internal Revenue Service or a state tax department.

FUTURE – BETTER REPORTING
New Jersey is not known for its reporting or its transparency. Reporting is especially important with respect to the corporate business tax because so often lobbyists and politicians claim tax changes will improve the state’s economy, job creation or improve the elusive business climate.

Three reports would help interested parties understand more – a unified development budget, a tax expenditure report and a corporate statistics of income report. So far, New Jersey has produced none of these reports.

Unified Development Budget
A 2007 state law required the state to produce an annual Unified Development Budget to assess the use of state resources (business tax credits and other such programs) for economic development purposes. In one place, it would list all relevant data on state spending – through appropriations and tax credits – for economic-development activities.

States such as Minnesota, Maine, Texas, Connecticut and West Virginia have enacted disclosure laws that require companies to make public the value of subsidies they receive each year. Maine and Minnesota require that companies disclose wages and benefits paid. Connecticut, Maine and Minnesota require the companies to disclose actual job creation and/or retention.

Although the appropriate use of scarce public resources is critical, this report has never been done.

Tax Expenditure and Fiscal Analysis
While the state budget lists all direct spending, understanding the state’s complete financial picture is impossible without knowing how much is lost through the tax code. This March, New Jersey will produce its first tax expenditure report which will show the value of all subsidies provided to business and individuals through the tax code. In FY 2008, the Office of Revenue and Economic Analysis in the Division of Taxation identified 28 exclusions from the corporate business tax; since that time the number has grown.

The tax expenditure report will help analyze claims that tax credits and cutting corporate taxes strengthen New Jersey’s economy, make the state more competitive and attract new jobs. In 1989, $1.9 million in tax credits were provided to businesses from a small number of programs. Ten years later those credits had increased to $88 million. Today, 18 credits exist and lobbyists bring more to the legislature every day. As offsets to income, no appropriation exists and the cost of these credits is largely unknown. The only thing known for sure is that their existence erodes corporate tax collections.

Corporate Statistics of Income Report
Little is publicly known about who pays business taxes in New Jersey although information of this nature is available for personal income taxes paid by New Jersey households. Each year the Division of Taxation publishes the Statistics of Income (SOI) report that provides data for discussion and debate. Because of this document, for tax year 2007, we know the following:

  • The effective personal income tax rate (taxable income/tax paid) in New Jersey was 3.4 percent;
  • 1.7 percent of personal income tax returns with nearly 26 percent of all taxable income paid nearly 46 percent of the state personal income taxes;
  • The number of tax returns with incomes $500,000 and above has increased from 37,600 in 2005 to 43,200 in 2006 to 48,500 in 2007 (the most recent year aailable).
  • It is not possible to do similar analysis of corporate tax returns in New Jersey. But that is not true in all states. Eighteen states – including Connecticut, New York, Pennsylvania, Maryland, California and Virginia – annually make available extensive information about corporate taxes, including how many corporations are taxed; their net incomes and at what rate they are taxed; and which sectors pay the most taxes.

When NJPP requested similar information in February, we were answered quickly and courteously but were told this information would cost $910.08 because it required 16 hours of programming to retrieve the data. We ultimately agreed to pay about a third of that amount and now know that 251,839 corporate tax returns are filed in New Jersey.

WHAT’S NEEDED – BETTER RESEARCH
There are those who would suggest that a state’s tax structure is the leading cause of the current recession and that the only way out is to lower corporate taxes. One frequently used example is the Tax Foundation’s annual State Business Climate Index. Its ranking of New Jersey as 50th in the nation is often cited by business lobbyists as why changes are needed. But even the Tax Foundation’s own report makes a case for why the rankings have little meaning: “Clearly, there are many other non-tax factors that affect a state’s overall business climate: its proximity to raw materials or transportation centers, the quality of its education system and the skill of its workforce…” In each of these areas New Jersey would score well but none of these factors is captured in its index.

There is much to say about corporate taxes in New Jersey. For further reading on corporate taxes and business incentive programs, see A Question of Balance: Taxing Business in the 21st Century (2003), Taking Care of Business – Does it Cost Too Much? (2003), Big Firms Get Big Breaks (2007), Funding for Business Tax Breaks Shows Skewed Priorities (2008) and What’s the Rush? Costly Tax Changes Need More Deliberation (2008) on NJPP’s website.

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Filed under corporate tax breaks, income taxes, Monday Minute, New Jersey Policy Perspective

Before Biden, Uncle Walt said "It’s Your Patriotic Duty To Pay Your Taxes"

Tomorrow is April 15th, the day in which our income taxes need to be filed, unless of course, you are filing an extension.

Tomorrow is also the day that anti-tax protesting, teabaggers, who are really nothing more than Republicans without ideas, will hold rallies all across the country to protest the economic policies of Obama Administration and that of many state and local governments.
Many, if not all of these teabaggers recall with mocking sarcasm, during last years presidential campaign how then Vice-Presidential candidate, Joe Biden, said that it was our patriotic duty as Americans to pay our taxes. The teabaggers point to this, as well as other Obama policy decisions as evidence of Obama’s eagerness to embrace socialism and call him either a socialist, fascist, communist or any combination there of.   
With that in mind, I would like to point out to all of teabaggers who will be enjoying their tea parties tomorrow that before Joe Biden said it was our duty to pay taxes, uncle Walt Disney, at the request of the U.S Treasury in 1943, said it first in the following World War II propaganda film, starring none other than Donald Duck.
The short is actually very interesting because you can draw parallels between today’s United States, fighting a two front war against terrorism in Iraq and Afganistan and that of a World War II  United States, fighting a two front war in Europe and the South Pacific.    
So do your patriotic duty and pay your taxes tomorrow, like good americans should.  

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Filed under Donald Duck, income taxes, Joe Biden, patriotic duty, Spirit of '43, Walt Disney, World War II Propoganda film