The state budget showdown cum shutdown is history. The next item looming over Trenton is the special legislative session on property tax reform. What passes for intellectual discussion of taxation in New Jersey is driven much more by sloganeering and myth than simple fact.  

Combined State & Local Taxes 

Let’s begin by comparing combined state and local taxes in New Jersey to a few other states. We have to look at combined state and local taxes rather than any single tax or set of taxes because that’s the only comparison that makes sense. Why? 

The level of local taxes, specifically property taxes, can be anything we want. We can lower property taxes by having state government assume financial responsibility for some functions provided at the local level. For example, there is no logic that demands that local libraries be financed locally. We could provide library services at the local level while financing them at the state level. This would lower property taxes but not change the burden of combined state and local taxes. Simply reassigning the financial responsibility for this or that can change the appearance of things but not the tax burden New Jerseyans bear. 

Tax Burden 

The “burden” of combined state and local taxes in New Jersey, calculated by the Tax Foundation, is 10.8 percent. This means the average New Jerseyan forks over just a bit more than ten percent of his or her income to various governments. 

New Jersey ranked 17^th in state and local tax burden in 2006. For dimensioning purposes, New York’s state and local tax burden was 12.9%, the second highest in the nation. Connecticut came in at 11.3%, ninth highest in the nation. Pennsylvania ranked 24^th at 10.4% and Delaware was 49^th at 8.4%.  

Frankly, New Jersey’s state and local tax burden is not as bad as you expected and well within the region’s range. Yes, New Jersey might want to do some things to lighten the burden of taxes on citizens, but simply shifting financial responsibilities between state and local government and calling it tax reform isn’t the way to go.  

The Sales Tax 

If we let the “reformers” substitute state level taxes for property taxes, we really won’t change the way the combined state and local tax system affects people in various income groups.  

New Jersey’s sales and use tax is regressive – wealthier families pay a smaller fraction of their income in sales taxes than do the lowest income families. In 2002, the period for which the most recent data are available, families in the lowest 20% of the income range spent 1.7% of their income on sales taxes while families in the highest 20% spent about half that, 0.8%. Families in the top 1.0% spent even less – 0.3%. 

If the reformers succeed in lowering property taxes by increasing sales taxes, as just happened, New Jersey’s combined state and local revenues will still hit the poorest among us harder than those with the most resources.  

We would have to reform the sales tax before wholesale substitution for property taxes if we didn’t want to make things worse. Reform of the sales tax requires extending it to more professional services than the lawyers and accountants are willing to put up with at present.  

Personal Income Taxes 

New Jersey’s income taxes are progressive, that is, the effective rate rises as taxable income rises. In 2002, even before the half-millionaire tax had time to affect the data, families in the lowest 20% of income effectively paid no New Jersey State income tax.  

We have to go into the data for the second lowest income group before we can see the affects of state income taxes. For those in this second group, the income tax cost 1.0% of income, for those in the highest 20%, New Jersey income taxes cost 2% of income.

Effective income tax rates rise quickly from there. The top 1.0% fork over 6% of taxable income in New Jersey State income taxes and the 4% just below them have to pay almost 5% of their income through the income tax.  

A very large fraction of New Jersey’s highest income earners also “give at the office” through the corporation business tax. The CBT has almost become the “go to” tax in New Jersey jumping billions over the past few years. (This may also be part of the reason New Jersey’s business climate ranking is 49^th, almost the worst we could earn.)

 

Conclusion

There’s room for tax reform, but not as much room as we are being assured. But, merely substitution of one state tax for one local tax won’t change much. Most important, just fiddling with the tax structure won’t get us very far along in real “reform;” for that we need major changes in spending patterns, something most New Jerseyans are totally unwilling to contemplate.