To combat the COVID-19 economic downturn, New Jersey Governor Phil Murphy passed a millionaire’s tax. Here’s why he says that’s good for everyone.
Coronavirus infection levels are climbing all around the country again. As more and more Americans stay home to avoid infection, those rising infection rates will likely bring with them another serious economic downturn, just like they did in the spring. The drop in consumer spending will harm the bottom line of small businesses, which will then lay off employees — further depressing consumer demand.
Clearly, a new federal stimulus package is necessary to save the economy from collapsing — but with the Biden Administration not taking office until January 20, and with Senate leadership in doubt, it’s unlikely that we’ll be seeing a meaningful stimulus package from Washington DC anytime soon.
This means that state governments are on their own in the fight to protect their economies from the impacts of COVID-19. But most states have suffered a decline in revenue as consumer spending has dropped in the pandemic, and so they’re confronting budget deficiencies at exactly the moment when they most need to invest in their own economies. We know that slashing budgets during a recession actually slows economic recoveries, so how can states increase revenue?
For the answer to that question, look to New Jersey.
This year, New Jersey Governor Phil Murphy and the state legislature agreed on a deal to raise the income tax by 2% on incomes over $1 million per year to address the budget crisis brought on by the pandemic. Not only will this tax help administer coronavirus relief to the communities and small businesses that need it most, but it will also help rebalance a regressive state tax code which puts a bigger tax burden on poorer households.
In this week’s episode of Pitchfork Economics, David Goldstein and Nick Hanauer interview Governor Murphy about his decision to tax the rich.
Murphy, a millionaire former Goldman Sachs executive, wants to be very clear that he’s not fomenting class warfare.
“We don’t begrudge people’s success,” Murphy began. “Whether you’re a wealthy individual or a large corporation — we want more of each in New Jersey.”
But Murphy says he raised the tax because “I got elected to stand for a stronger, fairer New Jersey that works for not just some, but for everybody.” That meant asking the wealthiest New Jerseyans to “help us rebuild our middle class.”
From the beginning, Murphy laid out the conditions for the tax very clearly: “Anyone earning a million dollars and up, we’re asking you to pay a few pennies more, and we’ll put every dime of that into the middle class.”
The revenue raised from the tax, which affects less than 20,000 of New Jersey’s 9 million residents, will be directed to public education, healthcare, and infrastructure. And then, Murphy explained, “Depending on what your income is and how many kids you’ve got, if you’re in the middle class you’re going to literally get a check as part of the proceeds from this millionaire’s tax.”
You read that last part right: “There will be rebate checks next summer, directly into the pockets of folks who are in the middle class,” Murphy said.
It’s an idea inspired by the economic understanding that a state’s top earners aren’t the job creators — the consumer demand of a large and growing middle class is actually what creates jobs.
Taxing a small percentage of that high income bracket and directing that revenue to the middle class will help close the income inequality gap, spreading prosperity more evenly around the population.
Is Murphy concerned that some of those 20,000 millionaires might pack up and leave New Jersey, as trickle-downers often threaten? “We haven’t found one bit of evidence that suggests that’s actually true,” Murphy said. “When people say folks are going to leave, there’s no research anywhere that suggests that happens.”
In fact, a millionaire’s tax helps to create the kind of high-quality economy that attracts more millionaires: “People are coming into New Jersey at all income levels,” Murphy said, and they’re doing so because they enjoy the benefits of a strong middle class: “quality of life, great public schools, infrastructure that works.”
Murphy says wealthy people analyze that “total value proposition” and make their decisions accordingly. He believes they characterize New Jersey as “not the lowest-cost place to live, but it’s the best value for the money — the best place in America to raise a family.”
Murphy is enthusiastic about his new tax, and he believes it will work in states around the union. “If you care about the middle class, it’s an obvious policy step,” he argued. It improves outcomes for a broad swath of the economy, and “guess what? It’s good for the wealthy folks as well. It builds a better, stronger state — and that’s good for everybody.”
This is an opinion column. The thoughts expressed are those of the author(s).
Wealthy people analyze "total value proposition" and make their decisions accordingly, Murphy, a former Goldman Sachs executive, said.
New Jersey millionaires’ tax could drive rich clients to relocate
The hike Gov. Phil Murphy signed into law moved rates from 8.97% to 10.75% for $1 million-plus earners
- September 29, 2020
- By Mark Schoeff Jr.
A tax increase for New Jersey residents earning more than $1 million annually is likely to start conversations between high-net-worth clients and their financial advisers about whether it’s time to pack up and leave.
Gov. Phil Murphy was scheduled to sign into law today a budget bill that would impose a 10.75% tax on every dollar earned between $1 million and $5 million. Previous law levied an 8.97% tax on incomes in that range and imposed the 10.75% tax at $5 million and above.
When he announced the tax hike earlier this month, Murphy said the extra revenue would bolster the state’s budget during the coronavirus pandemic. In addition, he said the state would provide a $500 tax rebate to families with incomes under $150,000 — or individual making less than $75,000 — and at least one dependent child.
“In this unprecedented time, when so many middle-class families and others have sacrificed a great deal, now is the time to ensure that the wealthiest among us are also called to make a modest sacrifice by paying pennies on the dollar more for any income over $1 million,” Murphy said in a Sept. 17 statement.
But wealthy New Jersians may reconsider remaining part of the state’s tax base, investment advisers said.
“I don’t know that this tax increase creates an outflow, but it makes people think about it again,” said Christopher Cordaro, chief investment officer at RegentAtlantic in Morristown, New Jersey. “For anyone earning between $1 million and $5 million, it makes them take another look at is it worth it to stay in New Jersey. It will be on our clients’ agendas to discuss.”
The extra tax burden will make New Jersey residents think about relocating to lower tax states, such as next door in Pennsylvania, down to Florida or even to New York, where taxes are looking more affordable, said Kevin Donohue, a partner at Legacy Planning in West Chester, Pennsylvania.
“Those clients who are on the bubble about where they’re living, it could be the straw that breaks the camel’s back,” said Donohue, whose firm is located in suburban Philadelphia, not far from the New Jersey border. The tax hike “may cause them to reassess what they’re paying in New Jersey versus what they would be paying in Pennsylvania or New York. For many families, that’s a meaningful number.”
Even if high-earning clients don’t depart the state, they’ll be looking for ways to save on their taxes, said Cynthia Meyer, founder of Real Life Planning in Gladstone, New Jersey. The latest tax hike comes on top of the limitations on deductibility of state and local taxes ushered in by the 2017 federal tax reform law.
“New Jersey residents have gotten hit pretty hard by taxes,” Meyer said. “There’s going to be a bigger focus on tax minimization now.”
Those tax savings discussions could include making adjustments in retirement plans, matching capital gains against taxes and looking for tax breaks in areas such as real estate, she said.
Among the tax-saving options Cordaro outlines for his clients — other than departing New Jersey themselves — is relocating income-producing assets to tax friendly states. For instance, a client recently created a trust in South Dakota for a business interest so that when he sold it, he would avoid New Jersey taxes. South Dakota does not levy an income tax.
“My job as an adviser is to understand my clients’ values and quantify the different choices they have,” Cordaro said. “They have to make the decision.”
The New Jersey tax hike is not earth-shaking for the wealthy, said Andy Panko, owner of Tenon Financial in Iselin, New Jersey. But he has mixed feelings about the tax because much of the revenue will go to rebates for those in lower tax brackets.
“The tax itself is okay,” Panko said. “If you’re making multi-millions a year, this doesn’t feel that bad to me. What I don’t like is how they’ll use it. It’s not doing anything to help the budget. It’s an effort to redistribute wealth from the high-income earners to the low-income earners.”
Whether clients are upset or sanguine about the new tax, it’s important to reach out to them, Meyer said.
“If somebody has a client in New Jersey, they should call them today or tomorrow and say, ‘Let’s talk about it,’” she said.
Gov. Phil Murphy signed into law a hike from 8.97% to 10.75% for $1 million-plus earners.