This week, New Jersey’s Governor Phil Murphy and State Senate President Steve Sweeney cemented themselves as the ‘Shaq and Kobe’ of bad economic policy when they ushered in massive new tax hikes on Garden State residents. This deal, which was struck despite much political posturing by Sweeney against such a tax hike, will go down as a historic mistake made by New Jersey’s government.
Governor Phil Murphy and State Senate leader Steve Sweeney have been fighting over whether to raise tax rates on individuals or businesses, and over the weekend they decided to raise taxes on both.
Messrs. Murphy and Sweeney agreed to raise the state’s income tax on residents making more than $5 million to 10.75% from 8.97% and the corporate rate on companies with more than $1 million in income to 11.5% from 9%.
This will give New Jersey the fourth highest marginal income tax rate on individuals and the second highest corporate rate after Iowa. The corporate tax increase will supposedly last two years and then phase out over the next two years, but that’s what politicians always say.
The two Democrats claim this will do no harm because about 0.04% of New Jersey taxpayers will get smacked. But those taxpayers account for 12.5% of state income-tax revenue and their investment income is highly mobile. The state treasurer said in 2016 that a mere 100 filers pay more than 5.5% of all state receipts. Billionaire David Tepper escaped from New Jersey for Florida in 2015, and other hedge fund managers could follow. Between 2012 and 2016 a net $11.9 billion of income left New Jersey, according to the IRS. [Emphasis added]
One factor that will magnify the economic damage of the Murphy-Sweeney tax hikes is the atrocious timing of this agreement. Since Trump’s tax cuts capped the amount that individuals could deduct from state and local taxes, and New Jersey has the highest property taxes in the country, it should have been patently obvious to the legislature that it was time to cut taxes. Instead, Murphy and Sweeney dramatically raised them.
For an idea of why this will go down as a historic failure of governance, in ALEC’s new “Rich States, Poor States” report authors Arthur Laffer and Stephen Moore found that:
Now that the SALT subsidy is gone… We estimate, based on the historical relationship between tax rates and migration patterns, that both California and New York will lose on net about 800,000 residents over the next three years—roughly twice the number that left from 2014-16. Our calculations suggest that Connecticut, New Jersey and Minnesota combined will hemorrhage another roughly 500,000 people in the same period.
Keep in mind this report was released back in April — before New Jersey shoot itself in the foot by aggressively raising taxes on its residents and businesses.
The same ALEC report mentioned above also ranked New Jersey 46 out of 50 states in terms of economic outlook (with 50 being the worst). With the passage of the Murphy-Sweeney tax hikes, a bleak economic situation is now a dire one.
The Murphy-Sweeney tax hikes will not only incentivize a resident exodus, it will likely spark a stampede.