Hoping to jumpstart a bandwagon effect, advocates of soak-the-rich tax hike proposals in New York State are hyping a tax increase in New Jersey as evidence that New York needs to do the same.

Political optics aside, the actual fiscal and economic implications for New York of New Jersey’s latest tax hike on millionaire earners can be summed up in a phrase deployed by Governor Cuomo in other contexts: “zero, zilch, nada.”

After all, the argument against jacking up New York’s already high millionaire tax rate has never been premised on the assumption that targeted taxpayers would flee to, of all places, New Jersey—one of New York’s main rivals for the title of most highly taxed state in the country.

And there’s something missing from virtually all of today’s (mostly breathless) media coverage of the Trenton announcement: New Jersey officials are preparing to raise their already high tax rate on residents who have been hardest hit by the new federal cap on state and local tax (SALT) deductions.

What Murphy hath wrought

The actual Jersey policy change is less dramatic than the hype—although you wouldn’t know it from the portentous lead in the New York Times story:

New Jersey officials agreed on Thursday to make the state one of the first to adopt a so-called millionaires tax to alleviate shortfalls caused by the pandemic, intensifying a national debate over whether to increase taxes on the rich to help address widening income gaps.

In fact, although it isn’t mentioned until the ninth paragraph of the Times story, New Jersey’s top income tax rate is not increasing. Since 2018, it’s been pegged at 10.75 percent on incomes above $5 million, and it’s staying at 10.75 percent. The deal announced today by New Jersey Governor Phil Murphy and legislative leaders will reduce the top bracket threshold, so the 10.75 percent rate will hit all taxable incomes starting at $1 million.

New Jersey currently hits taxable incomes between $500,000 to $5 million with a rate of 8.97 percent, a hair above New York’s statewide rate of 8.82 percent on incomes starting at $1 million. In addition to increasing the top bracket tax bill by 20 percent for households earning between $1 million and $5 million, the announced change translates into a $71,200 a year tax increase for all those earning taxable incomes above $5 million.

All else being equal, the new tax will create a stronger financial incentive for the targeted high earners to migrate from New Jersey—especially now that the federal SALT deduction is capped at an insignificant $10,000. This spells real trouble for New Jersey’s tax base, which like New York’s depends heavily on the highest earning 1 percent of state residents, who generated 36 percent of Jersey’s net income taxes in 2016. Garden State politicians were reminded of the downside risk of high marginal income tax rates when Jersey lost one of its wealthiest residents, billionaire hedge funder David Tepper to Florida in 2016.

Murphy reportedly said the millionaire tax will raise $390 million. However, he’s also agreed to spend most of this on an annual rebate of up to $500 for families making under $150,000, which reportedly will reduce the net revenue gain to just $65 million.

In other words, despite the Times lead, the deal to hike the millionaire tax in Jersey will not, in fact, mainly serve “to alleviate shortfalls caused by the pandemic” but to alleviate political pressure on that state’s governor and lawmakers to be perceived on their left flank as raising taxes on the rich—while handing out a rebate to the Garden State’s middle class.

What’s it mean for New York?

Again, the political and fiscal implications of all this for the Empire State are nil.

As Budget Director Robert Mujica noted, “the overwhelming majority of billionaires and millionaires in this state live or work in New York City,” where the top rate is 12.7 percent—highest in the country after California’s 13.3 percent—not counting the added 4 percent unincorporated business tax many wealthy investment firm partners pay on their profit shares at the firm level even if they don’t live in the city.

The long list of low- and no-tax jurisdictions vying to attract New York’s high earners starts with Florida, and includes locales such as Nashville, Tennessee, which recently poached the headquarters of one of New York’s oldest money-management firms. In pure tax burden terms, New Jersey would be at the bottom of that list.

In fact, there is one silver-lining for New York in today’s New Jersey announcement: Murphy and legislative leaders also agreed to extend for four years a 2.5 percent corporate business surtax, which is tacked onto the state’s top corporate tax rate of 9 percent.

This will increase an existing corporate tax advantage for much of New York, where the tax rate is 6.5 percent (zero for upstate manufacturing corporations), and about 8 percent in the downstate metropolitan commuter transportation district. Then again, the same lawmakers pushing higher personal tax rates for income millionaires are also seeking to raise New York’s corporate tax.

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

You may also like

For State Lawmakers, Secrecy May Pay

New York state legislators may get a raise on January 1, 2021—but the people who elect them may not get to find out before voting ends next week. Read More

In Pandemic Recovery, New York’s Tax Base Is More Fragile Than Ever

New York's exceptionally wealthy state tax base is also exceptionally fragile, due to its heavy dependence on the highly volatile (and portable) investment-driven incomes of Wall Street workers and fund managers. Read More

Not a Moment Too Soon, Bill de Blasio Is Setting a Good Fiscal Example

After months of flailing, floundering and stalling on desperately needed cuts to New York City's pandemic-ravaged budget, Mayor de Blasio just made a smart and appropriate move to save money—in the process defying one of New York's most powerful government employee unions. Read More

On Measuring School Quality, Education Week Misses the Mark

Education Week’s rankings do not measure what counts. New York’s substandard achievement coupled with highest-in-the-nation spending and above-average wealth means that when it comes to school quality, New York fails to pass the mark. Read More

Even After Aid Cut, New York Will Spend Most on Education

If New York was a country in 2016—the most recent year for global education spending data—it would have boasted the highest per pupil expenditure in the world, even after subtracting 20 percent of state aid. Read More

NY outlook: worse than 2008-09

#NYcoronavirus: The outlook for New York's economy is the grimmest on record, according to the first post-pandemic lockdown round of credible economic surveys and forecasts. Start with the Federal Reserve Bank of New York, whose regional economists today issued a notably pessimistic report based on their monthly Empire State Manufacturing Survey and a broader Business Leaders Survey that take sin the northern New Jersey and metropolitan New York. Read More

Big bucks, no impact

The billions of dollars funneled from New York's treasury to movie and TV producers had no statistically significant impact on the industry's employment in the Empire State through 2017, according to a new multi-state study of such tax incentives. Read More

SALT suit swept aside

In what could rank among the least surprising federal court rulings of this or any year, a U.S. District Court judge in Manhattan has rejected New York's constitutional challenge to the state and local tax (SALT) deduction cap in the new federal tax law. Read More

Subscribe

Sign up to receive updates about Empire Center research, news and events in your email.

CONTACT INFORMATION

Empire Center for Public Policy
30 South Pearl St.
Suite 1210
Albany, NY 12207

Phone: 518-434-3100
Fax: 518-434-3130
E-Mail: info@empirecenter.org

About

The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.