Democrats in the New Jersey state legislature approved a tax hike on millionaires five separate times under then-Gov. Chris Christie (R) — knowing he would veto it.
But now that the state has a liberal governor eager to sign the bill, Democratic legislators are backing off the “millionaire’s tax,” echoing some of the concerns once expressed by Christie.
“This state is taxed out. If you know anything about New Jersey, they’re just weary of the taxes,” said New Jersey state Senate President Steve Sweeney (D), lead advocate of the millionaire’s tax during Christie’s tenure, in an interview.
This blue state’s sudden allergy to taxing the rich is an ominous sign not just for Democratic Gov. Phil Murphy, who swept to office last fall promising to fund a suite of new social programs via a millionaire’s tax, but for other liberals running for statewide office this year.
Democratic candidates in several states are campaigning on higher taxes on millionaires to pay for the robust social programs increasingly demanded by the party’s base, such as universal prekindergarten, expanded health-care benefits and free community college. But the unexpectedly rocky reaction to the plan in New Jersey underscores the difficulty in implementing higher taxes on the rich, even when Democrats have full control of the government.
“It’s easy to gain popular support for the millionaire’s tax on the campaign trail, since most people wouldn’t be impacted by it,” said Elaine Maag, a tax expert at the Tax Policy Center, a nonpartisan think tank. “But in reality, it’s very difficult to raise taxes on high-income people because they tend to be very well politically connected and vocal.”
Still, Democratic candidates across the country are embracing targeted taxes on millionaires “in record numbers,” said Celinda Lake, a Democratic strategist and pollster.
In Illinois, billionaire J.B. Pritzker is running for governor promising to tax the “millionaires and billionaires” of his state to fund universal pre-K and a public option for health care.
In Maryland, Ben Jealous, former president of the NAACP, is running for governor in part on a plan to make community college “free for every Marylander.” He has proposed doing so in part through a 1 percent income tax increase on those earning more than $500,000 annually.
Meanwhile, in Massachusetts, voters are expected to vote on a millionaire’s tax via a referendum in November after it was pushed through by Democrats in the statehouse. The measure would impose a 4 percent surtax on individual income more than $1 million.
And some national Democrats have embraced higher taxes on the wealthy as a key part of their agenda, arguing that the GOP’s 2017 tax overhaul should be repealed and that the money should be used to fund more-ambitious social programs for the poor and middle classes.
“If you say, ‘We’ll tax the wealthy,’ you are both being honest about how you’ll pay for it and about real power dynamics,” New York Mayor Bill de Blasio (D) told NBC News last week after a gathering at a liberal think tank in Washington. “It shows a willingness to stand up for people’s interests against those who hold all the power right now.”
The fight in New Jersey suggests that higher taxes on the rich may be easier to campaign on than to enact.
Murphy ran for office promising universal prekindergarten and free community college. To fund these initiatives, he is partly relying on the millionaire’s tax, which would start taxing income over $1 million at a new rate of 10.75 percent. That would raise $765 million annually for state coffers, according to Murphy’s office.
Now the plan is being tested as New Jersey works to complete a budget by June 30 — or risk shutting down the state government. The budget, which also directs funding to New Jersey’s transit system, wouldn’t fulfill Murphy’s campaign promises on their own without additional tax hikes. Murphy is also pushing a sales tax hike and new taxes on ride-hailing services such as Uber and Lyft. The combined package amounts to about $1.5 billion in new taxes.
Democratic leaders in the statehouse say that is untenable. They have blamed the tax law passed by Congress last December for their reversal, saying the tax overhaul already punishes wealthy New Jersey taxpayers by capping at $10,000 the amount of state and local taxes they can deduct from their federal taxes. (Previously, the deduction was limitless.)
The provision, intended to offset the cost of the federal tax law, disproportionately hits taxpayers in states with high state and local taxes, such as New Jersey.
A spokesman for Sweeney, the state Senate president, said families earning over $1.1 million in New Jersey already face an average $738 tax hike under the GOP law, citing data from the Institute on Taxation and Economic Policy (ITEP), a left-leaning think tank. That number accounts only for the GOP tax law’s changes for households and individuals, excluding the law’s cuts to the estate tax and corporate rates.
About 40 percent of New Jersey’s richest 1 percent also do not benefit from the tax cut on “pass-through” business entities and will therefore see a “sizable” tax hike under the law, said the spokesman, Mark Magyar.
Imposing a second round of new taxes could force many of these millionaires to leave the state, Sweeney said.
“The Trump tax increase for New Jersey changed the game for us here,” said Sweeney, who tweeted on election night last year that the millionaires tax should be the party’s first priority. “Circumstances change.”
But some of the tax experts cited by state Democrats have a different view. Factoring in all the law’s changes, including the corporate and estate cuts, ITEP says the GOP tax law cuts taxes for the richest 1 percent of New Jersey residents by an average of $21,700 in 2018. Only 3 percent of those earning between $315,000 and $925,000 get a tax hike, ITEP analysts say.
“It is not logical to consider provisions that raise taxes on the rich, while ignoring provisions that cut their taxes,” said Steve Wamhoff, ITEP’s director of federal tax policy, in an email.
Murphy has sought to downplay the rift with the Democratic legislators, publicly dismissing concerns that it could lead to a budget shutdown while also urging lawmakers to pass the measure.
An analysis by Murphy’s office found the federal tax law will cut taxes on New Jersey residents earning more than $2 million by about $59,320, with those earning more seeing even more dramatic tax cuts. Those earning between $1 million and $2 million will see average tax increases of less than $1,000, far smaller than the increases projected by Sweeney.
“A millionaire’s tax is the right thing to do, and now is the time to do it,” Murphy said in a statement to The Washington Post. “We are standing for fairness and fiscal responsibility by asking the wealthy to pay a little more.”
Murphy, a former Goldman Sachs executive and millionaire himself, has already notched some key progressive victories with the legislature’s help, including an equal-pay bill for women, expanding paid sick leave, restoring funding for Planned Parenthood, and a ban on offshore drilling.
Beyond his plans for new spending in pre-K and community college, Murphy also has to contend with bloated pension costs that have ballooned in the state, as well as its massive budget deficit.
Republicans say the Democratic legislature’s reluctance to pass the millionaire’s tax reveals their lack of confidence about the plan’s value for taxpayers. “Under Christie, they knew this would never get done,” said Mike DuHaime, a Republican political consultant who served as an adviser to Christie. “There was always something about their tax increases that we thought was just theater, and you can see that now that they’re in charge.”
Tax experts disagree about whether a millionaire’s tax would help New Jersey, with some conservative economists agreeing it will force rich taxpayers to flee the state. In turn, they say, that would shrink the state’s tax base and saddle the remaining middle-class taxpayers with a greater tax burden.
“We’re the most unaffordable state and least competitive, business-wise, by many metrics,” said Tom Bracken, president of New Jersey’s Chamber of Commerce. “Increasing taxes on job creators doesn’t help the situation.”
But other economists say there are few downsides to raising rates on the rich, arguing that there is little evidence that the rich choose where to live based on a state’s marginal tax rate. One study by a Stanford University researcher found that millionaire tax flight had “little effect” on a state’s tax base.
These economists also point to skyrocketing national income inequality and stagnating wages for U.S. workers, who would be more affected by broader tax increases, as reasons to focus on raising taxes on the ultra-wealthy.
“Murphy has big ideas for how to make New Jersey’s economy work for everyone,” said Meg Wiehe of ITEP. “This is the way to raise revenue to make them happen.”