This op-ed by NJPP research director Mary E. Forsberg ran in the Sunday, November 20 edition of Gannet’s New Jersey papers the Asbury Park Press, the Courier-News, Home News Tribune and Daily Record.

A lot of people in these tough economic times might argue that the only “fair” tax is a tax on someone else.

Most of us, however, understand that even if taxes are not welcome, they are necessary. Taxes provide a cost-effective means of educating our children, paving our roads, defending our borders, protecting our homes, caring for the elderly and hundreds of other services great and small. New Jersey state and local tax revenue last year totaled $53 billion.

So, who should pick up the tab?

To be fair, everybody should pay something.

But fairness demands those with the greatest means — especially those with income of $1 million or more a year — should pay at least an equal share.

That doesn’t happen now. According to a study by the Institute on Taxation and Economic Policy, New Jersey families in the lowest 20 percent of all income earners (those who make less than $21,000 a year) pay 10.8 percent of their income in state and local taxes. Families in the top 1 percent of income distribution (those who earn $732,000 or more a year) pay at most 9.5 percent of their income to state and local taxes.

This disparity could be rectified simply by increasing the top marginal tax rate on personal income, which would help reduce property taxes on middle-class homeowners. More also could be asked of corporations. And consideration should be given to the narrow application of the state’s sales tax.

Together, these four revenues accounted for 85 percent of total state and local tax revenue in fiscal year 2010. They represent the greatest opportunity to improve equity.

Before considering equity, it’s helpful to define the attributes of a fair tax system:

It must ask citizens to contribute based on ability to pay.

It must treat those with equal resources equally.

It must cover the broadest range of income, services and goods at the lowest rates necessary.

It is also helpful to consider the horizontal equity of a tax system. One horizontal measure is how New Jersey compares to other states. Seven other states had higher total state and local taxes as a percentage of personal income in 2008-09. And while New Jersey ranked third highest in local property taxes, it ranked 23rd for income tax and 39th for sales tax.

Personal Income Tax

At $10.3 billion, New Jersey’s state personal income tax is the state’s second-largest revenue source, after the local property tax.

It is the state’s most progressive tax, combining a refundable Earned Income Tax Credit on the lowest-earning taxpayers with progressively higher marginal tax rates starting at 1.4 percent and topping off at 8.97 percent on incomes $500,000 and above.

New Jersey taxes gross income equally regardless of source (wages, investment, retirement), and allows few deductions, exclusions or exemptions, which tends to complicate the system and benefit wealthier taxpayers.

New Jersey’s high marginal tax rate is the focus of complaints against the state’s personal income tax. But that argument doesn’t distinguish between the top marginal rate and the effective tax rate.

A great example of that difference can be found in Gov. Chris Christie’s 2009 taxes, which he made public last year. His family’s household income of $540,792 pushed them into the second-highest bracket at the time, 10.25 percent. However, he only paid that rate on the $40,792 of income above the $500,000 threshold. The rest of his income was taxed at lower marginal rates. In the end, the governor’s family paid an effective tax rate of 6.2 percent of its income.

Understanding the difference between marginal and effective tax rates is critical in order to appreciate the importance of a progressive income tax such as New Jersey’s. Progressive income taxes are fairest because they are based on the ability to pay.

Corporate Business Tax (CBT)

At $2.1 billion, New Jersey’s corporate business tax is the smallest of the four major taxes. It ranks eighth highest among states as a percent of personal income. Corporate taxes have provided important support for public services for a long time, but as state income and sales tax revenues have grown, the corporate business tax has shrunk as a share of total state revenues — from 13 percent of the total in 1980 to 8 percent in 2010.

A robust corporate income tax is an important fairness tool. It ensures that large and profitable corporations, which benefit from public services, pay their fair share toward the maintenance of those public services, just as working families do.

Recently, efforts have been made to decrease corporate tax liabilities, even though 93 percent of the 251,839 New Jersey corporate business tax filers paid $2,000 or less in corporate business taxes, according to data from the Division of Taxation.

A 4 percent surcharge lapsed in 2010 and the minimum tax rates on certain corporations were reduced by 25 percent in 2011. New Jersey recently became the 22nd state to enact a single sales apportionment, which allows multi-state corporations to exclude the value of their property and payroll when determining their New Jersey corporate business tax liability.

Sales Tax

At $8.5 billion, New Jersey’s sales tax is the state’s third-largest source of revenue. As a percentage of personal income, it ranks 39th among other state sales taxes. It is a regressive tax because it doesn’t take into account the ability to pay.

New Jersey is one of 46 states that levies a state sales tax, but New Jersey does not tax clothes (as 42 states do) or groceries (as 20 states do).While it may be fairer to exempt basics such as food and clothing, there are limits to that argument — particularly with respect to clothes. While it may be fair to exempt a child’s winter coat from taxes, is it fair to exempt a pair of $1,400 Manolo Blahnik ankle boots?

Property Tax

At $25 billion, New Jersey collects more property taxes than all three of its other major taxes combined. The state’s tax structure relies on taxing the value of land and buildings to pay for school and government services at the local level more heavily than all but three states.

Because the property tax is levied on an essential need — shelter — no homeowner or renter can escape paying. The essential nature of taxing property is that the lower a family’s income, the higher percentage of that income it pays. For poor families, property taxes account for 5.6 percent of household income versus less than 1 percent for the richest families.

Even as houses lose value, property taxes seldom decline. Just once in the past 40 years have total property taxes collected declined (1977, when the state enacted the income tax and dedicated revenues to property tax relief).

Despite decades-long efforts to provide relief, property taxes remain the state’s most intractable problem for middle- and low-income taxpayers. The subject of alternative revenue sources to fund local government and ease reliance on property taxes has been a non-starter in Trenton.

Restructuring New Jersey’s Tax System

New Jersey’s total tax system is relatively progressive compared to most other states, but there are still serious questions about fairness, especially when it comes to the broad spectrum that encompasses working and middle-class families.

Dealing with property taxes is central to creating more fairness in the state’s tax system.

Previous solutions haven’t worked well, if at all. From consolidating local governments to capping local government growth at 2 percent per year to forcing public employees to pay more for pensions and benefits, none of these will be enough to truly change the way New Jersey pays for schools and municipal services, which are the true cost drivers in the state.

What’s needed to create the most fairness in the state’s tax policy is to require corporations and the wealthiest 1 percent of income earners to step up and provide their rightful share of taxes rather than over-burden poor and working families with increased sales or property taxes.

New Jersey has been in the forefront of tax fairness since 2004, when the first so-called millionaire’s tax was enacted. It has reduced the negative impact of sales and property taxes through its progressive income tax, its refundable Earned Income Tax Credit and its relatively high threshold for paying income taxes.

In a time when New Jersey has cut state spending by nearly 12 percent since 2008, it is time to look at increasing revenues in a way that is fairest to the 98.7 percent of residents who earn less than $500,000 a year.