An Across-the-Board Income Tax Cut Would Put New Jersey on the Wrong Path

Contact: Jon Whiten, or 609-393-1145 ext. 15.

An across-the-board state income tax cut would be detrimental to New Jersey’s future because it would do nothing to create jobs and grow the economy while disproportionately helping those who need it least and eroding public capacity to invest in the true building blocks of job growth and a strong economy, according to a new report released today by New Jersey Policy Perspective.

The report, $elling New Jersey $hort, notes that the state’s finances are in no shape to absorb the revenue loss that an income tax cut would create – and even if they were, there are more effective ways for the state to invest those dollars in proven methods to grow the economy and create good jobs and shared prosperity.

“The answer to our faltering economy and dim job prospects is not to give the lion’s share of tax relief to those who need it least, and to dribble out barely visible cuts to the rest of us,” says Gordon MacInnes, president of New Jersey Policy Perspective. “This ‘trickle-down’ approach has not worked elsewhere, and it won’t work in New Jersey.”

Three key findings from the report, which analyzes a 10 percent across-the-board income tax cut first proposed by the administration in 2012 and recently identified as a top priority by a close economic advisor to the governor:

• The assertion that tax cuts will increase economic activity, produce badly needed jobs and grow New Jersey’s faltering economy is fictional. Decades of real-world experience clearly show that lower tax rates do not lead to states’ economic growth and job creation.

• An across-the-board income tax cut would benefit New Jersey households least in need of relief at the expense of those under the greatest financial stress. Under this type of tax cut, 80 percent of the benefit would to the top 20 percent of households and 58 percent to just the top 1 percent, further exacerbating New Jersey’s growing income inequality and further shrinking the state’s dwindling middle class.

• If New Jersey’s finances were strong enough to fund a tax cut – and they’re not – there are more effective ways to grow our economy and create good jobs. High-paying jobs aren’t leaving New Jersey for low-tax states; they are leaving for other high-tax areas that, unlike New Jersey, are exploiting the other assets they have that businesses care about: location, quality work force, strong communities with outstanding public schools, globally recognized research universities and a well-functioning infrastructure. In order for New Jersey to regain its competitive edge and create widely shared prosperity, it needs to pay attention to, and invest in, these public assets.

“The true path to prosperity lies in investing in assets that give New Jersey comparative advantages – not divesting from them,” MacInnes continues. “Those advantages include a well-educated workforce; convenient access to New York and Philadelphia in the middle of the world’s largest market; and great public schools, colleges and universities. Investment creates opportunities for striving working families and offers our best hope to reverse the shrinking of New Jersey’s middle class.”

While details of the likely proposal have not been released, NJPP analyzed a plan based on the 2012 tax-cut plan, using these reasonable assumptions:

• A 10 percent reduction in all state income tax rates

• The tax cut would be phased in over three calendar years, with a 3.33 percent reduction in the first year that grows to a 6.67 percent reduction in the second year before reaching the full 10 percent reduction in the third year. (The cost to the state would be borne over four fiscal years, since fiscal years do not match up with calendar years.)

• The 2010 cut to the state Earned Income Tax Credit (EITC) for low-income working New Jerseyans would be restored to 25 percent of the federal credit.

• The argument in favor of the tax cut would be that the state’s fiscal house is in order, and therefore it is time to cut taxes to spur economic activity and create jobs.

• The proposal would result in an annual revenue loss of approximately $1.54 billion once fully phased in.

In short, an across-the-board income tax cut puts New Jersey’s economic prospects at risk. The sensible course is to emphasize investment in proven assets and increased opportunity for striving families, not to invest essential state revenues in a failed economic-growth model that will largely benefit those who are already doing quite well.