November 30, 2009: New study looks at tax fairness

Low-income families in New Jersey pay a higher share of their income in state and local taxes than do the richest families in New Jersey, according to a new study by the Washington, D.C. based Institute on Taxation and Economic Policy (ITEP).

Because of the nation’s fiscal problems, lawmakers in New Jersey are wrestling with difficult tax and spending decisions now and the decisions are likely to become more difficult in the coming year. It is critical for those making these difficult decisions to understand how their actions will affect people at all income levels in the state.

When all of New Jersey taxes are totaled up, the ITEP study found:

  • New Jersey families earning less than $21,000–the poorest fifth of New Jersey non-elderly taxpayers–pay 10.8 percent of their income in New Jersey state and local taxes.
  • Middle-income New Jersey taxpayers–those earning between $41,000 and $69,000–pay 9.4 percent of their income in New Jersey state and local taxes.
  • But the richest New Jersey taxpayers–with average incomes of $2,258,300–pay only 9.5 percent of their income in New Jersey state and local taxes.

The main reason for this unfairness is the state’s high property taxes and its seven percent sales tax- whether you own a house or rent an apartment you still pay property taxes. If you own a home, it’s obvious that you would pay property taxes. For those who rent it is less obvious because the tax is paid through rent. The rule of thumb is that approximately 18 percent of rent is attributable to property taxes. Even though New Jersey does not tax clothing or food, its seven percent sales tax also falls disproportionately on the worst-off families.

The state’s one progressive tax — the income tax — is insufficient to offset the impact of these other taxes, although the rate structure is very progressive and New Jersey recently increased the value of the refundable earned income tax credit (EITC) to 25 percent of the federal credit and expanded program eligibility. New Jersey income tax rates for married couples range from 1.4 percent starting at incomes above $20,000 to 10.75 percent at incomes over $1 million. But because of the way rates are structured, no family with a $1 million income actually pays 10.75 percent of their income in taxes to the state.

The ITEP report, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, makes an important contribution to understanding the impact of taxes on New Jersey residents.