New Jersey’s Income Tax: How Progressive?

By John W. Zerillo

WHY AN INCOME TAX

When it comes to providing services to residents-and paying for them-states are more important today than they were 25-30 years ago. The primary reasons for this come from above and below. On one hand, states have assumed a larger portion of many costs that previously were borne at the local level, especially with regard to primary and secondary public education. On the other hand, the federal government has devolved more responsibilities to states, like welfare.

With the increased burdens for state government comes the task of figuring out how to raise the necessary money. And of course that involves taxation. So, governments wrestle with the issue of how to develop and maintain tax structures that meet residents’ needs and do so in an equitable manner. In 41 states this includes a tax on personal income. On average, personal income taxes make up the second largest source of state revenues (behind sales taxes).

In 36 of those states-including New Jersey-the income tax is “graduated” or “progressive.” The two words describe the same thing: a tax system in which not only the amount paid rises as a taxpayer’s income goes up, but the rate at which the tax is levied goes up as well.

Progressive income taxes are considered equitable by the two important measures of the concept: vertical and horizontal. Vertical equity means that the tax burden is distributed differently among people of differing economic circumstances. In a system with vertical equity the share of income paid in taxes rises as income rises. Horizontal equity means that taxpayers in similar economic circumstances share similar tax burdens. By contrast a tax that fares poorly on the horizontal equity scale is the local property tax. Two homeowners in different towns could well pay very different percentages of their income in the form of property tax because of such variables as the value at which their municipality assesses their house and the rate of tax the municipality charges its residents.

Progressive taxation also is logical because upper income citizens have a great deal more disposable income than their lower income counterparts; they can generally “afford” the higher rates. Progressive taxes, particularly at the state level, can also partially mitigate the burden of sales and property taxes that are “regressive,” which means the lower someone’s income is, the higher percentage of that income they pay in the form of those taxes.

New Jersey’s overall system of taxation is highly regressive. As reported in the NJPP report Upside Down and Backwards: Taxes in New Jerseyin February 2003, the poorest people in the state pay more than twice the percentage of their income in the form of state sales, state income and local property taxes than the wealthiest, when the full value of upper-income taxpayers’ ability to deduct some state and local taxes from their federal obligation is considered.

So the income tax in New Jersey is asked to do two things: raise money to pay for important services and, through its progressivity, help combat the regressive effects of the rest of the tax system.

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