Upside Down & Backwards – Taxes in New Jersey

By Jon Shure

WHO PAYS?

No one consciously designed it this way. New Jersey’s tax structure has evolved over time. The local property tax-actually a real estate tax-is a holdover from colonial times. The state sales tax was established in 1965, ending a long period during which state government took in relatively little in revenue from citizens and provided relatively little in terms of services as compared to other states, especially northeastern neighbors. The state income tax came along in 1976, the response to a state Supreme Court ruling requiring a new system to pay for schools in view of the unconstitutionality of relying so heavy on local property taxes for that purpose.

Even this brief history shows the interconnectedness of taxes in New Jersey, especially the link between the local property and state income tax: one created expressly to reduce the burden of the other in a way that aimed at taking more from those best able to pay and less from those least able.

It is crucial, then, to consider New Jersey’s major taxes as a whole when analyzing how equitable and efficient the system is and how effectively it does or does not meet the need of providing services to citizens. Indeed, looking at any tax in isolation can provide a distorted view. The income tax, for example, might look pretty good in that it exempts anyone making less than $20,000 a year (rather generous, but some states exempt much more) and waits until a married couple earns over $150,000 before charging its top rate. And yet the income tax has come under recent criticism from those who complain that so much of its burden is concentrated on such a relatively small percentage of state residents-those with the highest incomes.

The property and sales taxes, on the other hand, are frequently criticized for being regressive, which is to say that they take a larger share of a poor person’s income per year than a rich person’s. There are, those, however, who argue in favor of their fairness on grounds that people have some control over where they live and what they spend and could, at least theoretically, reduce their burdens by making different choices.

Add to this the emotional impact of taxes. Very few people think they are undertaxed, a feeling that might come more from the gut than out of knowledge of actual tax rates and burdens. What’s needed, then, is an assessment of how the tax burden in New Jersey falls on people at various income levels. With that information, policymakers and average people can know who pays what, and in what ratio to others.

That information is now available from the Washington-based Institute on Taxation and Economic Policy. ITEP’s just-released report, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, provides state-by-state data on the non-elderly family tax burden for each 20 percent of the population, according to its income.

The bottom line for New Jersey:

This continues to be a state where the combined impact of sales, income and property taxes is that the lower someone’s income, the higher percentage of that income they pay in those three taxes. In a word, the state/local tax structure in New Jersey is regressive.

Though the poorest people in New Jersey pay slightly less in taxes as a percentage of their income compared with seven years ago, in only six other states do poor people pay a higher share of their yearly income in taxes than in NJ.

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