Topic Category: Tax and Budget

It’s Tax Day: Let’s Commit to Investing in New Jersey

Posted on by Sheila Reynertson

Taxes, and the important services they help finance, are woven into almost every part of our everyday lives. Today, Tax Day, seems like a good day to share some examples of how the tax dollars we pay support a variety of things that help our communities thrive.

It is the school down the street where our kids get their start. It is the neighborhood park where we hang out after work and on weekends with our families. It’s the bike lanes our kids use to ride to school or the train we ride to commute to work.

It’s the new road that takes us out to the airport, where we head out on a business trip. It’s the tax incentives that helped a small business get started. And it’s the community college where thousands of students get educated and trained for success in their careers.

It’s the fire station in town, the 911 operator who’s always there, or the hospital where some of our kids were born. It’s the food assistance that a struggling family needs to put food on the table. It’s the Social Security benefit that retirees rely on to get by and the Medicare coverage they use to get the health care they need.

It’s so easy to be skeptical about government and the elected officials who run it, but how government shapes our tax code is a reflection of us, our values and the priorities we care about.

Sadly, new changes to the federal tax code may make it harder for New Jersey to fund important services and programs. With the state already struggling to meet its obligations, it is now facing current and future spending cuts due to the lopsided nature of the new federal tax plan which gives huge tax breaks to corporations and wealthy families.

According to a new state-by-state analysis of the 2018 tax law, the distributional impact of the new tax plan overwhelmingly benefits the country’s wealthiest families. In New Jersey, it sends 69 percent of the benefits to the top 20 percent of wage earners, and the top 1 percent – those who make $924,600 or more – receive an average tax cut of $21,700. Yet, the poorest 20 percent of New Jerseyans – those who make an average $15,800 in annual income – receive an average tax cut of just $140. Those individual tax cuts are scheduled to expire in 2025.

Now, Congressional Republicans are considering making these tax cuts permanent, claiming they would help the middle-class. However, according to an ITEP analysis, extending the temporary tax provisions in 2026 would not help the middle-class any more than the enacted tax law does in 2018. If that happens, the top 5 percent of New Jersey earners would again receive the lion’s share (68 percent) of the benefit while those in the bottom 20 percent would get an nearly invisible 19 cents a week tax break – essentially a 0 percent share of the benefit.

The implications of this law could not come at a worse time for New Jersey. The reality is that the federal tax plan is fundamentally flawed and poses a significant risk to New Jersey’s economic future. According to the latest analysis from the Center on Budget and Policy Priorities, the federal tax plan exasperates income inequality, weakens tax revenue at a time when the nation will need more to care for the aging Baby Boomer generation and introduces more tax loopholes to be taken advantage of by those with the means to do so. Furthermore, it leaves millions without health coverage with the repeal of the provision that requires individuals to purchase health insurance or pay a penalty.

All told, the new federal tax plan will lead to enormous federal deficits of about $1.5 trillion over the next ten years that are likely to lead to deep spending cuts to important public services that New Jersey families rely upon. Over a quarter of New Jersey’s budget (26.7 percent) is made up of federal grants.

New Jersey’s lawmakers should be vigilant in their long-term response to these fundamental changes by pursuing policies that both shore up the state’s depleted rainy day fund and make our tax code more equitable. They can do so by focusing on the new revenue proposals targeted toward corporations and wealthy households as proposed by both Governor Murphy and Senate President Sweeney. Taxing earnings of $1 million at a higher rate, restoring the sales tax, closing corporate loopholes and making large businesses pay their fair share; these targeted tax changes can help New Jersey make the kind of investments needed to get the state back on its feet and protect itself against harmful federal cuts down the line.

This Tax Day, let’s be honest about one thing: New Jerseyans care deeply about everyone paying their fair share. Supporting the kinds of services and programs that develop and maintain thriving communities is important to the state’s future, and making sure that everyone contributes – particularly those who have significantly benefitted from recent changes in the tax law – is foundational to securing the long-term, sustainable growth and investment that New Jersey needs.

Op-Ed: DREAMers Need Real Tuition Equality

Posted on by Erika J Nava

This op-ed appeared in the March 25, 2018 edition of the Star-Ledger.

Our state policymakers can mitigate the federal government’s attacks on immigrants by taking actions that would honor New Jersey’s history as the golden door for immigrants and maintain our state as a welcoming, inclusive place.

One way is to help all New Jersey students attain their educational goals in the state they call home. Our Senate has that opportunity Monday with a floor vote on S-699, a bill that would allow undocumented students to access state financial aid, particularly the Deferred Action for Childhood Arrivals (DACA) recipients who already qualify for tuition equality.

In 2013, the state boosted educational and economic opportunities for New Jersey’s undocumented students by allowing those who meet certain requirements to pay in-state tuition rates at public colleges and universities. This has helped more students pursue a higher education, which will put them – and New Jersey – on a path toward greater economic opportunity.

But the absence of financial aid keeps many eligible students from completing a four-year degree. This has direct economic impact on New Jersey, which has third-highest share of jobs in the nation that require a bachelor’s degree, making it increasingly important for working-class families to send their children to college.

Undocumented students are like others from working-class families, except that their legal status disqualifies them from receiving federal financial aid and assistance from poverty relief programs. Most of the beneficiaries of DACA came to New Jersey in their parents’ arms. They graduated from our high schools, worked to help their family make ends meet, became vital members of our communities, and served in our military.

There are about 74,000 undocumented immigrants who came to the U.S. before the age of 18, have lived at least four continuous years in the United States, and graduated from high school or are currently enrolled in a secondary school.

They’ve helped grow our economy and made New Jersey, which has the third-largest share of immigrants in the U.S., a more productive place to live. To deny them access to affordable education is to send our state into the future with one arm tied behind our backs.

Consider a young woman named Adriana, who is a member of Make the Road NJ in Passaic: After three years as a part-time student, she was forced to drop out of Bergen Community College because the ancillary costs of full-time education are unmanageable. These days, she works at the mall. Adriana has the potential to finish school but is shut out of federal and state aid programs, even if her family pays taxes.

These students should be given the opportunity to pursue higher education regardless if the federal government ultimately follows through with its threat to end DACA completely. We all benefit from having a more educated population and we should not be the state that blocks the passion of DREAMers for higher education. Lest anyone forget: We have told them since they were children that there is no better way to succeed in America than to graduate from college.

New Jersey’s undocumented students are part of our community. Parents in undocumented families, like the rest of us, work hard and pay taxes – at a higher effective tax rate than the state’s wealthiest one percent – just to give their kids a better shot at success than they themselves had.

And all New Jersey students who meet the educational requirements and prove their financial need should be able to access the same programs as their classmates regardless of their immigration status.

By seeking access to state financial aid for college, these families are not asking to cut to the front of the line. They are simply asking for a chance to stand in line with the rest of their classmates and make New Jersey better.

Op-Ed: Tax Law Requires More Than 'SALT Cap' Workarounds

Posted on by Gordon MacInnes

This op-ed appeared in the March 14, 2018 edition of the Bergen Record

Recently, you might have noticed that your take-home pay bumped up slightly, which for most of us was in the “pleasant-surprise” category. Enjoy it while you can, but before painting the town red, you should know that next year’s news won’t be so good.

There’s a reason that the Republican federal tax law was enacted without a single public hearing or time for observers to evaluate the 700-page bill: it’s really a sneaky way to reassure only the wealthiest Americans that Uncle Sam is looking out for their interests by slashing corporate tax rates (a move that disproportionately boosts the bank accounts of those at the top), dramatically cutting the estate tax and reducing their annual federal tax rates. The new law opens doors to even greater concentration of wealth, and – because it’s recklessly financed by running up the federal deficit – will very likely be tied to deep and devastating cuts to a wide range of public services and investments that working Americans rely on.

If you live in a high-wealth and high-tax state like New Jersey, the news gets worse. For the first time in 100 years, taxpayers may no longer deduct their full state and local taxes (“SALT” for short) from the income on which federal taxes are owed. The deductible ceiling is set at $10,000, so if you pay more than that with property and income taxes combined, your taxable income will increase by a bit.

As a result, many lawmakers have focused their attention on “workarounds” — proposals to essentially evade this new cap on SALT deductions. Rep. Josh Gottheimer and Gov. Phil Murphy have proposed setting up municipal charitable funds so that taxpayers can make charitable contributions to replace most of their municipal, county and school tax bills. Their plan faces a host of technical, political and legal challenges that make the odds of success too long to bank on.

There’s another problem with the charitable contribution proposal and other SALT cap workarounds: those who stand to benefit the most from it are already doing quite well, thank you. In fact, a total lifting of the SALT cap would give 54 percent of its benefits to New Jersey’s wealthiest 1 percent of families, those with incomes of over $1.1 million. On average, each of those families would get a tax cut of $79,460 (a cut that exceeds the median New Jersey family income!).

What about the rest of us? The bottom 80 percent of New Jersey families – those with incomes under $142,000 — would receive less than 1 percent of the benefits if the plan were adopted. Nine out of ten of these families would see not a penny; and the average tax cut for the lucky 10 percent would be $75 a year. That’s $1.44 a week!

In fact, for all the attention in New Jersey on the SALT deduction cap, there is widespread misinformation about what it really means for most families. Yes, a greater share of New Jerseyans will be affected by this new cap than in most other states. And yes, some of them are solidly middle-class, thanks to the state’s high property values and correspondingly high property taxes. But New Jersey’s middle-class families whose SALT payments exceed the new $10,000 deduction cap, pay property and state taxes that only modestly exceed the cap.

The GOP tax law opens up other opportunities that should be given top priority by New Jersey’s political leaders. The state is a deplorable financial condition, ranking in the bottom fifth of states for job creation, worker income and economic activity since the end of the Great Recession. The list of neglected or ignored services and assets is lengthy. Consider such woeful facts like NJ Transit’s declining performance, going from the best-performing commuter railroad in the U.S. ten years ago to the bottom. State financing of our public colleges and universities operating costs has declined by 25 percent over the last eight years, driving up tuition and student debt. And then there’s slashed property tax relief and declining aid to public schools.

In short, the GOP tax law opens up immediate opportunities to invest in the state’s critical assets. As noted, the GOP plan favors the top 1 percent, meaning that New Jersey could require the wealthiest families to return a modest share of their bounty for the benefit of them and all New Jerseyans. Federal corporate tax rates have dropped 40 percent, which opens the opportunity for corporate citizens to help all of us by paying a slightly higher state tax to improve schools and public colleges. And New Jersey must prepare for threatened cuts to federal programs that aid poor, working and middle-class families.

New Jersey has a poor record of investing in its enviable assets like location, a highly-trained work force, high performing public schools and the nation’s 3rd highest percentage of striving immigrants. To reverse that trajectory will require sensible, bold actions to not dawdle, but exploit the openings of a one-sided federal tax “reform.”

Op-Ed: Tax Law Requires More Than ‘SALT Cap’ Workarounds

Posted on by Gordon MacInnes

This op-ed appeared in the March 14, 2018 edition of the Bergen Record

Recently, you might have noticed that your take-home pay bumped up slightly, which for most of us was in the “pleasant-surprise” category. Enjoy it while you can, but before painting the town red, you should know that next year’s news won’t be so good.

There’s a reason that the Republican federal tax law was enacted without a single public hearing or time for observers to evaluate the 700-page bill: it’s really a sneaky way to reassure only the wealthiest Americans that Uncle Sam is looking out for their interests by slashing corporate tax rates (a move that disproportionately boosts the bank accounts of those at the top), dramatically cutting the estate tax and reducing their annual federal tax rates. The new law opens doors to even greater concentration of wealth, and – because it’s recklessly financed by running up the federal deficit – will very likely be tied to deep and devastating cuts to a wide range of public services and investments that working Americans rely on.

If you live in a high-wealth and high-tax state like New Jersey, the news gets worse. For the first time in 100 years, taxpayers may no longer deduct their full state and local taxes (“SALT” for short) from the income on which federal taxes are owed. The deductible ceiling is set at $10,000, so if you pay more than that with property and income taxes combined, your taxable income will increase by a bit.

As a result, many lawmakers have focused their attention on “workarounds” — proposals to essentially evade this new cap on SALT deductions. Rep. Josh Gottheimer and Gov. Phil Murphy have proposed setting up municipal charitable funds so that taxpayers can make charitable contributions to replace most of their municipal, county and school tax bills. Their plan faces a host of technical, political and legal challenges that make the odds of success too long to bank on.

There’s another problem with the charitable contribution proposal and other SALT cap workarounds: those who stand to benefit the most from it are already doing quite well, thank you. In fact, a total lifting of the SALT cap would give 54 percent of its benefits to New Jersey’s wealthiest 1 percent of families, those with incomes of over $1.1 million. On average, each of those families would get a tax cut of $79,460 (a cut that exceeds the median New Jersey family income!).

What about the rest of us? The bottom 80 percent of New Jersey families – those with incomes under $142,000 — would receive less than 1 percent of the benefits if the plan were adopted. Nine out of ten of these families would see not a penny; and the average tax cut for the lucky 10 percent would be $75 a year. That’s $1.44 a week!

In fact, for all the attention in New Jersey on the SALT deduction cap, there is widespread misinformation about what it really means for most families. Yes, a greater share of New Jerseyans will be affected by this new cap than in most other states. And yes, some of them are solidly middle-class, thanks to the state’s high property values and correspondingly high property taxes. But New Jersey’s middle-class families whose SALT payments exceed the new $10,000 deduction cap, pay property and state taxes that only modestly exceed the cap.

The GOP tax law opens up other opportunities that should be given top priority by New Jersey’s political leaders. The state is a deplorable financial condition, ranking in the bottom fifth of states for job creation, worker income and economic activity since the end of the Great Recession. The list of neglected or ignored services and assets is lengthy. Consider such woeful facts like NJ Transit’s declining performance, going from the best-performing commuter railroad in the U.S. ten years ago to the bottom. State financing of our public colleges and universities operating costs has declined by 25 percent over the last eight years, driving up tuition and student debt. And then there’s slashed property tax relief and declining aid to public schools.

In short, the GOP tax law opens up immediate opportunities to invest in the state’s critical assets. As noted, the GOP plan favors the top 1 percent, meaning that New Jersey could require the wealthiest families to return a modest share of their bounty for the benefit of them and all New Jerseyans. Federal corporate tax rates have dropped 40 percent, which opens the opportunity for corporate citizens to help all of us by paying a slightly higher state tax to improve schools and public colleges. And New Jersey must prepare for threatened cuts to federal programs that aid poor, working and middle-class families.

New Jersey has a poor record of investing in its enviable assets like location, a highly-trained work force, high performing public schools and the nation’s 3rd highest percentage of striving immigrants. To reverse that trajectory will require sensible, bold actions to not dawdle, but exploit the openings of a one-sided federal tax “reform.”

Deliberate Disinvestment Has Been A Disaster for New Jersey

Posted on by Sheila Reynertson

Last week Governor Murphy reiterated his support for a millionaire’s tax on New Jersey’s highest earners to help pay for some of New Jersey’s most pressing needs – property tax relief and reinvesting in K-12 education.

Senate President Stephen Sweeney, who posted a millionaire’s tax 5 times during Christie’s tenure and put it on the top of his list of legislative priorities as recently as November, now views a tax on New Jersey’s highest earners as only an “absolute last resort” and instead is pushing for a surcharge on large corporations to help fund education.

Despite some quibbling, it is refreshing to hear New Jersey most powerful politicians talking about cleaning up the state’s tax code and raising new revenues that the state desperately needs. But frankly, this should not be an “either/or” choice: New Jersey needs both. To really get the state back on track, profitable corporations and top earners in the state must pay their fair share.

Yet Assembly Speaker Craig Coughlin has taken a different tack altogether, stating that “our top priority should be to reduce spending, better manage our existing resources, and fully examine all revenues from existing programs before we raise taxes on anyone.”

But we’ve seen this movie before. And it didn’t have a happy ending for New Jersey’s economy or for its middle-class working families.  

Governor Christie boasted of his deep cuts to what he liked to call “discretionary spending” – in other words, state investments in higher education, direct property tax relief and other middle-class priorities. As he presented his final budget, he said those investments were $2 billion less than in 2008, creating what he dubbed “a new baseline for government.”

That baseline – reinforced by tax cuts that drained critical dollars from New Jersey’s coffers – led the state to suffer 11 credit downgrades from three major credit-rating companies during the Christie administration. In other words, this “new baseline” didn’t match the state’s needs.

That baseline means that over 10,000 state government jobs – and over 100 public programs – have disappeared, dragging down the overall economy and making it harder for the public servants who remained to serve the public.

That baseline means deliberate disinvestment in New Jersey families. It means that the state’s public schools are underfunded; that more children can’t thrive in high-quality Pre-K classrooms; that parents and college students are taking on more debt as state support of higher education drops; that seniors, the disabled and low- and middle-income homeowners dependent on dwindling property tax relief are left out to dry; that commuters are paying 30 percent more for tickets on a public transit system that has become unreliable and, in some cases, downright dangerous.

Here’s the reality: New Jersey has already reduced spending – and reduced it beyond a sustainable level, reduced it to the point where it’s putting our future at risk. The trickle-down agenda of tax cuts and spending cuts has been the state’s chief economic policy for the past eight years. Legislative leaders owe it to those who have been paying for those cuts to embrace a better plan. First admit that there’s no more room to cut spending without even further harming families. Then make a commitment toward raising new revenue, and doing so in an equitable way.

Already, the tired and false claim that higher taxes will drive millionaires and successful businesses out of New Jersey has come roaring back. This time, though, legislators should consider what it is about New Jersey that helps foster a growing class of millionaires in the first place. It is undeniable that the public assets that make this great state hum – mass transit to major economic city centers, high quality education, an educated workforce – are key ingredients of prosperity. In fact, New Jersey now has the second most millionaires per capita in the country with just about 1 in 12 households having $1 million or more in investable assets. That’s up from third place a year ago.

Public assets cost money, and they work best when we all chip in and pay our fair share. That can only happen if New Jersey takes critical, bold steps to make its tax code fairer and its finances more stable with new revenues.  

Investing in New Jersey’s Future Will Require New Revenues

Posted on by Gordon MacInnes

Critical investments in public assets won’t happen without more public income

To read a PDF version of this report, click here.

To begin rebuilding a strong state economy, New Jersey’s governor and legislators must stabilize the state’s finances and put the Garden State back on track to invest in its competitive assets, which have been largely neglected during a 25-year slide into financial peril. New investments require new revenue that should be tied to much-needed public services and essential investments.

This is the most pressing – and most contentious – of the many problems facing the state’s new governor and legislature. And it can’t be solved by more can kicking, the threat of more spending cuts or misreading the impact of President Trump’s tax revisions. A robust plan for new funding streams is required.

Crucial Public Investments Have Deteriorated

A quarter century of tax cutting, false promises and high-risk financial shenanigans have degraded New Jersey’s economic assets and imperiled its future. How bad has it gotten? Here’s a quick look.

School, municipal and county aid has been sharply reduced after adjusting for inflation, resulting in a steady increase in property taxes

The combination of reduced state aid, steady inflation and property tax caps have led to budget cuts, layoffs of public employees, tacked-on bills for sports and sewers, borrowing to cover annual costs and other financially imprudent – even dangerous – actions by towns, counties and school districts.

Direct property tax relief was slashed during the recession and has not been restored

In 2008, the state budget included $2.8 billion in direct funding to reduce property taxes for eligible aged, disabled or working-class New Jerseyans.[1] By 2012, this had been slashed by 57 percent to just over $1.2 billion, where it has pretty much remained for 7 years[2].

Residential property taxes continue to be the highest in the nation

What politician doesn’t promise “lower property taxes,” almost always without specifying how or what will lower them? Residential property taxes of more than $22.5 billion match the total collected by the state from income and sales taxes, $15 billion of which is dedicated to property tax relief.[3] If even a millionaire’s tax increase affecting only 20,000 of 4 million households is beyond consideration, there is no prospect of significantly reducing property taxes.

New Jersey has shifted the cost of public higher education to students and their families

New Jersey’s public colleges and universities have seen a steady decline of 24 percent since 2010 in state operating aid, when adjusted for inflation.[4] This helps explain the rapidly increasing costs of tuitions and fees at these institutions, and the accompanying growth in student debt. If state support for the operating costs of 4-year public colleges had just kept up with inflation in those costs beginning in 2010, instead of providing $703 million for operating costs for the 2016-17 academic year, the state would have put up just over $1 billion, a gap of 48 percent.[5] And during the same time, the number of students – full-time, part-time and graduate – grew by 10 percent.[6] At county colleges, operating support dropped 18 percent between 2009 and 2017.[7]

NJ Transit – once the national public transit model – is now the nation’s underperformer

State disinvestment in NJ Transit has led the agency to turn more frequently to riders, who now pay the nation’s highest fares for the 2nd worst on-time performance[8][9]. Location is New Jersey’s greatest asset, but if commuter trains to New York and Newark continue their downward slide, the prospects for attracting young families to towns like Ridgewood, Princeton, Summit, Red Bank, Bernardsville and Maplewood with their lively downtowns, excellent public schools and parks are badly diminished.

The state’s budget is unbalanced and its reserve fund is depleted

Next year’s budget begins with having to replace at least $700 million in one-time revenues in this year’s budget and a raid of at least $200 million on a very small reserve to fund Gov. Christie’s opioid treatment campaign. How small is that reserve? New Jersey currently has the third lowest level in the nation – at just 1.3 percent of spending, or enough to fund 4.6 days of operations. The median of the 50 states is 8 percent, enough to fund nearly a month (29.3 days) of operations. And the state’s more permanent “rainy day fund” has been at zero since 2009.[10]

Lawmakers have put New Jersey on the hook for billions in future tax breaks

As the Great Recession receded, New Jersey opted to run the table with a massive set of tax subsidies and little else. Eight years later, the state is in the bottom quintile of states when it comes to economic activity, new job creation and public and private investment. The 2013 Economic Opportunity Act needs to be sharply revised to minimize the harm that this reckless expansion of $5 billion in tax breaks will have over the next few decades and redirect public investments to tried-and-true methods of economic development.

The state is currently unable to fund promised public employee pensions

Since 1994, governors and legislators of both parties have hidden behind the complexity of actuarial calculations to promise pensions and health benefits that they did not bother to fund. New Jersey was the first state to confess to “fraudulent misrepresentation” to the Securities and Exchange Commission for increasing pension benefits by 9 percent financed by funds that didn’t exist. The total owed now exceeds $125 billion ($93 billion for pensions and $34 billion for retiree health benefits). This year alone, the state is $2.5 billion short of the required contribution.[11]

The Big Question: If New Jersey can’t finance the pensions it owes public employees or keep its commuter trains running or even discuss taxing a few thousand millionaires, how can it invest in New Jersey’s crucial assets like great public schools, the nation’s highest-quality preschool program, public colleges and universities or the nation’s 3rd largest public transit system?

Tax Reforms Can Bolster New Jersey’s Economic Future

By cleaning up the state tax code, reversing some of the most ill-advised tax cuts of recent years and asking the state’s wealthiest households to pitch in a bit more, New Jersey could raise over $2.5 billion in new revenues that could be invested in the state’s long-neglected assets, putting the state back on the right track.

Like all investments, public investments take time – and dollars – to bear fruit. Policymakers must begin sowing the seeds for restoring New Jersey’s economic prospects and achieving widely shared prosperity now – and they must do so by raising new revenue to make these critical investments. They should start by restoring the tax cuts that Gov. Christie held hostage to signing the overdue financing of the Transportation Trust Fund in 2016. 

Return the sales tax to 7 percent and modernize its application ($700 million+)

Most New Jerseyans haven’t been helped by the sales tax reduction by a third of a penny since 2016 (from 7 percent to 6.625 percent).[12] But the loss to the state of $600 million each year counts. For example, that’s near the amount that must be found next year to keep up with the 10-year schedule to fully fund pensions. Moreover, the economy has become more service than goods-oriented, yet the sales tax hasn’t kept up with the times. Expanding the sales tax to more services – such as accounting and interior design – would help modernize the sales tax without punishing low- and moderate-income families.[13]

Restore the estate tax at a threshold of $1 million ($400-600 million)

Under New Jersey’s recently-eliminated estate tax, only about 5 percent of the state’s 70,000 deaths each year triggered an estate tax payment. The new federal tax law doubles the floor on federal estate taxation to $24 million for a wife-husband estate, meaning that most of New Jersey’s wealthy families have nothing to worry about. Restoring the state estate tax with a threshold of $1 million would capture most of the dollars but very few of the estates that formerly were assessed. (In fact, it would recoup 93 percent of the tax revenue the state is now losing, capturing an estimated $5.6 billion over the next decade.[14]) On top of that, it would be sensible to increase the tax rate to capture some of the windfall the wealthiest heirs will get from the federal law.

Make the income tax more equitable by increasing rates on the wealthiest 5 percent of households ($1 billion+)

Increasing income tax rates on New Jersey’s wealthiest families households by creating 4 new income tax brackets and raising the top tax rate (on income over $2.5 million) to 11 percent would make the state’s tax code fairer. This tax increase – which is supported by 3 in 4 New Jersey voters – would be paid almost exclusively by New Jersey’s ultra-wealthy, with the top 1 percent – households with average annual incomes of $3 million – paying 85 percent of the new tax.[15] And even after this change, the wealthiest New Jerseyans would still be paying much less of their incomes on state and local taxes than the bottom 80 percent.

At the very least, policymakers should increase the income tax rate on earnings over $1 million, the so-called “millionaire’s tax” that would raise $600 million or more. The withdrawal of support by the Senate President puts even this modest revenue increase in peril, but does not dilute the fairness or value of it. The argument that its renewal would somehow lead to a loss of revenue defies simple arithmetic and common sense. The number of households with over $1 million in income filing taxes in New Jersey increased from 13,300 in 2005 to 20,600 by 2015, a 55 percent increase, which hardly represents the “exodus” so frequently asserted.[16] And the percentage of households reporting incomes of $500,000 and up increased five-fold in the years 1994 to 2014 (from .4 of 1% to 2%).

Close corporate tax loopholes used by multi-state corporations ($110m to $290m)

“Combined reporting” requires multi-state corporations to file a tax return that captures its business activities in all states in which they conduct business. This approach, which is now in force in 25 of the 45 states with a corporate business tax including such classic “red” states as Texas, Utah and Montana, prevents corporations from transferring profits to states without a business tax or ones with a very low tax rate. Most of New Jersey’s largest corporations are already honoring combined reporting requirements in other states without dire consequences.[17]

Consider recouping a piece of the windfall corporations will receive from the federal tax changes ($500m)

The recently enacted federal tax “reform” is friendliest to corporations, which have been granted a permanent and significant tax cut. It’s sensible for New Jersey to offset some of this windfall by modestly raising the corporate tax rate and investing the new revenue in public assets and services that can boost the state’s economy and help working families get ahead. An increase of 2.5 percent from the current rate of 9 percent would produce approximately $500 million in additional revenues without diluting strongly the federal tax windfall.

These are tax changes that need attention and deliberation if New Jersey is to return to a competitive economic position. Without raising these revenues to restore and expand public investments, New Jersey will continue to be in the bottom 20 percent of states for economic activity and job growth.

Next Tuesday, Gov. Murphy will present his first budget. If it does not call for significant new revenues, then New Jersey is fated to continue on its downward slide of a quarter century without the means to invest in the state’s neglected assets.

Endnotes

[1] New Jersey Office of Management and Budget, Fiscal 2009 Budget in Brief, February 2008. http://www.nj.gov/treasury/omb/publications/09bib/BIB.pdf

[2] New Jersey Office of Management and Budget, The Governor’s FY 2013 Budget Summary, February 2012. http://www.nj.gov/treasury/omb/publications/13bib/BIB.pdf

[3] New Jersey Department of Community Affairs, Property Tax Tables, 2017, http://www.state.nj.us/dca/divisions/dlgs/resources/property_docs/17_data/17taxes.xls

[4] Center on Budget and Policy Priorities, A Lost Decade in Higher Education Funding State Cuts Have Driven Up Tuition and Reduced Quality, August 2017. https://www.cbpp.org/research/a-lost-decade-in-higher-education-funding-state-cuts-have-driven-up-tuition-and-reduced

[5] NJPP analysis of Commonfund Higher Education Price Index, 2017 Update. Available at https://www.commonfund.org/commonfund-institute/higher-education-price-index-hepi/

[6] NJPP analysis of New Jersey Office of the Secretary of Higher Education enrollment statistics. Available at http://www.state.nj.us/highereducation/statistics/index.shtml#ENR

[7] Ibid 5

[8] The Star-Ledger, Boston’s stuck! Beantown rail fleet tops NJ Transit as least reliable, October 2017. http://www.nj.com/traffic/index.ssf/2017/10/nj_transit_trains_are_no_longer_the_least_reliable_in_us_but_its_close.html

[9] The Star-Ledger, Do N.J. rail commuters pay the highest fares in America?, May 2016. http://www.nj.com/traffic/index.ssf/2016/05/nj_rail_riders_still_pay_the_highest_fares_in_america_or_dont_they.html

[10] The Pew Charitable Trusts, State Rainy Day Funds Grow Even as Total Balances Lag, Updated January 2018. http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/fiscal-50#ind5

[11] “State of New Jersey, Debt Report, Fiscal Year 2016, March 2017. http://www.nj.gov/treasury/public_finance/pdf/DebtReportFY2016.pdf

[12] New Jersey Policy Perspective, Poll: Most New Jerseyans Want Bold Solutions on State Taxes, November 2017. https://www.njpp.org/budget/poll-most-new-jerseyans-want-bold-solutions-on-taxes-public-investments

[13] New Jersey Policy Perspective, Modernizing New Jersey’s Sales Tax Will Level the Playing Field & Help the Economy Thrive, February 2018. https://www.njpp.org/budget/modernizing-new-jerseys-sales-tax-will-level-the-playing-field-help-the-economy-thrive

[14] New Jersey Policy Perspective, Fairly and Adequately Taxing Inherited Wealth Will Fight Inequality & Provide Essential Resources for All New Jerseyans, June 2017. https://www.njpp.org/budget/fairly-and-adequately-taxing-inherited-wealth-will-fight-inequality-provide-essential-resources-for-all-new-jerseyans

[15] New Jersey Policy Perspective, Reforming New Jersey’s Income Tax Would Help Build Shared Prosperity, September 2017. https://www.njpp.org/budget/reforming-new-jerseys-income-tax-would-help-build-shared-prosperity

[16] NJPP analysis of New Jersey Treasury Department Statistics on Income data, 2006 and 2017.

[17] New Jersey Policy Perspective, Nearly All of New Jersey’s Largest Employers Already Subject to ‘Combined Reporting’ in Other States, January 2016. https://www.njpp.org/budget/nearly-all-of-new-jerseys-largest-employers-already-subject-to-combined-reporting-in-other-states

Modernizing New Jersey’s Sales Tax Will Level the Playing Field and Help the Economy Thrive

Posted on by Sheila Reynertson

To read a PDF version of this report, click here.

Strengthening New Jersey’s ability to compete in the 21st century economy requires updates to a sales tax code that was designed and implemented before the rise of online shopping and a service-oriented economy.

New Jersey can modernize its sales tax and raise revenue required to invest in public services by:

  • Broadening the tax base to include more services
  • Adopting a remote sales tax law
  • Closing the online hotel tax loophole
  • Repealing the yacht sales tax
  • Last but not least, returning the tax rate to 7 percent

Like nearly all other states, New Jersey levies a sales tax on consumers purchasing goods and services at the retail level. The sales tax brings in more than $9 billion a year, making up a little over 25 percent of state revenues, making it a critical source for funding higher education, health care, public safety and other important public services required for a thriving state economy. About 20 percent of New Jersey’s sales tax revenue comes from non-residents.

Examples of taxable items in New Jersey include cars, furniture and meals in restaurants. Taxable services include snow removal and lawn maintenance, auto repair and cable and internet services. Exempt from the sales tax are goods and services like groceries, clothing, certain professional services and real estate sales. Although New Jersey does not allow local governments to levy general sales taxes, there are a few exceptions in place to mostly help tourism thrive in a handful of shore towns and support economic development in Atlantic City.

The general sales tax is added as a percentage of the purchase price.[1] Sellers add the tax to the purchase price, collect the tax from the buyer at the time of sale and then periodically submit the revenue to the state treasury. The current rate is 6.625 percent, the fifth highest among states that levy a sales tax (California has the highest state-level rate, at 7.25 percent). But because other states permit municipalities to levy a local sales tax, New Jersey’s rate is actually lower than that of nearby metro areas. New York City’s combined sales tax rate, for example, is 8.875 percent. Philadelphia’s combined rate is 8 percent.

Because so many everyday items are taxed, just about everyone in the state pays the sales tax. But the sales tax is regressive, meaning that low-income shoppers spend a larger share of their income on the sales tax then everyone else. The bottom 20 percent of New Jersey families pay 5.5 percent of their average annual incomes to sales and excise taxes (this includes fuel taxes, which aren’t directly addressed in this report), while middle-income families pay 3.2 percent and the wealthiest 1 percent of families pay just 0.7 percent. However, keeping grocery items and clothing tax-free does help make New Jersey’s sales tax less regressive than other states’ sales taxes. In fact, the gap between the average share of income paid to sales and excise taxes by the bottom 20 percent of families and the top 1 percent in New Jersey is the 10th smallest of all states.

On the whole, the sales tax has been a reliable source of revenue for New Jersey, making up over 25 percent of New Jersey’s revenues in nearly every year since 2000 (with the exception of 2005 and 2006). But the 2016 cut to the sales tax will put a dent in collections. Lawmakers ought to reform New Jersey’s sales tax with three priorities in mind: modernizing it, making it fairer and ensuring it raises adequate revenue to spur public investments.

Broaden the Sales Tax to Include More Services

The nature of New Jersey’s economy has changed dramatically since the sales tax was first introduced in 1966. At that time, industries producing goods accounted for more than a third of the national gross domestic product (GDP). By 2016, the manufacturing sector was down to 18 percent of the economy, according to the federal Bureau of Economic Analysis. Meanwhile, the services industry grew from half of GDP to more than two-thirds during that same 50-year period.

Things like cell phones, internet, cable TV, health clubs, tanning salons and lawn maintenance are common services people pay for today that were not as widespread a few decades ago. As services become an ever-more important fixture of the state economy, policymakers ought to be taxing more of them.

The services subject to New Jersey’s sales tax were last updated in 2006. These changes a dozen years ago led to the taxation of services like computer software, floor covering installation, delivery charges, some landscaping services, storage units, health club memberships, tanning salons, massage services and tattoo parlors. At the time, the state estimated the sales tax reform would generate over $400 million in new annual revenue.[2] In its first year, it did just that, bringing in $427 million, a 5 percent increase in sales receipts.

As services become an even larger part of household spending, New Jersey’s sales tax must adjust and adapt. The taxation of services also allows state policymakers to fold them into the sales tax code with a focus on high-end services to make the tax code fairer. These include professional services like accounting and bookkeeping and those provided by architects, attorneys and engineers as well as services that are predominantly utilized by upper-income households like investment counseling, interior decorating, private club membership fees, chartered flights, horse training and dry-cleaning services. (See Appendix for an expanded list of exempt services.) In addition, policymakers need to reverse course on legislation passed last year that dropped the sales tax on limousine services.

Levying sales taxes on more services would make New Jersey’s tax systems not only fairer but would help to create a more stable tax base over the long term and may help reduce the year-to-year volatility of sales tax collections. Finally, expanding the sales tax to include more services could generate a substantial amount of revenue to help the state maintain funding of important investments like higher education, public safety, mass transit and other vital services.

Adopt a Remote Sales Tax Law

In 2012 New Jersey negotiated an agreement with Amazon to force the online retail giant to collect sales tax from Garden State consumers. It was an important step, but more action on remote sales to New Jersey shoppers is needed.

Federal law prevents states from collecting sales tax from out-of-state retailers that don’t have a physical presence in the state. Nonetheless, online and catalog shoppers that live in states that charge a sales tax are still legally obligated to pay the tax on purchases directly to the state government. Most people, of course, are not aware of this obligation and many of those who are, willfully ignore the law. This lack of compliance, while common, undermines states’ ability to collect sales tax on internet, catalog and other remote sales and puts local businesses owners who must charge sales tax on every purchase at a severe disadvantage. Without the authority to require out-of-state sellers to collect and submit sales taxes, states have lost more than $10 billion in lost annual revenue to online shopping alone.[3]

A federal solution to this problem would be ideal, but without a federal fix there is one avenue that could empower New Jersey to collect sales tax on remote sales and protect local businesses from unfair competition. An innovative disclosure law enacted in Colorado in 2016 requires remote retailers to remind customers that they likely owe sales tax on their purchases.[4] It also requires remote retailers to report some purchaser information to the state which it can use to seek payment of unpaid taxes on “big-ticket” items.[5]

Specifically, the law requires that out-of-state sellers notify their customers on the online “shopping cart” summary page that they may owe sales tax on what they bought. The seller then must mail a statement to their customers each year with a summary of the dollar amounts and nature of their purchases made the previous year and a reminder of their sales tax obligations. Finally, a document listing each customer’s total annual dollar amount of purchases must be provided by the remote seller to the state revenue department. This notification allows the state to selectively collect owed sales tax from customers who made large online purchases.

A more comprehensive and efficient solution to taxing remote purchases would be federal legislation authorizing states to require all remote sellers to charge sales tax in exchange for a simplified sales tax code. But until that happens, New Jersey should do what it can to ensure that its online shoppers are paying their fair share of sales tax, giving small in-state businesses a level playing field and providing the revenue needed to fund vital services and invest in things like education, infrastructure and health care.

Close the Online Travel Loophole and Tax Airbnb Bookings

Right now online travel companies like Expedia, Orbitz and Priceline can avoid collecting all the applicable sales tax on hotel room bookings even though New Jersey collects the tax when travel agents or travelers themselves book the same room. This loophole is not uncommon and costs states between $275 million and $400 million in combined annual revenue.[6]

Here is how the loophole works: online travel companies do collect taxes on applicable sales and lodging taxes but only on the wholesale room rate they pay hotels for the right to rent the rooms, not the higher retail room rate they actually charge renters. They argue that this practice fulfills their tax collecting obligation. However, state routinely tax the full retail price charged to customers for other types of sales found on online travel websites.

To ensure that the full retail room charge is taxed when the room is booked online, New Jersey needs to modernize its law which was written before the advent of the online booking industry. Closing this loophole could generate between $8 million and $12 million more in annual sales tax revenue based on 2010 data.[7]

Similarly, short-term rental marketplaces like Airbnb should also be collecting sales tax. In 2016, over 6,000 New Jersey homeowners rented out rooms or homes on Airbnb to over a quarter of a million people, generating $50 million in income. Last year the legislature passed a bill to include a sales tax plus an occupancy tax to these informal online bookings. Despite support from the business community and Airbnb itself, Gov. Christie vetoed the bill. It was estimated that the bill would generate more than $6 million in sales tax revenue and help to level the playing field for New Jersey’s lodging industry.

Reverse the Tax Break for Yacht and Boat Buyers

In 2016, New Jersey cut the sales tax on boats and other vessels sold in the state in half and capped the sales tax on boats at $20,000 – meaning that buyers of the most expensive boats are receiving even larger tax breaks. For example, an 80-foot yacht in the $5 million range used to be subject to a $350,000 sales tax. That same luxury boat is now subject to just $20,000 in sales tax – a 94 percent tax cut. The special and unnecessary exemption for boaters is estimated to cost the state between $8 million and $15 million in annual revenue.[8]

At a time when the state has not increased funding for TANF for over 30 years, it certainly sends the wrong message to provide such tax breaks for those who need it the least. This 2015 sales tax cut should be reversed.

Return the Sales Tax Rate to 7 Percent

Last but not least, lawmakers need to reverse the gimmicky 2016 reduction in the sales tax rate, which has put very little extra cash in the pockets of most New Jersey working families but has blown a large hole in the state’s budget.

Under the tax cut, which was part of a larger deal to secure long-overdue transportation infrastructure funding, New Jersey’s sales tax dropped from 7 percent to 6.625 percent, where it stands today. The cost of this cut is about $600 million a year and growing (by 2026, for example, it’s expected to be $735 million).[9]

That kind of revenue loss is a huge blow to the state, but because the cost is spread across so many purchases and so many families, it barely registers in the pocketbooks of everyday New Jerseyans. Even the wealthiest 1 percent of families only save an average of $14 a week, while those in the bottom 20 percent earning less than $25,000 will see savings of less than a buck a week. New Jerseyans in the middle 20 percent (household incomes between $49,000 and $79,000) get an average tax cut of $1.65 a week.[10]

Appendix: Services Exempt from New Jersey Sales Tax

Endnotes

[1] New Jersey also levies an excise tax on specific items, including gasoline, alcohol and tobacco.

[2] Center on Budget and Policy Priorities, Expanding Sales Taxation of Services: Options and Issues, July 2009. https://www.cbpp.org/sites/default/files/atoms/files/8-10-09sfp.pdf

[3] Bruce, Fox and Luna in Center on Budget and Policy Priorities, States Should Adopt a Version of Colorado’s Remote Sales Tax Law, August 2017. https://www.cbpp.org/sites/default/files/atoms/files/8-3-17sfp.pdf

[4] Center on Budget and Policy Priorities, States Should Adopt a Version of Colorado’s Remote Sales Tax Law, August 2017. https://www.cbpp.org/sites/default/files/atoms/files/8-3-17sfp.pdf

[5] Only seven states (Alabama, Kentucky, Louisiana, Oklahoma, South Dakota, Vermont and Washington) have enacted some type of sales tax notification and reporting law. However, most are inferior to Colorado’s law and none are as comprehensive as the Multistate Tax Commission’s draft model law.

[6] Center on Budget and Policy Priorities, State and Local Governments Should Close Online Hotel Tax Loophole and Collect Taxes Owed, April 2011. https://www.cbpp.org/sites/default/files/atoms/files/4-12-11sfp.pdf

[7] Ibid at 7.

[8] Legislative Fiscal Note: http://www.njleg.state.nj.us/2014/Bills/S3000/2784_E1.PDF

[9] Legislative Fiscal Note: http://www.njleg.state.nj.us/2016/Bills/A0500/12_E3.PDF

[10] Analysis using Institute on Taxation and Economic Policy microsimulation, using 2016 incomes. The analysis is targeted to tax impacts for New Jersey residents only using an estimate that non-residents pay 20 percent of New Jersey sales taxes.

Modernizing New Jersey’s Sales Tax Will Level the Playing Field and Help the Economy Thrive

Posted on by Sheila Reynertson

To read a PDF version of this report, click here.

Strengthening New Jersey’s ability to compete in the 21st century economy requires updates to a sales tax code that was designed and implemented before the rise of online shopping and a service-oriented economy.

New Jersey can modernize its sales tax and raise revenue required to invest in public services by:

  • Broadening the tax base to include more services
  • Adopting a remote sales tax law
  • Closing the online hotel tax loophole
  • Repealing the yacht sales tax
  • Last but not least, returning the tax rate to 7 percent

 

Like nearly all other states, New Jersey levies a sales tax on consumers purchasing goods and services at the retail level. The sales tax brings in more than $9 billion a year, making up a little over 25 percent of state revenues, making it a critical source for funding higher education, health care, public safety and other important public services required for a thriving state economy. About 20 percent of New Jersey’s sales tax revenue comes from non-residents.

Examples of taxable items in New Jersey include cars, furniture and meals in restaurants. Taxable services include snow removal and lawn maintenance, auto repair and cable and internet services. Exempt from the sales tax are goods and services like groceries, clothing, certain professional services and real estate sales. Although New Jersey does not allow local governments to levy general sales taxes, there are a few exceptions in place to mostly help tourism thrive in a handful of shore towns and support economic development in Atlantic City.

The general sales tax is added as a percentage of the purchase price.[1] Sellers add the tax to the purchase price, collect the tax from the buyer at the time of sale and then periodically submit the revenue to the state treasury. The current rate is 6.625 percent, the fifth highest among states that levy a sales tax (California has the highest state-level rate, at 7.25 percent). But because other states permit municipalities to levy a local sales tax, New Jersey’s rate is actually lower than that of nearby metro areas. New York City’s combined sales tax rate, for example, is 8.875 percent. Philadelphia’s combined rate is 8 percent.

Because so many everyday items are taxed, just about everyone in the state pays the sales tax. But the sales tax is regressive, meaning that low-income shoppers spend a larger share of their income on the sales tax then everyone else. The bottom 20 percent of New Jersey families pay 5.5 percent of their average annual incomes to sales and excise taxes (this includes fuel taxes, which aren’t directly addressed in this report), while middle-income families pay 3.2 percent and the wealthiest 1 percent of families pay just 0.7 percent. However, keeping grocery items and clothing tax-free does help make New Jersey’s sales tax less regressive than other states’ sales taxes. In fact, the gap between the average share of income paid to sales and excise taxes by the bottom 20 percent of families and the top 1 percent in New Jersey is the 10th smallest of all states.

On the whole, the sales tax has been a reliable source of revenue for New Jersey, making up over 25 percent of New Jersey’s revenues in nearly every year since 2000 (with the exception of 2005 and 2006). But the 2016 cut to the sales tax will put a dent in collections. Lawmakers ought to reform New Jersey’s sales tax with three priorities in mind: modernizing it, making it fairer and ensuring it raises adequate revenue to spur public investments.

Broaden the Sales Tax to Include More Services

The nature of New Jersey’s economy has changed dramatically since the sales tax was first introduced in 1966. At that time, industries producing goods accounted for more than a third of the national gross domestic product (GDP). By 2016, the manufacturing sector was down to 18 percent of the economy, according to the federal Bureau of Economic Analysis. Meanwhile, the services industry grew from half of GDP to more than two-thirds during that same 50-year period.

Things like cell phones, internet, cable TV, health clubs, tanning salons and lawn maintenance are common services people pay for today that were not as widespread a few decades ago. As services become an ever-more important fixture of the state economy, policymakers ought to be taxing more of them.

The services subject to New Jersey’s sales tax were last updated in 2006. These changes a dozen years ago led to the taxation of services like computer software, floor covering installation, delivery charges, some landscaping services, storage units, health club memberships, tanning salons, massage services and tattoo parlors. At the time, the state estimated the sales tax reform would generate over $400 million in new annual revenue.[2] In its first year, it did just that, bringing in $427 million, a 5 percent increase in sales receipts.

As services become an even larger part of household spending, New Jersey’s sales tax must adjust and adapt. The taxation of services also allows state policymakers to fold them into the sales tax code with a focus on high-end services to make the tax code fairer. These include professional services like accounting and bookkeeping and those provided by architects, attorneys and engineers as well as services that are predominantly utilized by upper-income households like investment counseling, interior decorating, private club membership fees, chartered flights, horse training and dry-cleaning services. (See Appendix for an expanded list of exempt services.) In addition, policymakers need to reverse course on legislation passed last year that dropped the sales tax on limousine services.

Levying sales taxes on more services would make New Jersey’s tax systems not only fairer but would help to create a more stable tax base over the long term and may help reduce the year-to-year volatility of sales tax collections. Finally, expanding the sales tax to include more services could generate a substantial amount of revenue to help the state maintain funding of important investments like higher education, public safety, mass transit and other vital services.

Adopt a Remote Sales Tax Law

In 2012 New Jersey negotiated an agreement with Amazon to force the online retail giant to collect sales tax from Garden State consumers. It was an important step, but more action on remote sales to New Jersey shoppers is needed.

Federal law prevents states from collecting sales tax from out-of-state retailers that don’t have a physical presence in the state. Nonetheless, online and catalog shoppers that live in states that charge a sales tax are still legally obligated to pay the tax on purchases directly to the state government. Most people, of course, are not aware of this obligation and many of those who are, willfully ignore the law. This lack of compliance, while common, undermines states’ ability to collect sales tax on internet, catalog and other remote sales and puts local businesses owners who must charge sales tax on every purchase at a severe disadvantage. Without the authority to require out-of-state sellers to collect and submit sales taxes, states have lost more than $10 billion in lost annual revenue to online shopping alone.[3]

A federal solution to this problem would be ideal, but without a federal fix there is one avenue that could empower New Jersey to collect sales tax on remote sales and protect local businesses from unfair competition. An innovative disclosure law enacted in Colorado in 2016 requires remote retailers to remind customers that they likely owe sales tax on their purchases.[4] It also requires remote retailers to report some purchaser information to the state which it can use to seek payment of unpaid taxes on “big-ticket” items.[5]

Specifically, the law requires that out-of-state sellers notify their customers on the online “shopping cart” summary page that they may owe sales tax on what they bought. The seller then must mail a statement to their customers each year with a summary of the dollar amounts and nature of their purchases made the previous year and a reminder of their sales tax obligations. Finally, a document listing each customer’s total annual dollar amount of purchases must be provided by the remote seller to the state revenue department. This notification allows the state to selectively collect owed sales tax from customers who made large online purchases.

A more comprehensive and efficient solution to taxing remote purchases would be federal legislation authorizing states to require all remote sellers to charge sales tax in exchange for a simplified sales tax code. But until that happens, New Jersey should do what it can to ensure that its online shoppers are paying their fair share of sales tax, giving small in-state businesses a level playing field and providing the revenue needed to fund vital services and invest in things like education, infrastructure and health care.

Close the Online Travel Loophole and Tax Airbnb Bookings

Right now online travel companies like Expedia, Orbitz and Priceline can avoid collecting all the applicable sales tax on hotel room bookings even though New Jersey collects the tax when travel agents or travelers themselves book the same room. This loophole is not uncommon and costs states between $275 million and $400 million in combined annual revenue.[6]

Here is how the loophole works: online travel companies do collect taxes on applicable sales and lodging taxes but only on the wholesale room rate they pay hotels for the right to rent the rooms, not the higher retail room rate they actually charge renters. They argue that this practice fulfills their tax collecting obligation. However, state routinely tax the full retail price charged to customers for other types of sales found on online travel websites.

To ensure that the full retail room charge is taxed when the room is booked online, New Jersey needs to modernize its law which was written before the advent of the online booking industry. Closing this loophole could generate between $8 million and $12 million more in annual sales tax revenue based on 2010 data.[7]

Similarly, short-term rental marketplaces like Airbnb should also be collecting sales tax. In 2016, over 6,000 New Jersey homeowners rented out rooms or homes on Airbnb to over a quarter of a million people, generating $50 million in income. Last year the legislature passed a bill to include a sales tax plus an occupancy tax to these informal online bookings. Despite support from the business community and Airbnb itself, Gov. Christie vetoed the bill. It was estimated that the bill would generate more than $6 million in sales tax revenue and help to level the playing field for New Jersey’s lodging industry.

Reverse the Tax Break for Yacht and Boat Buyers

In 2016, New Jersey cut the sales tax on boats and other vessels sold in the state in half and capped the sales tax on boats at $20,000 – meaning that buyers of the most expensive boats are receiving even larger tax breaks. For example, an 80-foot yacht in the $5 million range used to be subject to a $350,000 sales tax. That same luxury boat is now subject to just $20,000 in sales tax – a 94 percent tax cut. The special and unnecessary exemption for boaters is estimated to cost the state between $8 million and $15 million in annual revenue.[8]

At a time when the state has not increased funding for TANF for over 30 years, it certainly sends the wrong message to provide such tax breaks for those who need it the least. This 2015 sales tax cut should be reversed.

Return the Sales Tax Rate to 7 Percent

Last but not least, lawmakers need to reverse the gimmicky 2016 reduction in the sales tax rate, which has put very little extra cash in the pockets of most New Jersey working families but has blown a large hole in the state’s budget.

Under the tax cut, which was part of a larger deal to secure long-overdue transportation infrastructure funding, New Jersey’s sales tax dropped from 7 percent to 6.625 percent, where it stands today. The cost of this cut is about $600 million a year and growing (by 2026, for example, it’s expected to be $735 million).[9]

That kind of revenue loss is a huge blow to the state, but because the cost is spread across so many purchases and so many families, it barely registers in the pocketbooks of everyday New Jerseyans. Even the wealthiest 1 percent of families only save an average of $14 a week, while those in the bottom 20 percent earning less than $25,000 will see savings of less than a buck a week. New Jerseyans in the middle 20 percent (household incomes between $49,000 and $79,000) get an average tax cut of $1.65 a week.[10]

Appendix: Services Exempt from New Jersey Sales Tax

Endnotes

[1] New Jersey also levies an excise tax on specific items, including gasoline, alcohol and tobacco.

[2] Center on Budget and Policy Priorities, Expanding Sales Taxation of Services: Options and Issues, July 2009. https://www.cbpp.org/sites/default/files/atoms/files/8-10-09sfp.pdf

[3] Bruce, Fox and Luna in Center on Budget and Policy Priorities, States Should Adopt a Version of Colorado’s Remote Sales Tax Law, August 2017. https://www.cbpp.org/sites/default/files/atoms/files/8-3-17sfp.pdf

[4] Center on Budget and Policy Priorities, States Should Adopt a Version of Colorado’s Remote Sales Tax Law, August 2017. https://www.cbpp.org/sites/default/files/atoms/files/8-3-17sfp.pdf

[5] Only seven states (Alabama, Kentucky, Louisiana, Oklahoma, South Dakota, Vermont and Washington) have enacted some type of sales tax notification and reporting law. However, most are inferior to Colorado’s law and none are as comprehensive as the Multistate Tax Commission’s draft model law.

[6] Center on Budget and Policy Priorities, State and Local Governments Should Close Online Hotel Tax Loophole and Collect Taxes Owed, April 2011. https://www.cbpp.org/sites/default/files/atoms/files/4-12-11sfp.pdf

[7] Ibid at 7.

[8] Legislative Fiscal Note: http://www.njleg.state.nj.us/2014/Bills/S3000/2784_E1.PDF

[9] Legislative Fiscal Note: http://www.njleg.state.nj.us/2016/Bills/A0500/12_E3.PDF

[10] Analysis using Institute on Taxation and Economic Policy microsimulation, using 2016 incomes. The analysis is targeted to tax impacts for New Jersey residents only using an estimate that non-residents pay 20 percent of New Jersey sales taxes.

Op-Ed: How to Counter the GOP Tax Plan with Bold Action

Posted on by Sheila Reynertson

This op-ed appeared in the February 14, 2018 edition of NJ Spotlight.

The new federal tax law has generated a lot of press, sparked a fair amount of outrage and led many elected officials scrambling to respond with sound policies.

Unfortunately, there seems to be widespread confusion about the winners and losers under the new law – confusion that is complicating efforts to clean up New Jersey’s tax code and raise new resources to invest in critical public services.

The facts are well-established about what this tax plan really does. It disproportionately benefits those at the very top, providing a windfall for corporations and the wealthiest households and peanuts for the working people of New Jersey. To wit: New Jersey’s families with annual incomes over $1 million will see an average annual tax cut of $30,440 under the new law, whereas the bottom 60 percent (those with incomes of $80,000 or less) can expect a whopping $520.

In response to the tax law, Senate President Steve Sweeney has called for a top-to-bottom review of New Jersey’s tax structure. This is not a bad idea on its surface, but any such examination needs to include all the relevant facts.

Here are some worth considering.

Under the Christie administration, New Jersey sharply cut taxes for the best -off families, wealthy heirs and businesses, draining billions of dollars a year from the state’s coffers at a time when public services and investments were already suffering from cuts to essential services and neglect of critical asset. It’s no surprise, then, that two-thirds of New Jersey voters say the wealthiest families and large corporations are paying “too little” in taxes.

And despite persistent political promises, prosperity has not trickled down. In fact, the lack of state dollars to fund critical priorities has led to huge backdoor tax hikes that have disproportionately harmed working and middle-class families.

Take public higher education, for example, which helps to ensure an educated workforce and a thriving business climate. State operating support has been slashed by more than 21 percent since 2008 – a big reason why, over the same time, average tuitions have risen by 17.5 percent, leading to an explosion in student loan debt.

Or take public transportation. NJ Transit is one of the state’s most enviable assets and a key to economic vitality. Yet, New Jersey has slashed operating support by 59 percent between 2005 and 2017, forcing the transit system to make up the difference through punishing fare hikes, including the largest (25 percent) in the transit agency’s history in 2010 and another 9 percent hike in 2015. The fare increases between 2009 and 2017 have been about double the rate of inflation, creating a real hardship for many commuting families and depressing overall growth. Public transit is essential for a more sustainable and efficient economy, but not if it becomes plagued by broken-down trains and a shrinking ridership.

The list goes on. Without adequate funding, public services and investments like these have suffered causing the state economy to remain stagnant. And when state finances are depleted like this, it’s the most vulnerable who pay the biggest price. Child poverty remains higher than it was before the Great Recession. Nearly half of young adults are living with their parents, the highest percentage in the country. And, the median household income remains stagnant while income inequality in the state is at its highest level ever.

Meanwhile, the state’s tax code is already upside-down. New Jersey’s bottom 20 percent of families pay an average of 10.7 percent of their annual incomes to state and local taxes, while middle-income families pay 9.1 percent and the wealthiest 1 percent of families pay just 7.1 percent.

There are sensible ways to reverse course. Chief among them:

  • Raise the income tax rate on the state’s wealthiest 5 percent of families to generate over $1 billion in new funding for property tax relief and K-12 education. This policy change – modeled after California’s 2012 tax overhaul and similar to legislation introduced last session by Senator Ray Lesniak – is supported by 3 in 4 New Jerseyans.
  • Enact legislation to close corporate tax loopholes. Following the lead of 25 other states and limiting multi-state corporations’ ability to use accounting tricks to dodge state taxes – as proposed by Senate Budget Chairman Paul Sarlo – would level the playing field for New Jersey’s small and local businesses and raise up to an additional $290 million a year.
  • Reverse the tax cut that no one asked for, and that 60 percent of New Jersey voters say hasn’t helped them or their families, by restoring the sales tax to 7 percent so the state regains about $600 million for critical investments.
  • Restore New Jersey’s estate tax on heirs of fortunes worth $1 million or more – as supported by 62 percent of New Jersey voters – and bring back over $500 million a year in lost revenue.

With enormous federal tax cuts clearly favoring the wealthiest now taking hold, it is time to act – not retreat – by enacting smart tax policy and making long-overdue investments in the building blocks of a strong state economy.

Op-Ed: Why Unauthorized Immigrants Should Be Permitted to Drive Legally

Posted on by Erika J Nava

This op-ed appeared in the February 6, 2018 edition of The Star-Ledger.

Earlier this month, Phil Murphy took the reins of the governor’s office, bringing a long list of priorities to help make New Jersey fairer and stronger for everyone, as well as a strongly stated – and frequently reaffirmed – commitment to protect the state’s half million undocumented residents from a bevy of attacks from the Trump administration.

While the federal attacks on New Jersey’s immigrants are unlikely to stop, the good news is that there are state-level policies Gov. Murphy can advance that will make the Garden State a fairer and more welcoming place for all who choose to live here. At the top of that list is expanding access to state driver’s licenses to all residents who can prove their identity, regardless of their immigration status. This common-sense policy – which is already on the books in 12 other states and D.C. – will make New Jersey’s roads safer and increase the well-being of families – without costing the cash-strapped state anything. (In fact, an expanded license program would raise new revenue for the state.)

Allowing more drivers to access a new, limited license would make New Jersey’s roads safer, in large part because there would be more people who are trained, licensed, insured and accountable for their driving record. Drivers would also be less likely to flee the scene of an accident, since they would be licensed and insured. This is exactly what happened in California after it passed a law similar to the one New Jersey is considering. In addition, towns and cities across the state would be safer as the trust between immigrant communities and law enforcement improves.

There is no other state-level policy that can have a greater impact on the daily lives of mixed-status families. These families are made up of U.S. citizens (often children) and undocumented residents (often parents). These families constantly live with the anxiety of being separated from one another. This increases when they have to make a choice to drive without a license to complete necessary daily tasks such as taking their children to school and doctors’ appointments..

Expanding access to New Jersey driver’s licenses could help the state’s an estimated 466,000 undocumented community members of driving age. Of those nearly half a million eligible new licensees, we estimate that about half – 233,000 – would obtain a license within the first three years.

But this expansion stands to help other vulnerable New Jerseyans as well, including the transgender community, U.S. veterans, homeless people, people who do not have money to renew expensive identifications required under the current system, and others. This limited driver’s license would allow people to drive legally and confirm their identity, but it could not be used to board an airplane, apply for a job or obtain benefits.

Unlike some of the pressing priorities confronting the new governor, expanding driver’s licenses would not only pay for itself, but would also generate new revenues. The state would likely collect nearly $12 million in license fees in the first three years of implementation. But even more important is the fact that New Jersey’s economy works best when everyone can work and provide for themselves and their families. Across the state, having a car with the ability to drive legally and safely is central to achieving that goal. By expanding access to driver’s licenses, Gov. Murphy and the legislature can help more New Jerseyans participate in, and contribute more to, the state’s economy.

Gov. Murphy has promised that New Jersey will now be a state that fights against the federal agenda targeting the most vulnerable by pushing for state policies that work for everyone. For this to happen, lawmakers have to treat immigrants – both documented and undocumented – as the assets they are, and push for common-sense immigration policies that would help the Garden State stand out as a fair and welcoming place for everyone. Gov. Murphy can begin by putting a policy to expand access to driver’s licenses at the top of his legislative agenda.

With the governor’s leadership, New Jersey can become the 13th state to allow all its residents to apply for driver’s licenses regardless of their immigration status and send a clear message across the country that he is serious about putting New Jersey on a more welcoming and fairer path.

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