Tax Reform

This is probably the most complex of all the complex changes I propose:

1. Sales Tax is abolished and it is replaced by income tax. Accordingly, if the state collected 8 billion in sales tax, we must collect an extra 8 billion in income tax.

2. Property tax is abolished for primary residences of N.J. Taxpayers, true farmland, and for businesses. It is substituted quantitatively by income  and dividend tax. NOTE: Property tax is still paid by: Residential rental properties, vacant commercial property, vacation and second homes, and primary residences of non-N.J. Taxpayers.

3. New Jersey minimum wage must at least double to push all wages up.

4. Some corporate taxes are abolished.

5. Taxes on some types of  dividend are abolished and othes increase significantly.

To present a clearer picture, I introduce here the Summaries of Appropriations for New Jersey FY 2011.

http://www.state.nj.us/treasury/omb/publications/11budget/pdf/summaries.pdf

And the Property Tax Spreadsheet for 2009 (latest available at the time this was written):

http://www.state.nj.us/dca/lgs/taxes/taxmenu.shtml

From this spreadsheet, we should extract three important figures:

Total county tax levy (included in property tax):      4.5 billion

Schools:                                                                12.8 billion

Municipalities:                                                         6.8 billion

Total property taxes:                                             24.1 billion

Note: According to Recommendations Pie in the Summary of Appropriations, page B-2, the state almost doubled the school budget with 12.2 billion (FY2011) to 25.0 billion.

From Resources Pie, we know that income tax collected was 10 billion. New Jersey would need a subtotal of:

Schools                                                                12.8 billion

Old sales tax                                                          8.0  billion

Original Income tax                                              10.0  billion

Subtotal                                                               30.8  billion

Up to this moment, I left out municipalities and counties. To be on the safe side, I will add 9.2 billion for municipalities and residual county departments, rounding off the needs to 40.0 billion.

With the system we have now, we pay:

Property taxes                                                       24.1 billion

Sales tax                                                                 8.0 billion

Income tax                                                            10.0 billion

Total                                                                     42.1 billion

42.1 – 40.0 = 2.1 billion
Savings:                                                                 2.1 billion

I am estimating that the savings by eliminating county government, consolidating all police departments, and all boards of education would amount to 2.1 billion. I believe this is a conservative estimate.

2.1 billion/42.1 billion x 100 = 5% tax cut.

I have not included anything here about the 600 authorities and commissions but that cost to taxpayers is either hidden in the property tax or as tolls and user fees. I am still working on those things.

The method I would like to apply in resolving these issues is to address the big items first and later mop-up the smaller items in the budget.

Here’s a look at the total property tax revenue that was collected by New Jersey school boards, town councils and county governments from 2006-2010.
2010: $25.01 billion, up 4 percent
2009: $24.05 billion, up 3.6 percent
2008: $23.2 billion, up 4.9 percent
2007: $22.1 billion, up 5.8 percent
2006: $20.9 billion, up 6.9 percent
Source: New Jersey Department of Community Affairs

Proposed changes in the tax code:

1. Two rates for earned income: 10% and 20% (Note that these are approximations since I do not have a projection of the fiscal situation New Jersey will be in 2014). However I believe those rates are prudent and I will strive to keep them at that or lower.

There will be no deductions except for children. There will be a tax credit for renters only but credit can not be higher than earned income.

2. Dividends:

They will be separated in several categories:
a) From S corporations and self-employed who have an employer identification number and who operate in NJ: zero%
b) From mutual and other retirement funds: Unchanged.
c) From stock:
1. For C corporations operating in N.J.: zero%
2. For corporations without operations in New Jersey: New tax rate is 50%.*

* There will be an individual income threshold below which non-NJ corporations dividend will be taxed as regular income ( a lower %)

* Corporate presence in New Jersey should be judged of significance by the New Jersey Division of Taxation to to be included in the list of “In State Corporations” and to qualify for the lower tax rate.

d) From U.S., state, and municipal bonds: Unchanged

Corporations Tax ID numbers will be required in the returns and stock dividends will be differentiated in the three groups above.

Corporate Tax:

The state government is in the process of implementing some changes to the tax code for corporations. Accordingly, it would not be prudent to make an estimate now of what the tax rate will become. However I am confident that it will be lower that what we will find in the code in 2014.

It is my belief that we must lower the corporate tax rate to attract new corporations to New Jersey. That is the price that we must pay to re-develop industry in our state.

Update 9/6/11: Corporate tax will be 1% except in areas designed as industrial centers where the corporate tax will be 0%.

 

Winners and Losers with Tax/Economic Reforms I Propose

 

Winners:

a) Anybody who works for less than $15/hr with benefits or $18/hr without benefits. Their gains are dampened somewhat by the fact that state income tax will be higher. On the other hand, they will have no sales tax and if they are homeowners they will have no property tax. If  they are renters, a payroll credit softens the impact of the higher income tax.

b) Anybody who works for a pay rate or salary above those described in (a) because the minimum wage increase will place an upward pressure on all wages. Inflation of consumer goods is checked by neighboring states as consumers would flock to PA and NY if NJ merchants increased their prices significantly.

c) Homeowners who are New Jersey taxpayers. They will only face the general income tax which is proportional to income. Seniors in particular are among the principal beneficiaries. In cases where a NJ resident works outside New Jersey and does not pay NJ income tax, a prorated portion of the property tax remains in effect.

d) All corporations, regardless of type and size, and professional employers who have employees in the State of New Jersey will not only enjoy zero tax on their earnings but they will pay no property taxes in their sites. Some rural areas of the state may be excluded from this policy as a conservation barrier. Same applies to limited partnerships and limited liability companies (which could be C or S corporations as well.)

e) Farmers and landowners. Absence  of property tax will ease the burden of holding on to large tracks of land.

f) Merchants of all types. Lack of a sales tax and higher wages should increase demand, drawing consumers even from outside New Jersey if New Jersey merchants maintain level prices.

g) Investors, regardless of income, who invest in New Jersey or in corporations which operate in New Jersey would see zero tax rate on their dividend and capital gains. Dividend and capital gains from New Jersey receive “Most Favored Nation” treatment.

About Even

h) People who rent. Generally speaking, the reforms are inclined to stimulate home-ownership. Income tax increase is almost balanced out by automatic payroll deduction (which is paid by rental property taxes) and elimination of sales tax.

i) Owners of residential rental property. Until we design a better method, property taxes will continue to be in effect.

Losers:

j) Investors whose dividend and capital gains are earned in operations not present in New Jersey. By far the biggest losers here although retirement accounts are exempt and there is a threshold (to be determined) below which such dividend is treated as regular income.

k) Land/homeowners who are not New Jersey residents and taxpayers. Their property tax rates are very likely to increase.

l) Career politicians. There will be many less public positions available for them once they get out of political office.

Note that there may be exist niches not included in the compilation above. For instance, some workers of current local boards of education could be displaced as result of consolidation although the number could be much smaller than expected. Another example is commercial rental property: If it is occupied, there will be no property taxes on it but if it is vacant, property taxes will apply.

5 responses to “Tax Reform

  1. Please calculate and present some effective tax rates for various family situations under your tax plan vs. current. For example) Homeowner and: Married no kids earning $65K, 100K, 150K, 250K, 500K. Married two kids earning same amounts. Single earning same amounts plus $40K. Renter and: all the same.

    Feel free to make some assumptions about sales tax and average property taxes, but DCA has some of that already.

    Ignore Corporations for now.

    This will show where the burden of your tax plan will fall and possibly (if the numbers are in your favor) give it some real merit.

  2. Terribly sorry: What you ask is impossible at this point because of the number of variables involved:

    We do not know:
    a) What the legislature will approve and how much resistance there will be at different proposals.
    b) What the public will approve in referendum (some changes involve amendments to the NJ Constitution).
    c) What the economic situation will be at in 2014, 2015.
    d) I have no means to calculate at this moment amount of revenue from non-NJ dividend, capital gains, etc., nor how much of that will be in retirement accounts. (exempt from higher tax) or will be of filers with incomes under threshold (also exempt however threshold is not determined yet as Legislature will have input on it)
    e) Can not estimate amount of NJ-generated dividend and capital gains which will receive “most-favored nation” treatment in tax code.
    f) Can not, realistically, leave corporations out for data; it would be misleading.
    g) Unable to calculate level of savings from: 1. Elimination of county governments (part of budget remains to operate schools, DPW’s, etc); 2. Savings from consolidation of boards of education, police departments (latter probably small)
    h) Unable to anticipate the outstanding public obligations in 2014. (Example: Public pensions vis-a-vis Stock Market)

    What you can be certain of is that I will push for government reduction (of one or more layers), that property taxes will be abolished for the majority of NJ taxpayers, that income tax will increase for all NJ taxpayers, and because renters do not benefit from the abolition of property tax but will be exposed to a higher income tax they will have a payroll adjustment to at least partially compensate.

  3. I understand, of course you can’t be certain of anything in the future, but all policy / tax reform proposals need fiscal estimates. What I’m curious to know is: what effect will raising income taxes while lowering and or abolishing property taxes and sales tax have on the typical New Jersey resident taxpayer. Will they end up paying more or less in the end. That is all. It’s interesting proposal; I’m just not sure if the end result is a reduced tax burden. I was hoping you might have some numbers to support that it is.

    It might be possible to use prior data from NJ’s Statistics of Income, DCA’s Average Property Tax data, and Sales Tax collections from out of Budget documents. Of course, even this approach is not perfect (i.e. no sales tax = more neighboring state visitors = economic stimulus = business income), but it might be a good start.

  4. My belief is that some will pay more and some will pay less. Now, the difference will not be determined so much by their wealth (or lack of it), but particularly among the rich it will be determined by how they invest.

    Investment in corporations that have an operation in New Jersey will certainly be more advantageous – from a tax viewpoint – than investment in Asia though the latter may bring a better return.

    I do hope you understand that, since as gov I would not be able to use tariffs, I will attempt to use tax policy to steer investment.

    I estimate that after all the cutting in government is done (if it is all approved) there may be approximately $5 billion less in government need for revenue – from almost $60 billion now to about $55 billion (note that that figure includes property taxes)

  5. One notable advantage of my reforms can not be priced in $ although it will be very beneficial for New Jersey taxpayers: Since there will only be income tax, politicians will not be able to play shell games any longer. Any future tax increases will have to be frontal and explained. Only the Legislature will be able to approve such increases.

    That will be even more determinant when the number of independent authorities is reduced as I propose. As you all may know, some authorities serve as bonding vehicles to circumvent the constitutional mandate of balanced state budgets. Bonding to cover operating expenditures is fiscally suicidal and is only justifiable very short-term to bridge quarterly fluctuations in revenue.

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