Tax hikes prompt new report

//July 30, 2009

Totals paid by highest N.J. earners could soon pass 50 percent, foundation says.The tax hikes recently enacted by New Jersey and other states prompted a national organization to issue a midyear update of its annual state tax report for the first time.

The Tax Foundation, which has produced its ÂFacts and FiguresÂ report on state taxes since 1941, decided to update the numbers this week to reflect the latest round of increases.

New Jersey and other states could soon see the total tax rate paid by the highest earners exceed 50 percent, according to the reportÂs authors.

The 10.75 percent tax rate for income over $1 million is the third-highest in the country, trailing only Hawaii and Oregon, which are tied for first at 11 percent for their highest earners.

ÂItÂs a bit of a troubling trend,Â said Mark Robyn, a foundation staff economist. While states are losing tax revenue due to the downturn, targeting upper-income residents for tax increases can have negative side effects. For one thing, high earners tend to have more volatile income than most taxpayers, which can increase the boom-and-bust pattern of state budget revenue, Robyn said. In addition, high-income residents may choose to relocate or invest less as their taxes increase.

ÂWhatÂs the incentive to earn the next dollar?Â Robyn asked.

He said broad-based increases or complete tax reform are preferred over targeted tax hikes.

Foundation tax counsel Joseph Henchman said that if this recession proceeds like previous ones, the fiscal year that started on July 1 will be a difficult one for most states.

ÂI think we are likely to see some broader-based tax increases in 2010Â across the country, Henchman said.

Henchman said the organization has studied New JerseyÂs upper-income tax increases from recent years to forecast how so-called ÂmillionaireÂs taxesÂ will play out in other states.

ÂWe found that after its implementation, revenue did go up, but the income earned by those individuals went down,Â he said.

While New JerseyÂs income tax increases are scheduled to end in a year, the 2011 expiration of federal income tax cuts will send New JerseyÂs highest combined income tax rate above 50 percent, according to the foundation.

The state tax hikes may not be over: Pennsylvania, Arizona and North Carolina each are considering increases.

The report is available at www.taxfoundation.org/files/f&f_booklet_midyear-20090723.pdf.

E-mail Andrew Kitchenman at [email protected].