Corzine’s Budget Plans: Plus Why Taxes Matter

Governor Jon Corzine is planning more than $2 billion in spending cuts and nearly $2 billion in tax increases according to a report in the Star-Ledger.

The cuts will likely include:

• - $100 million from higher education
• - $200 million through layoffs and other personnel actions involving 15,000 non-unionized state workers
• - A freeze on state aid for public schools with the exception of the Abbott School Districts where increases in state aid will be less than the $511 million previously projected

We consider spending more than the previous year on any line item to be an increase, but the reduced increase in school aid helps lower Corzine’s projected $4.5 billion budget gap. However, even if the entire $511 million increase in school aid was eliminated, the total cuts listed only come to $811 million. Therefore, we’re still missing the specifics on most of Corzine’s cuts. Our guess is municipal aid to suburban towns will be cut, the proposed contribution to the state worker’s pension fund will be greatly reduced and property tax rebates will be eliminated for some previously eligible.

Tax increases will likely include:

• - Sales tax increased from 6 percent to 7 percent
• - Sales tax will be extended to some presently untaxed services
• - A surtax" or surcharge will be levied on income tax

The article states the two changes in the sales tax will net about $1.4 billion, which would leave about $600 million to be raised from an income tax surcharge. New Jersey’s Constitution mandates revenue from the state’s income tax may only used for property tax relief, also known as school aid to municipalities. Assuming Corzine considers an income tax surcharge to be governed by the law’s limitation on use, this new revenue would likely be used for increases to Abbott School aid and property tax rebates.

The article states Corzine has abandoned a gross receipts tax on services provided by professionals like lawyers, doctors, and engineers.

Such a move would have drawn fierce opposition from the 15,000-member New Jersey State Bar Association. "If in fact that was in the budget, or that became part of the legislation, we absolutely would have gone to war," association president Stuart Hoberman said.

Gee, if taxes don’t matter why would New Jersey’s State Bar Association go to war over a tax the lawyers wouldn’t pay? Perhaps because the increased tax on their customers would reduce business.

Here’s how Rutgers University economist James Hughes sizes up the tax increase options:

James Hughes said a new gross receipts tax on businesses might cause the most pain to the economy, by fostering the impression that "business is being singled out again to solve state budget problems."

An income tax surtax, Hughes said, might be a bad move just two years after the state raised the income tax on the 35,000 taxpayers earning more than $500,000.

Hughes said the sales tax option "may turn out to be the most palatable one." Democratic sources said recent polling has borne that out.

At least one professor believes taxes matter. On the other hand there’s Professor Thurman Hart trying to prove taxes have no impact on economic growth. He takes on a Ken Adams post and as usual proves he's clueless on economic matters. From an XPat post on Blue Jersey:

Of course, you have to deal with Nevada's outlier. Something is obviously going on there that isn't happening anywhere else. If you separate Nevada from the rest, the average drops to 4.5 - barely two-tenths of a point above average.

Thurman deals with Nevada's 9.3 percent growth rate by excluding it from his analysis. Why? Maybe becasue Nevada has no corporate income tax, has the 5th best business tax climate according to the Tax Foundation and is right next-door to high tax California. Thurman must have missed the news:

Fast-growing Nevada and Arizona had the highest rates of net migration from other states between 1995 and 2000 and many of their new residents came from California, according to two Census 2000 reports.

Or this recent explanation for the California exodus:

What's gone wrong? A big part of the story is a tax and regulatory culture that treats the most productive businesses and workers as if they were ATM machines. The cost to businesses of complying with California's rules, regulations and paperwork is more than twice as high as in other Western states.

But the worst growth killer may well be California's tax system. The business tax rate of 8.8% is the highest in the West, and its steeply "progressive" personal income tax has an effective top marginal rate of 10.3%, or second highest in the nation. CalTax, the state's taxpayer advocacy group, reports that the richest 10% of earners pay almost 75% of the entire income-tax revenue in the state, and most of these are small business owners, i.e., the people who create jobs.

All of this has contributed to the trend of wealthy taxpayers disappearing from the state.

We’re sure Ken Adams will have something to say on the topic also, so be sure to check out his blog SmadaNeK.