Study shows 'negligible' rise in millionaires leaving N.J. after 2004 income-tax hike; a 2009 tax increase prompted the rich to seek out more tax loopholes Watch video
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A view of the exterior of the Statehouse in Trenton in this 2005 file photo.TRENTON — Republicans say it would drive millionaires out of the state. Democrats say it’s a painless way to raise $600 million.
But the "millionaire tax" being debated in Trenton would do neither, if history is any indication.
A soon-to-be published study out of Princeton and Stanford universities analyzes a similar income-tax increase in 2004, finding only a "negligible" rise in the number of millionaires who left New Jersey afterward. And according to the state Treasury, a 2009 tax hike prompted the rich to seek out more tax loopholes — upending the Legislature’s revenue estimates.
"It’s more of a political question right now than it is a fiscal question," said John Graham, a Democratic fundraiser and one of the state’s estimated 15,000 millionaires. Politicians should be fixing underlying issues such as the state’s pension and benefits system, he said, not papering over budget holes with taxes on the rich.
And yet, Graham said, he’d rather pay the extra money than leave the state.
"I know several who’ve left, though," he said. "They’re down in Florida."
Gov. Chris Christie vetoed the tax last year and has vowed to do so again. Undeterred, Democrats are insisting that he take another look because the extra revenue would go toward property-tax relief and school funding — two areas they say desperately need more money. The state now relies on the top 1 percent of its earners for 40 percent of its income-tax revenue.
The migration study looks at New Jersey’s tax records from 2000 to 2007 for all residents earning more than $500,000. There was a slight uptick in the number of them who left after Democratic Gov. James E. McGreevey raised their taxes in 2004, but the authors say they migrated because the housing market was booming and home sales were a very lucrative business.
"Migration is just not that much of a story in terms of the number of millionaires in the state," said Cristobal Young, a Stanford University sociologist who co-wrote the report with Princeton sociology graduate student Charles Varner. Now, after the recession, "nationwide migration is at the lowest level we’ve seen in 50 or 60 years. It’s really hit the brakes."
Young and Varner calculated that the state missed out on a total of $16.4 million from 2004 to 2007 because of migrating millionaires, but gained about $1 billion every year in extra money from those who remained. Meanwhile, the total number of New Jerseyans with income above $500,000 actually rose, from 33,000 in 2002 to 47,000 in 2006.
NO PLACE LIKE HOME
Like everyone else, the authors say, the rich want to stay close to their friends, families, neighborhoods and professional contacts. Plus, there are steep moving costs to consider — even steeper for business owners looking to leave — and some millionaires may be willing to give up more money if they think the government will put it to good use.
"My view would be that none of the choices are pleasant, but I do believe the wealthy should pay their fair share," said Orin Kramer, a millionaire who previously chaired the state pension system and a major Democratic supporter.
Even if every millionaire stayed, the Christie administration doubts the state would really reap $600 million — an amount officials say wouldn’t solve the state’s fiscal problems anyway. In 2009, when Democratic Gov. Jon Corzine raised the top tax rate to 10.75 percent for a year, the Legislature predicted added revenue of $1 billion, but Treasury spokesman Andy Pratt said the state only collected an extra $560.2 million.
"The minute you start basing your revenue on (a millionaire tax) your budget goes up and down like a yo-yo," he said. "Once you start taxing people, they start finding ways to get more exemptions. Almost everyone who makes more than $1 million a year has professional tax help. There’s nothing illegal about it."
The state would overshadow all of its closest neighbors if it raises the tax rate to 10.75 percent for anyone making more than $1 million, as Democrats are proposing.
Without having to uproot their families or leave their jobs, the rich could move to New York, where Gov. Andrew Cuomo, a Democrat, this year cut the top tax rate from 8.97 percent — the same as in New Jersey — to 6.85 percent. They could decamp to Pennsylvania, which has no special tax bracket for millionaires, just a flat rate of 3.07 percent. They could also move to Connecticut, which takes 6.5 percent of its millionaires’ incomes.
"I would love to tell people to come to my home state, but you know what? The best deal is in Pennsylvania, the best deal is in New York," said Philip Kirschner, president of the New Jersey Business and Industry Association. "My duty is to my client."
James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said the millionaire tax was bad policy. He was also skeptical of Young and Varner’s study. The economy ebbs and flows, he said, and the four-year period after the 2004 tax increase provided only a snapshot, not a comprehensive look.
He said even people with financial means don’t just get up and move overnight. Selling a home can take time, or maybe they have kids in school and want to wait until they graduate, Hughes said.
State treasurer Andrew Sidamon-Eristoff is another critic of the Democratic plan.
"(It’s) a self-destructive tax increase that will obliterate our competitive position, drive jobs and investment out of the state and consign us to a cycle of deterioration and retrenchment from which we will never be able to get ourselves out," he testified before the Senate budget committee, which has been holding hearings on Christie’s $29.4 billion budget proposal.
The state’s over-reliance on top earners has created a boom-and-bust revenue cycle that is too unpredictable, Sidamon-Eristoff said.
For example, when the economy was rolling in 2008, the state saw its income tax revenue swell to $12.6 billion. The next year, the economy spiraled downward, driving down income tax revenue to $10.47 billion, a 16 percent dip.
The number of millionaires who filed tax returns during that same period dropped from 16,000 to 12,176, a nearly 25 percent decrease mostly due to the slashing of bonuses and other perks.
Still, Democrats said the report by Young and Varner should serve as a wake-up call.
"Republicans who favor tax breaks for the wealthy can shout into the wind all they want about millionaires fleeing our state, but the facts don’t support it," said Lou Greenwald (D-Camden), chair of the Assembly Budget Committee.
A Rutgers-Eagleton poll released last month found 72 percent of state residents surveyed supported the millionaire tax. A majority also supported Christie’s efforts to overhaul the state’s pension and benefits system for public workers, though they hoped the governor compromised with the Legislature on that issue.
By Salvador Rizzo and Jarrett Renshaw/The Star-Ledger