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To combat the COVID-19 economic downturn, New Jersey Governor Phil Murphy passed a millionaire’s tax. Here’s why he says that’s good for everyone.

Coronavirus infection levels are climbing all around the country again. As more and more Americans stay home to avoid infection, those rising infection rates will likely bring with them another serious economic downturn, just like they did in the spring. The drop in consumer spending will harm the bottom line of small businesses, which will then lay off employees — further depressing consumer demand.

Clearly, a new federal stimulus package is necessary to save the economy from collapsing — but with the Biden Administration not taking office until January 20, and with Senate leadership in doubt, it’s unlikely that we’ll be seeing a meaningful stimulus package from Washington DC anytime soon.

This means that state governments are on their own in the fight to protect their economies from the impacts of COVID-19. But most states have suffered a decline in revenue as consumer spending has dropped in the pandemic, and so they’re confronting budget deficiencies at exactly the moment when they most need to invest in their own economies. We know that slashing budgets during a recession actually slows economic recoveries, so how can states increase revenue?

For the answer to that question, look to New Jersey.

This year, New Jersey Governor Phil Murphy and the state legislature agreed on a deal to raise the income tax by 2% on incomes over $1 million per year to address the budget crisis brought on by the pandemic. Not only will this tax help administer coronavirus relief to the communities and small businesses that need it most, but it will also help rebalance a regressive state tax code which puts a bigger tax burden on poorer households.

In this week’s episode of Pitchfork Economics, David Goldstein and Nick Hanauer interview Governor Murphy about his decision to tax the rich.

Murphy, a millionaire former Goldman Sachs executive, wants to be very clear that he’s not fomenting class warfare.

“We don’t begrudge people’s success,” Murphy began. “Whether you’re a wealthy individual or a large corporation — we want more of each in New Jersey.”

But Murphy says he raised the tax because “I got elected to stand for a stronger, fairer New Jersey that works for not just some, but for everybody.” That meant asking the wealthiest New Jerseyans to “help us rebuild our middle class.”

From the beginning, Murphy laid out the conditions for the tax very clearly: “Anyone earning a million dollars and up, we’re asking you to pay a few pennies more, and we’ll put every dime of that into the middle class.”

The revenue raised from the tax, which affects less than 20,000 of New Jersey’s 9 million residents, will be directed to public education, healthcare, and infrastructure. And then, Murphy explained, “Depending on what your income is and how many kids you’ve got, if you’re in the middle class you’re going to literally get a check as part of the proceeds from this millionaire’s tax.”

You read that last part right: “There will be rebate checks next summer, directly into the pockets of folks who are in the middle class,” Murphy said.

It’s an idea inspired by the economic understanding that a state’s top earners aren’t the job creators — the consumer demand of a large and growing middle class is actually what creates jobs.

Taxing a small percentage of that high income bracket and directing that revenue to the middle class will help close the income inequality gap, spreading prosperity more evenly around the population.

Is Murphy concerned that some of those 20,000 millionaires might pack up and leave New Jersey, as trickle-downers often threaten? “We haven’t found one bit of evidence that suggests that’s actually true,” Murphy said. “When people say folks are going to leave, there’s no research anywhere that suggests that happens.”

In fact, a millionaire’s tax helps to create the kind of high-quality economy that attracts more millionaires: “People are coming into New Jersey at all income levels,” Murphy said, and they’re doing so because they enjoy the benefits of a strong middle class: “quality of life, great public schools, infrastructure that works.”

Murphy says wealthy people analyze that “total value proposition” and make their decisions accordingly. He believes they characterize New Jersey as “not the lowest-cost place to live, but it’s the best value for the money — the best place in America to raise a family.”

Murphy is enthusiastic about his new tax, and he believes it will work in states around the union. “If you care about the middle class, it’s an obvious policy step,” he argued. It improves outcomes for a broad swath of the economy, and “guess what? It’s good for the wealthy folks as well. It builds a better, stronger state — and that’s good for everybody.”

Wealthy people analyze "total value proposition" and make their decisions accordingly, Murphy, a former Goldman Sachs executive, said.

New Jersey budget expands Millionaire’s Tax extends CBT surcharge

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Overview

The COVID-19 pandemic has strained and depleted the finances of state and local economies around the country. New Jersey is no exception. Citing deep revenue shortfalls, largely attributable to the pandemic, Governor Phil Murphy (D) signed the Fiscal Year 2021 state budget into law September 29. The budget legislation adopts several changes to the personal and corporate income tax laws designed to help raise revenue.

Download the full publication New Jersey budget expands Millionaire’s Tax extends CBT surcharge

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The takeaway

By expanding the Millionaires Tax and extending the CBT surcharge, New Jersey estimates it will generate approximately $750 million of additional tax revenue to help address it’s fiscal needs.

As another potential revenue source a financial transactions tax was introduced in the legislature in July. See PwC’s Insight here. If enacted, the financial transactions test would have imposed a tax on persons or entities that process 10,000 or more financial transactions through electronic infrastructure located in New Jersey during the year. The tax was set to be $0.0025 per financial transaction processed in the state. For purposes of this tax, the financial transaction tax would be triggered any time there was a transaction involving the purchase or sale of a financial security. While the financial transactions tax was not included in the Governor’s FY 21 Budget, it remains to be seen whether it may be included in future legislation. Accordingly, taxpayers should continue to monitor state developments.

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Gov. Phil Murphy (D) signed the FY 2021 state budget into law, expanding the Millionaire’s Tax and extending the CBT surcharge.