New Jersey faced a government shutdown late last week when its governor, Democrat Phil Murphy, squabbled with leaders of his own party in the Legislature over whose taxes to raise — those of businesses or those of wealthy individuals. In the end, officials compromised and raised taxes on both. The tax burden will increase by about $440 million in a state where residents and businesses already pay some of the nation’s steepest levies. Even before the new, more expensive budget passed, businesses said that they were reluctant to expand in New Jersey, and surveys show that New Jersey’s residents leave the state in greater numbers than citizens of most other places. Among those exiting in droves are the state’s young people, and it’s difficult to see how placing more burdens on the state’s economy will help stem that outflow.
Facing his first budget, Murphy wanted to boost taxes on individuals earning more than $1 million, claiming that they needed to pay their “fair share” — even though New Jersey’s top tax rate of 8.97 percent was already one of the nation’s highest. Legislative leaders, however, worried that raising personal income taxes in the wake of President Trump’s federal tax reforms — which limited the deduction of state and local taxes — might prompt a further exodus of rich people out of the state, which has seen some prominent residents decamp in recent years. Lawmakers argued that New Jersey should boost taxes on corporations, which had received a tax cut under the recently passed federal tax reform. The compromise between Murphy and Democratic legislative leaders involved raising the top individual tax rate to 10.75 percent on those earning $5 million a year or more, while also boosting the corporate tax rate to 11.5 percent from 9 percent for companies with earnings exceeding $1 million — the second-highest top corporate rate in the country.
That can’t do much for business confidence in a state that many firms, including homegrown ones, increasingly avoid. In a recent poll, only 14 percent of New Jersey’s own businesses said they would consider expanding in the state, while more than double that number, 29 percent, said they were looking to grow elsewhere. Out-of-state firms aren’t interested in coming to Jersey, either, except when the state offers big incentives. New Jersey ranked 47th among states for businesses looking to expand, according to a May survey by Chief Executive magazine.
Murphy and state leaders argue that taxes alone don’t matter; more important is the overall business environment, they contend. That may be true, but they aren’t doing the state any favors in that regard, either. In late June, the state passed one of the nation’s toughest “equal pay” laws, which will force employers to justify pay differences among employees, increase fines on businesses, and make it easier for employees to bring lawsuits for wage discrimination against firms operating in the Garden State. Murphy has also signed a law making New Jersey one of only a dozen states forcing firms to offer paid sick leave. Now he wants to hike the minimum wage to $15 an hour.
While Murphy has been busy raising taxes and expanding mandates, he’s found little time for fiscal reforms. He’s ignored proposals by a bipartisan commission to reduce government-employee pension and health costs, though the state already has one of the worst-funded government-pension systems in the U.S., and the burden of employee benefits alone could consume as much as a quarter of the state budget by the end of Murphy’s first term. He shows little interest in addressing the many mandates that Jersey businesses face, including some of the nation’s steepest environmental-permit fees.
Murphy’s philosophy is to increase taxes and spending to encourage “investment.” He’s gotten a break because of the superheated “Trump economy,” which is registering strong gains that have boosted state tax collections. Still, Murphy wanted more; thus, the tax increases. Among his priorities was increasing spending on schools by nearly $350 million (counting $58 million in preschool funding) in a state that already spends more per pupil on public schools than most others. True, New Jersey’s K-12 schools are better than most, but the state’s long-term outlook is troubled. A recent study by the New Jersey Business and Industry Association, for instance, found that the state had the highest net outmigration of so-called millennials and post-millennial youth. Well-educated New Jersey young people leave the state — and they don’t come back.
No doubt, in Gov. Murphy’s way of seeing things, fixing that problem will require even more investment — and higher taxes along with it.
Steven Malanga is the George M. Yeager Fellow at the Manhattan Institute and senior editor of City Journal, from which this was adapted.