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BK Blog Post
Posted by Jared Bernstein.
From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team.
This has been a terrible few weeks for tax policy.
Donald Trump declares himself “smart” for tax avoidance; leaked returns show him to have claimed almost a billion in losses, much of which stems from ways in which the code privileges those selling real estate, which he presumably has used to write off taxes owed for years, and his proxies—Giuliani and Christie—declare him to be a genius, as opposed to a rich guy in a favored sector with a bevy of tax lawyers.
Ok, that’s all campaign mishegoss, but while all this rhetorical nonsense is transpiring, one of those proxies just noted—Gov. Chris Christie—is currently trying to enact some really bad tax policy, and he’s getting help from lawmakers in both parties, proving that you don’t have to be a Republican to screw this up.
Back in July, I wrote that New Jersey lawmakers seemed poised to do something misguided. Their gas tax, which is among the lowest in the nation and hasn’t been increased since 1990, is insufficient to fund their transportation infrastructure, so Democratic leaders in the legislature put an increase of 23 cents per gallon on the table.
What happened next was the unfortunate part. Both chambers and the governor started lining up tax cuts that would have to accompany the increase. A proposed horse trade in the state Senate would have increased the gas tax by scrapping the estate tax and some taxes on charitable deductions and retirement income, while the Assembly, with the support of Gov. Christie, would have slashed the state sales tax instead.
Eventually and predictably, the cuts outnumbered the increase. The Senate bill, in total, was expected to cost more than $800 million annually after the first year of implementation, the Assembly bill more than twice that amount.
As I asked back in July, where is it written that an overall revenue loss is the optimal outcome? There’s no question that NJ cannot meet its infrastructure needs on a tax that hasn’t been adjusted in decades. But in what world does that imply the need to deprive the state of funds needed for its safety net, education system, and other priorities?
Yes, the gas tax is regressive: low-income people spend a higher share of their income on gas. In this regard, the part of the new, merged deal that would increase the state’s Earned Income Tax Credit from 30 to 35 percent of the federal EITC is warranted. But that cost only amounts to 6 percent of the new gas tax revenue.
The cuts in the new deal include the complete elimination of New Jersey’s estate tax, the expansion of a tax exemption for retirement income for higher-income families, and a reduction of the state sales tax from 7 percent to 6.625 percent by 2018. By the time these and the other measures are fully phased in, they’ll cost the Garden State coffers about $1.4 billion per year, less than the $1.2 billion per year the gas tax is expected to raise (though it would allow enough borrowing to fund $2 billion annually in projects).
The cuts are structured such that there’s some goody in here for everyone. A lower sales tax sounds great to low- and middle-income households. If you’re extremely wealthy, the prospect of passing on millions of dollars to your heirs tax-free surely seems appealing as well. But if the citizens of New Jersey want their kids to have access to functioning roads, bridges, and highways, a world-class education system, adequate health care, and a safety net to catch them when they fall on hard times, they’re going to need to take a stand against shortsighted tax deals that put those things out of reach.
The legislature will vote on the deal tomorrow in a special session. As Vice President of New Jersey Policy Perspectives Jon Whiten points out, it would “disproportionately benefit well-off New Jerseyans while decimating the state’s ability to pay for essential services, promised obligations and other critical investments.”
Policymakers should reject this bill, instead demanding a clean gas tax update (given the fact that inflation has been eroding the value of the gas tax for two-and-a-half decades, raising it would be more of a restoration than something new). We can and must address New Jersey’s infrastructure issues without starving the rest of government of resources. The fact that Christie and legislators from both major political parties have thus far refused to do that speaks volumes to the tired nature of our cramped tax debate, in which what’s playing out in New Jersey is but one salient example of a much larger problem.