BOHANON & CUROTT: Indiana could benefit from New Jersey’s new tax on wealthy

Economic Analysis: Cecil Bohanon & Nick CurottState governments across the nation are in fiscal crisis. Revenue is down and massive budget deficits are looming. Some states—notably California, Massachusetts, New Jersey and New York—are considering tax hikes on their highest-income earners: a so-called “millionaires’ tax.” New Jersey’s proposal is furthest along, and its specifics remind us of John Stuart Mill’s 1848 characterization of tax progression as a “mild form of robbery.”

The Garden State’s income tax has eight income brackets. The top bracket—$5 million or more in income—is subject to a marginal tax rate of 10.75%. Note that, as is the nature of a progressive income tax, this rate applies only to the income above $5 million. For the bracket below this top tier, assessed on income between $500,000 and $5 million, the marginal tax rate is 8.97%. The soon-to-be-enacted tax proposal will impose the 10.75% rate on all income above $1 million. This implies that Jerseyites whose income tops $5 million will pay an additional $71,200 a year, and those who earn more than $1 million a year will also pay more.

The “millionaires’ tax” is expected to raise about $390 million. The funds will be used to give a $500 tax rebate to New Jersey households with children and incomes under $75,000 if single-parent, and under $150,000 if two-parent. It is to be distributed next summer before the state gubernatorial election.

An estimated 800,000 New Jersey households are eligible for the rebate; an estimated 16,000 New Jersey households and 19,000 non-New Jersey households earn $1 million or more in the state. Of course, the political logic is clear: For every vote-eligible household paying the new tax, 50 vote-eligible households are getting remuneration. While we’re sure some see this as a great victory for social justice—we see this as an unprincipled “mild form of robbery.”

Indiana, in contrast, imposes a flat 3.23% tax rate on all income. And we propose the following temporary Indiana tax reform. Let’s offer any household that moves to Indiana in 2020 or 2021 and earns $1 million or more, a zero tax rate on their income above $1 million for two years.

A $10-million-a-year New Jersey household will save $1 million a year in the first two years and over $700,000 on a permanent basis. The change will also add $32,300 per year to the Indiana treasury for 2020 and 2021 and $323,000 thereafter. What have we got to lose?•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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