With Gray Davis long gone from the California governor’s seat, there has been some tough competition this year for the title of “America’s Worst Governor.” Governors Jennifer Granholm (Mich.), Frank Murkowski (Alaska), and Mark Warner (Va.) must be considered possibles for the dubious honor due to their successful attempts to raise taxes even as economic growth and state revenues have rebounded sharply nationwide. Rather than make modest spending cuts that would carry their states through to next year, when the revenue picture would be brighter, each passed significant tobacco tax hikes (with Warner also increasing the sales tax).
That said, the aforementioned governors have a lot of running to do if they’re going to catch this races’ front-runner, Gov. Jim McGreevey of New Jersey. None has a fiscal rap sheet as ugly as McGreevey, the man who can justifiably lay claim to having passed the most economically harmful state tax hikes this year.
While he has had an inauspicious term so far and is not very popular, even within his own party, McGreevey capped off his third year by raising taxes on cell phones, cigarettes (the state’s tax was already highest in nation), cosmetic surgery, and tires. But worst of all from an economic standpoint, McGreevey pushed a tax increase on the earnings of those who make more than $500,000 in a given year.
States have been less willing to raise their income taxes in recent years, in part due to extensive research by Dr. Richard Vedder and others showing how oppressive levies on earnings drive people and jobs out of state to a greater extent than other forms of taxation.
Yet McGreevey’s rush to raise income taxes, boost spending by 13 percent in one year (the largest increase in state history), and test his state’s constitutional balanced-budget requirement, set him apart from the other tax-and-spenders. In fact, his effort to raise the state’s income tax this year is uniquely misguided — no other state has enacted an increase in its income-tax rate so far in 2004.
Indeed, New Jersey presents a cautionary tale on the dangers of giving politicians access to new revenue streams — especially an income tax.
The Garden State began charging its income tax in 1976 at the seeming innocuous rate of 2 percent on the first $20,000 of family income and
2.5 percent on everything above $20,000. Today New Jersey has six tax brackets, with a top rate of 6.37 percent on income above $75,000 (twice that amount if married filing jointly).
McGreevey’s plan boosts the state income-tax rate on incomes of $500,000 or more to 8.97 percent — a 41 percent increase — and is projected to raise $800 million from 28,000 upper-income taxpayers. This soak-the-rich mentality would give New Jersey the sixth-highest income-tax rate (by a couple fractions of a percent) in the nation, and only worsen the state’s lousy business climate (ranked 40th nationwide).
Not only are income taxes economically harmful, but by tying future budgets to the fate of high-earning taxpayers, New Jersey officials will be setting up everyone else for higher taxes down the road. Contrary to left-wing mythology, it is not only the wealthy who earn $500,000 annually; rather, it is farmers, small businesses, and homeowners that register an income spike before going back down to more mundane levels.
Unfortunately, revenues from high earners tend to jump when the economy is growing and fall precipitously when a recession hits. This will lead to higher taxes across the board, as politicians spend freely in good times and raise taxes when times are tough and revenues slump.
The $2 billion total tax hit from McGreevey’s tax package is bound to anger New Jersey taxpayers in the short term, but the abject lack of fiscal discipline and the governor’s brazen attempt to sidestep his state’s constitution and take on $1.9 billion in debt may haunt the state for years to come. Republicans have filed a lawsuit to challenge the borrowing as a violation of the balanced-budget provision in the New Jersey constitution, which would seem to preclude the state from using debt proceeds to make up for a shortfall without voter approval.
Nonetheless, some creative judicial interpretation may be the only thing standing between big-spending politicians and their ability to foist unlimited debt upon current and future New Jersey taxpayers.
New Jersey is at an economic turning point. The state benefited from the
post-9/11 exodus from New York City as billions of dollars and thousands of jobs flowed into New Jersey. But if Jim McGreevey continues current taxing and spending policies while creating a legal loophole to allow for massive budget deficits, he may very well transform the Garden State into the equivalent of an economic swampland.
– Paul Gessing is director of government affairs for the National Taxpayers Union. Write to him at 108 N. Alfred St., Alexandria, Va. 22314, or visit www.ntu.org.