New Jersey is America’s taxing and spending leader: the Tax Foundation estimates that New Jersey residents spend 11.8 percent of their incomes on state and local taxes, more than any other state and 2.1 percentage points above the national average. Part of that is because New Jersey residents pay a lot of taxes to other states (mostly, income taxes paid to New York) but the state still ranks 5th in state and local taxes collected per resident, 36% above the national average. So, there’s a lot of room to cut before you truly get “to the bone.”
I have a piece at RealClearMarkets today that gives high marks to New Jersey Governor Chris Christie’s recent budget proposal. New Jersey has one of the country’s largest budget gaps: $10.7 billion, or about one-third the total amount of spending in last year’s budget. Governor Christie has proposed to deal with this gap not by raising taxes but by taming, once and for all, New Jersey’s runaway spending.
The best thing about Christie’s approach is its comprehensiveness. He’s not just saying “cut spending” — though of course, he is saying that, in all areas of the state’s budget. He also recognizes that state and local spending are interrelated issues, so he’s proposed a property tax cap to make sure that state spending cuts don’t just drive up local property taxes. And he’s proposing institutional reforms that will enable localities to cope with aid cuts by reducing spending.
Property taxes are always a political issue in New Jersey, but 20 years of tax reform has mostly succeeded in driving up the income tax while maintaining the country’s highest property taxes. This is because the “reforms” have focused on stuffing localities with money from statewide tax revenues, in the hopes that local officials might cut property taxes. Yeah, right. (New York has tried similar property tax reforms with a similar lack of success.)
To break this cycle, Christie has wisely chosen to copy a reform that Massachusetts enacted 30 years ago: a flexible property tax cap, which limits local tax growth unless voters approve an override referendum. This reform radically changed spending in Massachusetts, which has gone from the 2nd-most taxed state in 1980 to 23rd-most taxed today. And, unlike in California, the flexible nature of Massachusetts’ cap means it has not led to perverse changes elsewhere in the tax code.
I’d also recommend a look at Christie’s budget address. It’s weird to say this about a budget address, but I found the speech sort of inspiring. It made me almost believe that New Jersey might not actually be an ultra-high-tax state forever. I particularly liked the part where he made fun of other states:
Even as we gather, the newspapers have reported that many of our fellow states are resorting to the techniques and tricks that have gotten New Jersey into so much trouble in the past.
In Illinois, they are raising income taxes and increasing borrowing to solve this problem. Sound familiar? Like New Jersey, they will see taxpayers leave, and revenues fall. We have been there already and feel the sting of that failed policy today.
In Maryland, they are borrowing to cover current obligations. And in doing so, they are piling one problem on top of another, reducing the creditworthiness of their state, and creating a crisis that will be larger in the future. Hey, we’ve done that already, too. Today we live with the choking debt service that this failed policy has wrought.
Here’s hoping Christie can convince the legislature not to repeat those mistakes.