Cutting income taxes: Experts disagree on effectiveness

TRENTON – While it’s not clear how effective a 10 percent income tax cut will be in terms of economic growth, some experts acknowledged this week it could help on an individual basis.

As with most income tax cuts, the more money a person makes, the better the benefit.  And that is precisely how Democrats attacked Gov. Chris Christie’s proposal: as a giveaway to the wealthy.

In a state where poll after poll shows residents’ main worry is the nation’s highest property taxes, it’s not clear how satisfying an income tax cut will be.

Yet the highlight of Christie’s State of the State address Tuesday was his announcement that he would push for an across-the-board 10 percent income tax cut over three years.

But in the aftermath, Senate President Steve Sweeney certainly suggested Christie didn’t have his priorities straight, saying the proposal was a distraction.

“The governor is focusing on the wrong tax,” he said in a statement following the speech. “In his quest to build his national profile, he would throw the middle class, the working poor and seniors a few extra dollars in the hopes that they would not notice it going right back out the door in higher property taxes.”

But with Christie’s pledge that the 10 percent cut will be across the board, he is trying to avoid the accusation that he is pitting one group against another. Wealthy people pay more taxes and their tax rate will remain higher than those less well-off.

The state’s current tax rates range between 1.4 percent for those making less than $20,000 to 8.97 percent, for those making at least $500,000. Somebody earning the median inclome of $50,000 would have a tax rate of 5.525 percent.

However, Democrats countered that finding by pointing to Treasury Department data, which shows that the “effect (income tax) rate” for people earning between $50,000 and $74,999 is actually 1.7 percent.

Murray Sabrin, a finance professor at Ramapo College, who has run in various political races, said….”Any step in reducing taxes is a good step.”

He cautioned, though, “It must be accompanied by spending cuts so it doesn’t blow a hole in the budget.”

Ultimately, Sabrin believes the proposal is another example of just “nibbling around the edges,” switching the chairs on a ship deck. The proposal doesn’t get to the root cause of the state’s sky-high property taxes, which is school funding, according to Sabrin.

He said the state must change the way it funds education, and he calls for dismantling the “top-down” model of education funding, and decentralizing it.

Specifically, Sabrin called for creating several “mini-schools” run by teachers rather than large schools with layers of bureaucracy, excessive spending and overpopulated classes.

Christie, however, said at his town hall meeting at a Voorhees mall on Wednesday that he would increase school aid in addition to having the income tax cut. He made this announcement on the same afternoon when the Treasury Department released data showing that its collections fell below its projections for the latest quarter of the fiscal year.

Still, other experts favor the income tax cuts as a different approach to addressing the state’s fiscal challenges.

Joseph Henchman, vice president of states projects at the Tax Foundation, in Washington, D.C., described the governor’s income tax cut proposal as modest. Given strong competition from neighboring states – New York’s income tax rate is 6.85 percent for those making $300,000 or more and Pennsylvania has a flat tax rate of 3.07 percent – Henchman said New Jersey residents will still see relatively astronomically high rates in taxes.

State treasurer Andrew Sidamon-Eristoff had testified several times before budget committees last year that the lower taxes in neighboring states put New Jersey at a strategic disadvantage.

Henchman pointed out that when the income tax was originally put in place in the mid-1970s, it was intended to relieve the property tax burden. Future hikes in that tax, as well as the 1 percent increase in the sales tax in 2006, and the now-lapsed millionaire’s tax, were also intended for that purpose. In the end, they didn’t make a dent in curbing property taxes, but just “shifted accountability.”

“The reason everyone hates property taxes is because they are so visible,” he said. “With income taxes, they come out of your paycheck.”

Conservative groups have advocated for tax cuts as the key to economic growth. One such group, the Heritage Foundation, says tax cuts stimulate economic growth “by increasing the incentives to work, save, invest, and take on new risk…When those activities increase, tax revenues increase because more Americans work and earn more money.”

Details will be released in the coming weeks on how the three-year income tax cut and education funding come to fruition.

Cutting income taxes: Experts disagree on effectiveness