New Jersey’s increasing debt and taxes show Nebraska what not to do

Nebraska has avoided efforts to raise state taxes in the aftermath of the COVID-19 pandemic and is one of the few states whose revenues grew from the previous year. But states like New Jersey are providing an alternate view into what can happen when policymakers consistently rely on tax increases to paper over their financial challenges. The New Jersey Legislature just passed its $32.7 billion budget which included multiple tax increases and $4 billion in debt to avoid budget cuts.

According to a press release from New Jersey’s governor:

“In order to curtail painful budget cuts, and limit the size of emergency borrowing, the Governor is also proposing a selection of progressive tax policy changes that are estimated to yield just over a billion dollars for the nine-month FY 2021 period, including:

• Imposing the millionaire’s tax on all income above $1 million;
• Permanently incorporating the 2.5 percent corporation surcharge;
• Restoring the sales tax on limousines; 
• Removing the tax cap on boats; and
• Applying a 5 percent surcharge to high-income individuals with federally Qualified Business Income (QBI) who have benefited from a regressive new deduction for pass-through entities created under the 2017 federal Tax Cuts and Jobs Act. 

The Governor remains committed to tax fairness, and ensuring that most fortunate among us—millionaires and large corporations—pay their fair share.”

Every year in recent history someone in the Nebraska Legislature has proposed a ‘millionaire’ tax, or a special higher income tax bracket aimed at high-income earners. However, this policy is usually met with opposition since many small businesses file through the personal income tax as pass-through entities. This means that business income is taxed on the business owners’ tax returns through the individual income tax code – so the millionaire’s tax would negatively affect entrepreneurs and small businesses more than the wealthy individuals the tax is targeting.

Luckily, Nebraska has been successful in keeping such a tax from being enacted. Unfortunately for New Jersey, the state had held off a millionaires’ tax six times, but the seventh try was what it took for the measure to make it into law.

The New Jersey governor’s tag line for this budget is “Stronger, Fairer, and More Resilient.” But how does taking out more debt and taxing the very businesses and entrepreneurs the state needs for an economic recovery help make their state stronger or more resilient? New Jersey was hit hard by COVID-19 and already has one of the country’s highest unemployment rates.

Businesses (and their employees) do not need to be saddled with additional taxes and more government spending at a time when they need economic relief and support.

New Jersey and Nebraska might sound like strange states to compare, but they actually share a common bit of tax history. Both states were among the last to adopt income and sales taxes in the late 1960s and 1970s. The promise made in both states was that these new revenue sources would bring high property taxes under control and create more balance in the tax system.

Today, however, Nebraska remains one of the worst states for property taxpayers, while New Jersey has the nation’s least competitive tax code and, by many measures, the highest property taxes in the country (yes, even higher than Nebraska).

New Jersey is hoping to sweeten this tax hike by providing rebates for some low- and middle-income taxpayers. But critics rightly point out that the tax increase may be more of a gift for lower-tax states like Florida, which continues to receive individuals and businesses who think New Jersey’s finances are out of control.

Americans should be rooting for every state to make a strong recovery from this difficult economic downturn, but as recovery policies begin to differ, it will become clearer which approaches are helping states rise from the recession.