Sen. Tony Bucco (Courtesy of New Jersey Assembly GOP)
A Senate panel will weigh tying New Jersey’s income tax brackets to inflation next week, giving fresh air to a tax cut proposal that has remained stalled for more than a decade.
The proposal that will come before the Senate Budget Committee on Monday would require the Division of Taxation to annually adjust New Jersey’s tax brackets to track with the Consumer Price Index. The change would be costly — it would cut tax collections by hundreds of millions of dollars each year — but it’s one Republicans say is sorely needed as surging inflation cuts into the buying power of taxpayers’ income.
“Our low and middle-income folks need this now more than ever,” said Sen. Tony Bucco (R-Morris), the bill’s prime sponsor. “They do it at the federal level, and there’s no reason we shouldn’t give that same benefit and that same tax break to our residents here in New Jersey.”
New Jersey’s income tax is paid under a series of marginal rates that grow with a filer’s income, topping out at 10.75% for income that exceeds $1 million.
At present, the state’s tax brackets only move when lawmakers approve changes to the state’s tax code.
Though the Legislature approved the creation of a new tax bracket for multi-millionaires — and later millionaires — during Gov. Phil Murphy’s first term, the state’s tax brackets for earners in lower bands have not moved since temporary tax hikes put in place by Gov. Jon Corzine that expired in 2009.
If you don’t tie tax brackets to inflation, proponents of the move argue, they capture filers they weren’t intended to. In 1996, the 6.37% bracket for $75,000 in income was intended for income that in today’s dollars translates to $136,568.
That so-called “bracket creep” is what the sponsors want to avoid.
“That’s what people are looking for: They’re looking for a little relief, and I think this is it,” Bucco said. “A true tax cut for New Jerseyans is something that we haven’t seen in a long time. This would be the first step in that direction.”
Thirteen states, including New Jersey, do not link state taxes to the rate of inflation, according to the D.C.-based Tax Foundation.
Inflation surged to its highest levels in nearly 40 years in 2021, rising by about 7% after seasonal adjustments, according to data published by the Bureau of Labor Statistics.
While the measure would cut some residents’ tax bills, it would come with a cost to the state’s coffers.
In a fiscal note attached to the bill, the Office of Legislative Services forecasted the proposed changes would cut income tax collections by between $150 million and $440 million per fiscal year, depending on the exact rate of inflation.
Revenues from New Jersey’s income tax are constitutionally dedicated to property tax relief. That means income tax revenue must go to direct tax relief programs like the Homestead Benefit Program or to fund state school aid, teacher pensions, and other costs that might otherwise be paid for by property tax collections.
The constitution does not list valid spending items for the Property Tax Relief Fund. It says only that it must be used to offset or reduce property taxes.
Senate Minority Leader Steve Oroho (R-Sussex), another prime sponsor, said lawmakers chose to target the income tax because it draws less money from out-of-state residents than New Jersey’s other major taxes.
Only New Jersey residents or people who work in New Jersey pay the state income tax, he said. Everyone who shops in the Garden State pays sales tax, regardless of residency.
“You look at most states, they’ve learned how to reduce the tax burden on their own residents and basically have out-of-state people help pay for other services when they come into the state,” Oroho said, adding, “That helps reduce the burden on people in New Jersey.”
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