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State Fiscal Policy

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Updating New Jersey’s Revenue System

With or without the retiree benefit funding crisis, New Jersey’s state revenue system is in dire need of modernization if it is to maintain or increase the level of public investment in services and initiatives essential to economic growth. Every year, New Jersey’s anticipated expenses exceed its revenue, creating what is called a structural deficit. Lacking the resources to directly address the problem, policymakers instead have resorted to a patchwork of one-time gimmicks, unpaid or postponed bills, and raids on funds designated for specific purposes such as promoting energy efficiency and affordable homes. 

A reformed revenue system – updated to better reflect New Jersey’s demographic, economic, fiscal, and technological conditions – could produce more for public investment, reduce the structural imbalance, and mitigate some built-in inequity. Such reforms would not substitute for the significant shift in income and sales taxes required to address the pension crisis; they do offer additional opportunities to right the fiscal ship.

When the state sales tax was initiated in 1966, Americans were spending more on goods than on services. Today consuming patterns have reversed, and the sales tax is a less productive source of revenue for public investment because most services are not taxed.19 Many did not even exist 50 years ago, underscoring how out of date the state’s sales tax now is.


Lessen the inequity and increase the revenue yield of the state sales tax by expanding the number of services included.

Many states subject more services to their sales tax than New Jersey does, and they reap the resulting revenue. Some services that could be taxed, such as investment counseling or interior decorating or dry cleaning, are much more likely to be used by the wealthiest households.

Further, revenue from the state’s corporate business tax is less robust than needed to support public investment because policies enable multi-state corporations to shift profits made in New Jersey. This is done by attributing profits to various subsidiaries located in other states, ones with lower or no business taxes. Often those subsidiaries are created solely to reduce a company’s tax obligation.20


Join the 25 states that employ a system known as Combined Reporting, under which large, multi-state businesses must accurately keep track of income earned in each state and pay the appropriate state taxes rather than representing profits as having been earned by subsidiaries in states with little or no corporate taxation.

This reform could yield up to $290 million a year in additional state revenues. Many New Jersey firms that would be required to pay more in taxes under Combined Reporting maintain profitable operations in other states that have undertaken this reform, which suggests that it poses little or no hardship to them. Indeed, state and local taxes account for a relatively small share of businesses’ costs.21

Another source of state revenue could come from marijuana. Across the nation, attitudes toward marijuana have changed dramatically in recent years. Amid growing evidence that its use poses no greater dangers to most people than alcohol does, policymakers are seeing the financial upsides of legalizing marijuana to reduce the number of incarcerated nonviolent offenders and reap revenue from the taxation that would accompany legalization. To date, eight states and Washington, D.C., have legalized recreational marijuana use. In many other states, including New Jersey, medicinal use is legal.


Legalize and regulate the recreational use of marijuana.

Once marijuana is legalized and subject to taxation, the state would receive an estimated $300 million in revenue each year, based on a 25% tax rate on purchases.22 A portion of the proceeds should be targeted to remediation and investments in communities disproportionately harmed by marijuana prohibition.

Collectively, states lose billions of dollars a year because they are unable to collect sales taxes on purchases made through the Internet or mail-order catalogs. The growing importance of such sales undermines the revenue productivity of the state’s general sales tax because, even though consumers are legally bound to pay it, sellers are not required to collect and remit sales taxes unless those sellers have a physical presence in the state. In addition to depriving the state of revenue, this puts local “brick and mortar” businesses, which must collect sales taxes, at a competitive disadvantage.


Working with other states, encourage Congress to improve the states’ ability to raise revenues by taxing “remote” sales.

States cannot enforce their sales tax laws with remote sellers because of a 1992 U.S. Supreme Court decision that affirmed a federal law exempting businesses from collecting a state’s sales tax if they do not have facilities, employees, or another kind of presence in the state. Today, many large, national companies have a 5% to 10% price advantage over locally based competitors because they need not collect sales tax. In 2013 the U.S. Senate passed, with bipartisan support, legislation that would enable states to require out-of-state sellers to collect and remit sale taxes. The House of Representatives has yet to hold a hearing on the measure.

Although New Jersey is among the nation’s wealthiest states, with a median income at about $72,000 a year, the economic inequity among its residents is wide and growing. The 1% of New Jersey households that earn the most have seen their incomes increase by 190% since 1979, while the income of everyone else has risen by 20%. Only five states have a larger-percentage difference in average income between the wealthiest 5% of households and the least-wealthy 20%.23

More than a third of New Jersey households earn too little to provide for necessities.24  People at this income level struggle from paycheck to paycheck. A family of four in New Jersey needs $64,176 a year to afford a two-bedroom apartment at fair market rate and to cover the cost of maintaining one car, licensed in-home child care, food, out-of-pocket medical expenses, and taxes — plus an additional 10% of the total of all these items in case of overruns. These New Jersey families face fiscal crises as overwhelming as the state’s.

In relation to state fiscal policy, the burdens on the economically distressed result from both the erosion of public investment on their behalf and on the way New Jersey raises revenue at the state and local levels. Overall, New Jersey’s state and local tax system is what economists call “regressive”: The lower a household’s income, the higher share of that income it pays in taxes. For example, New Jersey families making less than $22,000 a year pay 10.7% of their income in state and local taxes; those making between $43,000 and $71,000 pay 9.1%; and those making more than $758,000 — the top 1% — pay 7.1%.25

The inequity is compounded by the fact that, as an alternative to raising broad-based taxes, New Jersey makes extensive use of fees, user charges, lottery receipts, and other non-tax sources that cost low- and middle-class households a greater share of their income than they cost the most affluent. To an extent, New Jersey mitigates these disparities through a state income tax that has higher rates for higher income; the exemption of food and clothing from the state sales tax; a state Earned Income Tax Credit to boost low-paid working families, and some property tax relief for families struggling to get by. More is needed.

As noted previously, the scale of the employee retirement obligations confronting the state will make it difficult (if not impossible) to avoid increasing some taxes on all state residents and businesses, including those of modest means. Through an increased sales tax, most New Jerseyans will likely pay more. At the same time, changes to income tax should be adopted to mitigate the additional burden felt by the state’s least well-off residents.


Consider exempting New Jerseyans officially designated as below the federal poverty line from paying any state Gross Income Tax.

Most New Jersey income tax is paid by more-affluent residents. More could be done, though, to help those who struggle the most. And any tax reductions provided to people having trouble making ends meet are likely to be spent quickly and locally, providing a boost to the economy.