Income tax cuts are the problem, not the solution

Much has been made about income taxes and income tax cuts – not just by Republicans, who base their entire economic plan on less taxes (which of course will usually vastly benefit their base by every conceivable metric), but also by Democrats lately as a way to provide stimulus or help in a time of need. And right here in New Jersey, Governor Christie’s plan to cut income taxes by 10% across the board is very short on details about how the potential $1 billion+ deficit would be paid for.

As a tax professional, there are so many things wrong with this, not the least of which is Christie’s statement about how everyone shared in the belt tightening over the past two years. If you remember, Christie gave the top earners a tax cut by letting the tax surcharge on the top income bracket expire – all while cutting the earned income tax credit, reduced property tax rebates, cut public transportation services, increased tolls and other fees that hit everyone BUT the top income earners hard.

But that really isn’t the point I really want to make here, which is that these income tax cuts (1) will not materially help those who are below the higher and highest income brackets, (2) will vastly be skewed towards those in the higher and highest income brackets and weren’t really sharing in any “belt tightening” in the first place, (3) don’t add jobs, (4) are far worse of a stimulus to the economy than spending on stuff like rebuilding roads, fixing the infrastructure, or maybe a big mass transit tunnel between NJ and NY – all of which would add jobs and help the economy.

Vastly skewed towards “the 1%”

While a “10% across the board income tax cut” sounds nice, let’s see how much this would help most people as opposed to the highest earners. Let’s use estimated NJ tax rates of 4% for a family making $50,000 and, say, 9% for someone earning $1,000,000. The $50,000 family would have a tax cut from around $2,000 to $1,800 – a total annual tax cut of $200. In contrast, the $1,000,000 earner would reduce the tax liability from $90,000 to $81,000, a total annual tax cut of $9,000. Granted, this is an estimate but rounding issues aren’t going to change this vastly unfair and unnecessary giveaway.

Reduced or “no income tax” states have very regressive tax systems

Governor Christie loves talking about how high NJ’s taxes are compared to other states – not acknowledging the other states’ local income tax rates or other taxes which are higher than NJ (sales tax, gasoline tax, etc.). So while it is great for LeBron James, it isn’t good for most others to move to Florida or Texas due to the even more regressive tax system there.

Additionally, we never hear from the Governors of NJ, FL, TX or whatever other state likes to tout their lack of income tax just how regressive the tax structure is in states with no income tax. For example, it is pretty much a given that sales tax is about as regressive as a tax that exists (with maybe the exception of social security taxes). Not just as it relates to the percentage of income that lower and middle income classes pay on sales tax for items that are generally necessary (food, gas, many needed services and in many states outside of NJ, clothing) but also in terms of just how unavoidable sales tax is for common necessities.

Taking a look at this sortable chart based on states, tax type and quarter or even taking a look at the 3rd quarter 2011 alone for notorious “no income tax” states like FL and TX, we see that Florida has almost 61% of its total tax collection on sales tax alone. Florida also has a gasoline tax that is 3-4 times higher than New Jersey’s – also very regressive. Texas has a whopping 63% of its total tax collection on sales tax alone, and a gasoline tax that is 50% higher than New Jersey’s. By contrast, New Jersey’s sales taxes accounted for just under 39% of total tax collection for the third quarter.

How is this paid for?

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