New Jersey may be the first, but probably not the last, state to raise taxes on the wealthy as a result of a steep decline in revenues due to the COVID-19 pandemic, creating challenges for advisors and their wealthier clients.
Last Thursday, New Jersey’s multimillionaire Democratic governor, Phil Murphy, said he had reached agreement with state legislative leaders to raise the state’s gross income tax rate on income between $1 million and $5 million from 8.97% to 10.75%, effective for the 2021 fiscal year.
The tax hike is part of the fiscal 2021 budget package, which is expected to be approved before the end of the month and take effect Oct. 1.
The tax would apply to income earned in 2020, according to a spokeswoman in the state’s treasury department. It is expected to raise $390 million in annual tax revenue. Residents earning over $5 million were already subject to the additional tax, dating back to 2018.
As part of the latest tax deal, the governor and legislative leaders also announced a $500 rebate for households with at least one child with incomes under $75,000 (for single taxpayers) and under $150,000 for a couple filing jointly.
Murphy had been pushing for a millionaire’s tax since he took office in 2018. It took the financial shortfall created by the pandemic and the perpetual need for the state, like all others, to balance its budget to convince state Senate leader Stephen Sweeney, who had previously opposed the tax, to go along with it.
“None of this is a surprise,” said Megan Gorman, the founder and managing partner of Chequers Financial Management, which is based in San Francisco but has clients in New Jersey and other states. “This is a trend that is going to be happening across the country.”
Two bills introduced in the California Assembly earlier this summer would have raised taxes on millionaires — one targeted just billionaires. They failed to gain traction but could be reintroduced during the state’s next legislative session.
Will Millionaires Flee the State?
Until many more states adopt similar income tax hikes on millionaires, some wealthy residents in New Jersey may choose to leave the state. They already pay relatively high property tax rates, which are no longer fully deductible due to the 2017 tax law limiting that deduction to $10,000.
“This may be the last straw for some of our clients,” said Ryan Marshall, a partner at Ela Financial Group, based in northern New Jersey. “One thing millionaire clients don’t like is paying taxes … When our clients retire, the number one question is whether or not they will live in New Jersey.”