TRENTON, N.J. (AP) — The idea sounds simple: Cut income taxes by 10 percent for everyone. Paying for it will be less so. Gov. Chris Christie’s proposal last week to implement a 10 percent across-the-board income tax cut garnered national attention at a time when many other states are raising income taxes to pay for their still bleeding budgets. But what the tax cut means for the majority of residents may not be as significant as what it means for state coffers.
The cost of the program for one year is estimated at $1 billion, but the amount that the state would lose out on in revenue would grow each year — historically about 5 percent, according to the Legislative Office of Budget and Finance. Over a decade, that would cost in the ballpark of $10 billion in lost revenue, which has traditionally been used to fund education.
By comparison, Christie scrapped a project in 2010 to construct a second rail tunnel between New Jersey and New York, citing potential cost overruns of between $2 billion to $5 billion that he said the state can’t afford.
Christie, a Republican, has not yet said how he will pay for his proposal other than phasing it in over three years. He’s expected to get more detailed when he outlines his state budget next month.
Meanwhile, the plan comes as the state faces a $325 million shortfall in revenue for what it had forecast for the first half of the 2012 budget year; that’s roughly the same amount as the tax cut would cost for the first year.
Christie has also proposed restoring a tax credit for lower-income workers — known as the Earned Income Tax Credit — that he cut in 2010.
But, he hasn’t said how he’ll pay for it.
Democrats who control the Legislature were quick to question where the money would come from, but were cautious about issuing a blanket refusal to pass any cuts.
“I think we have to hear more from the governor on this proposal and when he gives us his budget on Feb. 21, we have to identify where the money comes from to support this,” Assembly Speaker Sheila Oliver said. “But I don’t think anyone is adverse for wage earners keeping more money in their pockets.”
So, just how much would the average resident keep? The median household income for a state resident was $70,378 in 2008. Under Christie’s tax cut plan, that person would save about $180. However, Christie wants to phase in the program over three years, meaning that same worker would only save $60 a year for the first few.
Because New Jersey has one of the most progressive tax structures in the country, in which higher earners pay a bigger percentage of their income, those making $1 million would save $7,265.
“Under this tax cut, middle-class families don’t save enough for a week’s worth of groceries, while millionaires save enough to go on an exotic vacation,” said Assemblyman Majority Leader Louis Greenwald, D-Voohrees.
Christie’s tax cut proposal isn’t a new one and shouldn’t have come as a surprise — he promised to cut personal income tax rates across the board during his 2009 campaign.
In 1993, former Gov. Christine Todd Whitman promised to lower income taxes by 30 percent all around. She did that for lower and middle income taxpayers, but only cut 15 percent for upper middle-income taxpayers and 7 percent for the wealthy over two years.
Ironically, Whitman’s tax law changes resulted in New Jersey having one of the most progressive tax structures in the country in which higher earners pay a bigger percentage of their incomes. It also resulted in the state taking out a $2.7 billion bond to pay for the cut — a bond the state is still paying for today, and started what became a long trend of skipping pension payments to balance the state budget.
“When we reduced the income tax burden on New Jerseyans during my administration, it was good for both citizens and the state …” Whitman said in a statement praising Christie’s plan.
Christie had a similar sentiment in his State of the State address, saying the cuts would lead to “better lives for our citizens and more jobs for our state.”
Experts seem less sure. Kent Smetters, a professor at the University of Pennsylvania’s Wharton School and a former U.S. Treasury Department economic policy official under George W. Bush, said evidence that lowering income taxes leads to economic growth is mixed.
“You don’t see a huge impact over a year or two, but more so over longer periods of time, like a decade,” Smetters said.
There is very little evidence, he said, that lowering income tax rates leads to higher revenue collections down the road.
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