While New Jersey is still a high-tax state, it has been moving in the right direction the last few years. Bi-partisan business tax reforms enacted in 2011 are completely phased in. Among other things, TEFA energy taxes have been eliminated, and small businesses can now carry forward business losses just like many large corporations have been able to do for years. To keep this progress going, NJBIA is pushing for the next step in business tax reform – cutting New Jersey’s estate and inheritance taxes. I am happy to say the idea is getting plenty of attention from the Legislature.
New Jersey is an outlier when it comes to the so-called “death taxes.” For starters, New Jersey is one of only two states that has both an inheritance and estate tax (Maryland is the other), and it has the lowest exemption of any state that has an estate tax. On top of that, both New Jersey’s inheritance and estate tax rates are among the highest in the nation.
By comparison, 13 other states have an estate tax, and only six have an inheritance tax (including Maryland in both). Thirty-two states have no death taxes.
Along the same lines, New Jersey exempts only $675,000 from the estate tax; no other state has an exemption of less than $1 million of an estate’s value. The federal estate tax applies only to values exceeding $5.43 million.
So why is NJBIA pushing for reform of the estate and inheritance taxes now? Simply put, it will give us the biggest economic benefit for relatively little cost to the state budget.
A few years ago, lawmakers were discussing the possibility of a broad-based tax cut to the income or property taxes. The budget crunch that has since put the squeeze on New Jersey’s spending has made such ideas non-starters. Income, sales tax and corporate taxes make up the bulk of New Jersey’s revenues. Eliminating either the inheritance tax or the estate tax, however, would have a comparatively small impact on state revenues. The two together generate about $745 million in a budget that will exceed $32 billion in total.
While that is a relatively small amount for the state budget, it can be a lot of money for those businesses that are in the process of planning for their succession. A business owner who is set to retire and wants to leave the company to a family member other than a spouse or child would have to consider the significant tax impact in New Jersey. But they can avoid that tax impact by moving their business to one of 32 death-tax-free states.
Such tax reforms would have an impact beyond individual companies, as tax policies where New Jersey is an outlier hurts the state’s economy. An analysis by our research affiliate NJPRO (NJ Policy Research Organization) concluded that high tax rates contribute to New Jersey’s outflow of wealth, which in turn has cost New Jersey billions of dollars in state revenue. Hundreds of thousands of people have moved out of the state in the past decade, while New Jersey’s inflow of wealth dropped by $183 billion and declined in net wealth by $168 billion. (New Jersey: An Outlier in Death, Fall 2014, Facts for Discussion.)
Legislators from both parties have been open to the idea, and NJBIA has put this issue at the top of its list. Between now and the end of June, lawmakers will put together the state budget, which gives us a great opportunity to make this important change and keep the momentum towards a better business climate going.