Tax policy experts say New Jersey must reform its infamous taxes — broadening their base and lowering their rates — if the state wants to escape its image as unfriendly to businesses and taxpayers.
This fall, the Tax Foundation’s annual 2015 State Business Tax Climate Index revealed that New Jersey ranks last among the states in regard to the effectiveness of its tax system.
The index allows for a comparison among all the states’ tax systems, from most to least competitive.
“The study looks at tax structures in the 50 states. It’s more qualitative and compares how well each state’s tax code is structured,” said Scott Drenkard, economist and manager of state projects at the Tax Foundation in Washington and an author of the index.
“High rates and narrow bases are the opposite of good tax policy. Broad bases and low rates are good,” Drenkard said. “New Jersey has all of the major taxes and then some.”
A competitive tax system enables a state to raise sufficient tax revenue. The policies are economically neutral and simple.
Noncompetitive systems involve complex, multirate corporate and individual tax codes, above-average sales tax rates that exempt few business-to-business transactions, high state tax collections and few institutional restraints on the level of taxation or spending, according to the Tax Foundation.
“The study is done looking at five different taxes, and New Jersey consistently scores low in all of those areas,” said Laurie Ehlbeck, director of the New Jersey division of the National Federation of Independent Business.
States’ overall rankings on the index are based on separate corporate, individual income, sales, unemployment insurance and property tax rankings.
“For very small businesses, the two taxes of concern are high property taxes — New Jersey has the highest in the country — and the inheritance tax,” Ehlbeck said. “New Jersey is one of the only states that has both inheritance and estate taxes.”
The estate tax is the tax on your right to transfer property at your death, according to the IRS. Federal law mandates that estates can be taxed if they reach a minimum value of $5.4 million in 2015. In New Jersey, estates can be taxed if they’re valued at $675,000, according to the New Jersey Department of Treasury.
The inheritance tax currently is based on a sliding scale ranging up to 16 percent on the transfer of real and personal property with an aggregate value of $500 or more, according to the New Jersey Policy Research Organization.
Bluhm said the state must think about reforming its tax structure if it wants to be competitive.
“In order for New Jersey to remain competitive, we need to consider eliminating one of the two (taxes), like 48 other states have done,” Bluhm said. “People are not moving to Florida for just the weather. They have a good tax code.”
Florida ranked fifth on the index.
Currently, 14 states have an estate tax and seven states have an inherence tax. New Jersey and Maryland have both, said Sara Bluhm, the executive director of NJPRO. Maryland ranks 40th on the Tax Foundation index.
“Neither tax is desirable, but two?” Drenkard said.
“The estate tax is a double tax. You tax someone’s income, and then tax it again when they pass it on,” Drenkard said. “An inheritance tax is a triple tax. They’re taxed once on income, twice when they die and a third time when they pass it to their heirs.”
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