Tax Analysts Blog

Three Good Ideas From New Jersey -- If You Care About Good Tax Policy

Posted on Jun 29, 2016

There are three tax ideas that may pass in the New Jersey Legislature. They are important because they are good ideas. They are important because, well, New Jersey is not exactly a paragon of sound tax policy.

Garden State idea number one: Raise the gas tax. I have said this a thousand times. The gas tax is a good tax. The best way to pay for government is through a user fee, when possible. The gas tax is a proxy user fee. You drive, you buy gas. The revenue is used to maintain the roads so you can keep driving. It's a very old and simple concept. New Jersey needs money for its transportation trust fund. A bipartisan group of legislators wants to raise the tax from 14.5 cents a gallon to 37.5 cents a gallon.

If you need money for roads, this is the best way to raise it. Actually, a mileage tax or tolls would be the best way, but this is the most practical way to raise it. It's not perfect. Gas taxes are regressive (as are most user fees) -- as people continue to drive more fuel-efficient vehicles the tax will not raise revenue like it used to. Still, this is eminently better than paying for roads with sales or income taxes as other states have done.

Garden State idea number two: Increase the earned income tax credit. I generally don't like credits, exemptions, and deductions, but if we're going to give someone a tax credit, let's give it to the people who need it. The EITC helps the working poor and dispossessed. The proposal in New Jersey would raise the state EITC from 30 percent to 35 percent of the federal credit.

Some of my conservative friends decry the waste, fraud, and abuse associated with the EITC. I think those problems are exaggerated. They can also be addressed through better administration. But the credit requires people to work, and I would rather see tax expenditures for the poor than for just about anyone else who receives tax welfare.

Garden State idea number three: Repeal the estate tax. The same bipartisan group that wants to raise the gas tax and EITC wants to repeal the estate tax. This is a trifecta as far as I am concerned. The estate tax is a terrible tax for a lot of reasons. I know my friends at New Jersey Policy Perspective will disagree, and I respect that, but the tax is grounded in the politics of envy and jealousy. Rich folks have money through hard work or good luck -- and other folks want it. I reject the idea that society has a claim to your property merely because you are dead.

Moreover, every estate tax lawyer I have ever talked to says the rich move before visiting the great country club in the sky. Maybe some of the really rich don't move because they have the best lawyers money can buy. They don't really pay the tax. But there is a steady stream of old rich folks setting up residence in Florida to avoid the tax man. The tax actually hits the sort-of rich the hardest, as they don't have the resources to figure out how to escape the tax and are often caught unawares.

In any event, hats off to Sens. Paul Sarlo (D) and Steve Oroho (R) for taking the lead on three very good tax proposals.

Read Comments (6)

David Carrington Jr.Jun 29, 2016

Another great article, David. Although I disagree (surprise!) about the estate tax. The estate tax is NOT a tax on dead people: it's a tax on heirs. Dead people are dead; whatever problems they may or may not have, taxes ain't one of them.

My main problem with large inheritance it is that it violates one of the prime directives of capitalism. In a well-functioning capitalist economy, reward is for risk, innovation, and/or productivity. Being born to rich parents is none of these things. I'm all in favor of baby showers, but showering wealth on people for being born, and locking up that wealth for multiple generations, is counter-productive to capitalism. Insisting that these birth-lotteries be tax free just exacerbates the problem.

Emsig BeobachterJun 29, 2016

In days of yore when the federal estate and gift tax contained a full credit for state estate and gift taxes, it made perfect sense for states to piggy-back on the federal tax. Nowadays, it makes more sense for the states to tax the heirs through an inheritance tax which could have progressive rates and could be adjusted for the relationship between the decedent and the inheritor. I would permit a full marital deduction. Some allowance could be made for religious, charitable, or educational institutions.

Travis RechJun 30, 2016

I think there is a difference between the Federal Estate Tax and State Estate Tax (bad wording) in terms of administration and policy. I am a strong proponent of the FET for all the reasons you cited, but I think any jurisdictional tax that simply encourages states to race each other to the bottom isn't great policy.

Mike55Jul 5, 2016

For most people the ability to provide for heirs, or leave a legacy, is the biggest piece of the "reward." All of your risk taking, innovative, productive doobies are well aware of the estate tax before they die, meaning they will be incentivized by it in the same manner as any other tax.

More troubling though, the estate tax has become such a warren of traps for the unwary/unlucky that even the most ardent supporter can't pretend there's a shred of horizontal equity left. Instead these folks are forced to meekly proclaim "don't worry, only rich folks pay, so who cares!"* Not exactly the most compelling of policy arguments.

One final thought: even if I were to put aside my misgivings and accept that we just can't do without a federal estate tax (deficits and all), it wouldn't follow that an estate tax makes sense at the state level. The states have more flexibility than the Feds when it comes to collecting revenue (given that they need less of it, and have a full array of property, income, sales and excise taxes to choose from), so they should in turn be more selective. I'd put the estate tax towards the bottom of the list of tax options (until someone gets around to reforming it), so states would be better off making heavier use of more efficient tax vehicles.

*This is not a shot at Mr. Carrington, whose argument was different from (and far more interesting than) the typical pro-estate tax rhetoric out there.

Bracket CreepJun 30, 2016

David, improving the EITC "through better administration" is very simple and vague, much like when politicians say they can raise revenue through eliminating fraud, waste, and abuse. Do you have any specific proposals? For example, self-employed taxpayers can easily manipulate their income to maximize their EITC benefit - how could better administration address this?

Emsig BeobachterJul 1, 2016

I agree with Mr. Carrington --society need not bestow tax benefits to those who had the good fortune to have been born to wealthy parents. Furthermore, Mr. Carrington is correct is correct in characterizing the estate tax as a tax on heirs. I propose eliminating the estate tax and replacing it with a direct tax on the heirs, except for a full marital deduction, and possibly modified charitable deductions.

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