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Friday, July 07, 2006

NJ Exodus?

Fiscal conservative NJ Governor John Corzine reached a compromise with the NJ legislature to raise revenue in order to close a budget deficit yesterday. The plan will increase the sales tax from 6% to 7%. Per Newsday's report:

Half the $1.1 billion that it will raise will ease property taxes, which are among the nation's highest. Corzine had wanted all the money to go toward helping close a $4.5 billion budget deficit.

Wanna bet?

I am not sure from where the increased revenue estimate came but I expect the analysis was what they call "static scoring" rather than "dynamic scoring". In the tax revenue world, a static estimate assumes everything will stay the same so an increase in tax will result in an increase in revenues. A dynamic scoring recognizes that tax changes affect people's behavior. We have seen federal revenues increase substantially from the reductions in marginal income tax rates and reductions in dividend taxes. Conversely, we all know, increase the cost of something and sell less of it. Therefore, NJ gross purchases will likely decrease after the "1 cent" tax hike is operative.

I could not locate any comparables to prove that states that increase sales taxes actually lose revenue. The NJ revenue from sales taxes in the 3rd Q of 2004 were $1.7 billion. So it looks like the estimate merely assumed the same number and size of gross sales and may have factored in inflation.

We know the following:

Per 2006 Except for Ca at 7.25%, NJ has joined MS, RI and TN with the highest state sales tax rate at 7%.
Per 2002 NJ has the highest property taxes in the country.
Per 2000 NJ lost 60,000 citizens to out-migration.

Expect more people to leave the state, expect more e-commerce transactions from NJ residents and expect a smaller increase in revenues than are estimated.

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