Last year’s federal tax reform act has prompted a lot of handwringing and hyperbolic language from New Jersey officials over the loss of the state and local tax deduction. Just recently Rep. Josh Gottheimer advocated for a scheme to help some residents maintain their deductions by calling local taxes charitable deductions. The state needs to pursue this strategy, he contends, because we’re tired of picking up the tab for “Moocher states” that, according to him, take our handouts and steal our taxes.
I have serious doubts whether the donations plan can pass muster with the Internal Revenue Service. Although advocates say there’s precedent because 33 states already offer tax credits for contributions, most of these are for targeted efforts, like donations to programs that offer poor students vouchers to attend private schools. That’s not the same as suddenly calling property taxes meant to pay for basic services “donations.”
“The deficit New Jersey experiences is as much a function of the state’s own shortcomings as it is of any unfair treatment from Washington.”
Regardless of whether the plans are ruled legitimate, however, the larger question is whether New Jersey taxpayers are really subsidizing a bunch of “moochers” from around the rest of the country. The congressman’s notion is based on studies pioneered by the late Sen. Daniel Patrick Moynihan, which show that the flow of funds from Washington to the state exceeds the money that New Jersey residents send to Washington as taxes. Meanwhile, other states receive more back than they send. That underlies the idea that the federal government is shortchanging New Jersey. But when you look at what kinds of federal spending these studies track, you realize that the deficit New Jersey experiences is as much a function of the state’s own shortcomings as it is of any unfair treatment from Washington.
In these studies, the largest area of money tracked from Washington to the states is federal retirement income, three-quarters of which is Social Security payments to retirees. This is not discretionary income that the federal government is choosing to send to the states. It is money going to retirees where they now live. Jersey does not get a significant per capita share of this money because so many people leave the state when they retire. Even state workers flee in great numbers. A 2014 study found that nearly 25 percent of public employees leave New Jersey when they retire. That’s hardly the rest of the country’s fault.
While some retirees leave for the good weather elsewhere, many go because of the high taxes that help consistently get Jersey ranked as one of the worst places in which to retire. Moderate income residents leave because they can’t afford to pay taxes on their homes once they retire. Wealthier residents leave because they don’t want to see their wealth whittled by the state’s high inheritance taxes. A recent survey by the New Jersey Business and Industry Association, for instance, found that 40 percent of business owners plan to leave the state when they retire.
Another significant area of Washington spending is federal contracting, a big chunk of which is defense spending. This is money competitively bid out to individual companies. And New Jersey firms do especially poorly at winning federal contracts. Our take from the $400 billion federal contracting pie is well below the national average when measured on a per capita basis. That clearly hurts the state’s economy, but is anyone asking why the state does so poorly? Is there something fundamentally uncompetitive about the New Jersey economy? Perhaps that’s the kind of thing the congressional delegation and our representatives in Trenton ought to be investigating. Among other things they would find is that any defense industry the state once boasted has long ago disappeared.
When he was alive, Senator Moynihan understood that the flow of funds between Washington and the states was complicated and not something easily changed. In an essay attached to the 1999 study, he decided the only way to address the issue was to dramatically pair back the federal government’s taxes and spending, leaving the money in the states, where local governments could then decide how to use it.
“It is time to trade less activism in Washington in return for more revenue at home, for whatever active measures recommend themselves to the state or municipality in question,” Moynihan wrote.
Ironically, the new federal tax cuts accomplish some of that. The corporate tax reduction, for instance, will leave billions of dollars that would otherwise go to Washington in the hands of New Jersey businesses, where they could potentially spend it. The only problem is that Jersey isn’t a place where many of them want to continue doing business. The recent New Jersey Business and Industry Association survey found only 14 percent of local firms said they planned to grow further here. By contrast, 29 percent said they are looking to expand elsewhere.
That’s certainly not the fault of those “moochers” around the rest of the country.
This piece originally appeared in The Record
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Steven Malanga is the George M. Yeager Fellow at the Manhattan Institute and a senior editor at City Journal.
This piece originally appeared in The Record