When Phil Murphy beat out then-Lieutenant Gov. Kim Guadagno to clinch the gubernatorial seat in New Jersey last November, his victory was a big win for Democrats in the state, where the party already controlled the legislature.
Although it’s taken some time, a number of the new governor’s proposals are beginning to see the light of day. They include the millionaire’s tax (although now it’s the multimillionaire’s tax, which will be applied to incomes of more than $5 million), money for schools and transit, phasing in tuition-free community college and raising the Earned Income Tax Credit.
But some observers are surprised the implementation of new policies have taken so long. “People were really expecting Murphy to come in with all guns blazing, particularly because his party controls the legislature,” said Brigid Harrison, a political science and law professor at Montclair State University. “There should have been no impediment.” And he has yet to make good on a number of other campaign promises, she noted. But unexpected roadblocks have arisen. One Murphy adversary — the president — hardly came as a surprise, but the governor also faced fierce opposition from within his own party over tax proposals he has argued are imperative to fixing a “state in crisis.” And there’s also the issue of money. “[A] lot of what he proposed requires backing in the budget,” Harrison said. “You can’t get a lot done unless you have the funding.”
Murphy’s office said he was not available for an interview.
SALT in the wound
Looming over Murphy’s head before he even took the oath of office in January was a tax bill passed by U.S. Senate Republicans near the end of December that put a cap of $10,000 on the federal deduction for state and local taxes. New Jersey residents, who pay the country’s highest property taxes, had an average SALT deduction of around $18,000 in 2015, according to reports.
Some realtors saw an impact on the market not long after President Trump signed the tax bill into law. Robin Seidon, a broker who co-owns West of Hudson Realty Group and focuses on Glen Ridge and Montclair, said she saw a “very clear dividing line” after the weekend of April 14 and 15, just before 2017 taxes were due. Because of the uncertainty around the tax reform, she is now seeing higher than usual inventory, with houses sitting on the market for longer and taking price chops.
And while the taxes included in the state budget Murphy signed on June 30 — narrowly avoiding a state shutdown — will affect the real estate market to a certain extent, the federal tax changes will likely “have much more impact than … whatever New Jersey can do,” said James Hughes, dean emeritus at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University-New Brunswick.
Single-family homes on the high end of the market, a segment that has already been struggling, will see the most impact, Hughes maintained. And first-time home buyers and those buying moderately priced homes are “not going to get the bang for their buck in terms of deductions.”
To combat the cap, Murphy signed legislation in May that will allow taxpayers to donate to charitable funds set up by the state’s municipalities — while getting a property tax credit in return. The IRS has since questioned the validity of the legislation, a challenge New Jersey Attorney General Gurbir Grewal has said the state will fight.
Still, brokers are positive about the new law. “Any legislation that successfully preserves property tax deductibility can only help our real estate markets moving forward,”said Tg Glazer, vice president at the Coldwell Banker Residential Brokerage office in Bernardsville.
(Multi) Millionaire’s Tax
As part of his promise to “rebuild the middle class” in New Jersey, Murphy vowed to impose an increased income tax on the state’s millionaires. The budget passed by the state on June 30 raises taxes on those making $5 million or more; the initial proposal would have taxed those making $1 million or more.
Critics have warned that a millionaire’s tax could drive wealthy residents from the state. “The millionaire’s tax might be the last straw for some people, because it’s just compounding these other things,” said Peter Reinhart, director of the Kislak Real Estate Institute at Monmouth University.
Some of the state’s wealthy residents could simply decide to go to a more “tax-friendly state,” he noted. An oft-cited example is billionaire hedge-fund manager David Tepper, who moved to Florida in 2015 after more than two decades in New Jersey, leaving the state short millions of dollars in taxes, according to news reports.
The tax could also have the potential to push prospective high-end homebuyers to such states as New York or Connecticut, Harrison said. Retirees and college students who leave for school and don’t return, however, do most of New Jersey’s “out-migration,” she noted.
Corporate and other taxes
Also included in the budget on which Murphy and state lawmakers came to a compromise was a sales tax on Airbnb rentals, an additional $150 million for the Homestead property tax program — which will maintain the benefit that eligible homeowners have been receiving — and an increase in the state income tax deduction for local property taxes.
“If it wasn’t done, there would be criticism [for] taking away a benefit that’s needed in the face of New Jersey’s extraordinarily high property taxes,” Hughes said of the Homestead program funding, a property tax break for individual homeowners with income up to $75,000.
In addition, corporations will have to pay a 2.5 percent surtax — which increases the tax rate from 9 to 11.5 percent on entire net income more than $1 million — for the next two years. It will be phased out in the two years after that. Because the tax will be short-lived, Reinhart said he didn’t feel that it would factor heavily into corporations’ strategic decisions. But some businesses may be “skeptical” that the surtax will actually be eliminated within four years, he noted. “Once you have a revenue source, it’s pretty tough to give it up,” he said.
Development, though, is unlikely to be hindered by the tax. “Many development deals are done with single-entity LLCs, so I’m not sure that it will have much influence on specific projects,” Reinhart said. Still, the tax could exacerbate New Jersey’s reputation as being one of the country’s less business-friendly states, he said.
However, the new governor seems to be approaching that problem with various monetary incentives for industry. Less than a week after the budget passed, Murphy announced that Teva Pharmaceuticals would be moving its headquarters from Pennsylvania to Parsippany-Troy Hills Township after snagging a multimillion tax incentive package from the New Jersey Economic Development Authority, creating more than 800 jobs in the process.