In budget showdown, New Jersey governor insists on “millionaire’s tax.” Washington voters rejected concept a decade ago.

As we wrote yesterday, most states have managed to reach timely budget agreement this year. Notably, Governing magazine pointed out, New Jersey is not among them.

In New Jersey, one-party control hasn’t prevented disagreements. Democratic lawmakers introduced their own state budget on Monday that scraps Democratic Gov. Phil Murphy’s millionaire’s tax, setting up an 11th-hour showdown that could lead to a state government shutdown.

NJ.com reports the governor isn’t backing down.

Democratic Gov. Phil Murphy issued his strongest threat yet Wednesday to New Jersey’s Democratic-controlled state Legislature: Without tax increases, I’m prepared to slash spending items you want.

In a letter to lawmakers, Murphy warned that if they continue with their current plan to send him a state budget that lacks his proposal to increase income taxes on the state’s millionaires, or if they don’t agree to raise any other taxes, then he’ll consider line-item vetoes on the Legislature’s $38.7 billion proposed budget.

We’re not interested in wading into New Jersey budget dilemmas, but the showdown is instructive for what it tells us about progressive income taxes. The Tax Foundation has closely followed the debate over the millionaire’s tax. Dominic Pino wrote earlier this month,

On June 3, New Jersey Governor Phil Murphy (D) renewed his plea to expand the state’s so-called millionaire’s tax to apply to all income above $1 million, down from the current $5 million threshold…

The millionaire’s tax is a legislative zombie, killed and reanimated repeatedly by Garden State politicians. New Jersey was the first state to pass a true millionaire’s tax in 2004 when then-Gov. Jim McGreevey (D) approved an 8.97 percent income tax rate on incomes over $1 million.

After reviewing the legislative history of the tax, he hits on the main policy issue:

As we wrote in March, “The millionaire’s tax violates principles of stability and neutrality, while doing nothing to solve the state’s current problems with complexity and lack of transparency.” New Jersey currently has seven tax brackets and a labyrinthine tax code. Taxes on high earners are notoriously volatile because of the heavy reliance on capital gains and other impermanent revenue streams, and because high earners are not only the most incentivized but also the best equipped to move out of state for tax purposes. New Jersey already leads the nation in net outbound migration.

The whole thing reminds us of a similar debate here in 2010, when Initiative 1098 proposed a progressive income tax on high earners. The Washington Research Council analysis of the proposal concluded,

…the proposed income tax would penalize small business owners and entrepreneurs, destabilize the tax system by introducing a highly-volatile revenue stream, and damage our state’s national and global competitiveness for new investment and job creation. The I-1098 income tax scheme departs from fundamental policy principles and demonstrates a faulty understanding of the Washington tax structure.

Because the new income tax targets only the very top of the income distribution, its revenue stream will be very volatile. This will increase the likelihood of serious fiscal crisis the next time that the economy turns down…

Even for those who favor an income tax, the peculiar, punitive and volatile tax imposed by I-1098 cannot be considered acceptable. It jeopardizes the economic recovery, destabilizes the state revenue system, and chases jobs and investment from Washington.

Voters agreed. The headline in the Puget Sound Business Journal: I-1098 goes down in flames

The Seattle City Council, of course, continues its quixotic pursuit of an income tax on the wealthy, as the city’s business community amps up efforts to reshape the council in the what the Seattle Metropolitan Chamber of Commerce sees as a “change election.”

The more things change…