New Jersey residents earning $1 million face an effective tax rate about four times greater than residents at $100,000, assemblyman says

Earning $1 million in New Jersey can buy many things, but it also means you’ll be sending a larger share of your income to Trenton.

As state legislators remain divided over reinstituting a so-called "millionaires tax," state Assemblyman Declan O’Scanlon (R-Monmouth) argued in an opinion piece last month that millionaires are already paying a larger share of their earnings toward state income taxes than people earning $100,000.

"Taxpayers earning $1 million pay an effective tax rate that is about four times what taxpayers earning $100,000 pay," O’Scanlon wrote in the Dec. 16 piece published in The Star-Ledger. "When and how will we know when we’ve achieved ‘fairness’?"

Millionaires are paying an "effective tax rate" four times more than those earning $100,000?

That’s right, PolitiFact New Jersey found. According to the New Jersey Department of the Treasury, taxpayers earning $1 million pay an effective income tax rate of 6.88 percent, compared with 1.73 percent for people earning $100,000.

O’Scanlon told us his point was that those earning $1 million already pay their fair share. An increase in income taxes could drive people out of the state or discourage them from moving to New Jersey, O’Scanlon said.

"It’s wonderful politics," O’Scanlon said. "It’s lousy policy."

First, let’s explain what an "effective tax rate" is.

New Jersey currently imposes state income tax rates ranging from 1.4 percent on income of $20,000 or less to a top rate of 8.97 percent on income of $500,001 or greater.

But those rates don’t represent what individuals actually pay in total income taxes, because a person’s income faces different rates as his income increases. Also, taxpayers can receive various exemptions and deductions.

So, the "effective tax rate" represents the percentage of one’s gross income that actually goes toward income taxes.

Andrew Pratt, a Treasury Department spokesman, told us the department calculated effective tax rates for O’Scanlon, per the following income levels:

$100,000: 1.73 percent
$1 million: 6.88 percent
$5 million: 8.5 percent
$10 million: 8.72 percent

Based on those numbers, someone earning $1 million is paying $68,800 in state income taxes, compared to $1,730 for taxpayers earning $100,000.

For individuals with smaller incomes, the effective tax rate is even less. Taxpayers earning between $20,001 and $50,000 pay an effective tax rate of 0.7 percent, according to the state Treasury department.

Pratt also noted how higher-income earners represent a small percentage of taxpayers, but provide a significant portion of the tax revenue.

"Notice that income over $500,000 represents an infinitesimal 0.2 percent of taxpayers, yet brings in 34.1 percent of tax revenue," Pratt said in an email. "Throw in the rest of the top 1 percent of taxpayers, and you get 37 percent of total tax collections."

Roberton Williams, a senior fellow with the nonpartisan Tax Policy Center, told us an effective tax rate is the "appropriate measure to assess tax burden."

"That's the share of income going to taxes. A person's effective tax rate equals her tax liability divided by her pretax income," Williams said in an email. "Thus a person making $100,000 and paying a total of $15,000 in tax(es) faces an effective tax rate of 15%."

Our ruling

In an opinion piece in the Star-Ledger, O’Scanlon wrote: "Taxpayers earning $1 million pay an effective tax rate that is about four times what taxpayers earning $100,000 pay."

Based on data from the state Treasury department, O’Scanlon is correct. Taxpayers earning $1 million pay an effective tax rate of 6.88 percent, which is about four times the 1.73 percent paid by individuals earning $100,000.

We rate the statement True.

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