New study: Wealthy leaving New Jersey

February 5, 2010

A study released this week by Boston College's Center on Wealth and Philanthropy indicated that over five years, approximately $70 billion worth of wealth left the State of New Jersey, as financially well-off individuals and families moved away at a more rapid pace than they were being replaced. The same study showed that the state's charitable capacity declined by $1.13 billion, according to the Community Foundation of New Jersey and the Enterprise Trust at the New Jersey State Chamber of Commerce, the agencies that commissioned the study.  

More than 300,000 households moved out of the state from 2004-08, carrying a net worth 70% higher than the approximately 320,000 households that moved in. The study pointed to high property and personal income taxes as a root cause, showing that, on average, the exodus was comprised primarily of older, educated professionals who moved to such states as Florida where income, property, and estate tax burdens aren't as great. New York and Pennsylvania were other options, where cost-of-living is still fairly high, but property taxes still substantially lower than those of New Jersey in many regions.

No matter how you look at the findings of this study, this trend is significant for three reasons. First, there has never before been a study analyzing interstate wealth migration. Second, according to John Hughes, Dean of the Bloustein School of Planning and Public Policy at Rutgers, taxpayers in New Jersey's top 1% income bracket pay approximately 40% of the state's income taxes. And third, said study director John Havens to Newark's Star-Ledger, the situation in the Garden State is "above and beyond the general trend that is affecting the rest of the Northeast."

Why is that? According to the Star-Ledger article, a rush of new wealth amounting to almost $100 billion entered the state in the five years before 2004 when a series of changes in the state's tax structure took effect. According to "Fighting New Jersey's Tax Crush," a series published by the Asbury Park Press last year, New Jersey now has the highest property taxes in the nation (averaging $7,045 per household in 2008 and estimated to reach $9,200 per household by 2015). "New Jersey's property tax system is broken," says the Asbury Park Press. Washington, DC-based think tank The Tax Foundation calls it "dysfunctional."  Additionally, in 2009 New Jersey created three new individual income tax brackets: 8% on income over $400,000; 10.25% on income over $500,000; and 10.75% on income over $1 million. 

Hughes warned that the mass outflow of high-wealth taxpayers will continue until New Jersey officials address the situation. Calls for restructuring have prompted several grassroots and private sector efforts in the state, including the development of the "Reform Agenda for an Affordable New Jersey," a campaign spearheaded by the Somerset County Business Partnership that calls for reform of the public employees' pension system, the tax structure, and the state's overall dependence on local property taxes. 

The story initially grabbed my attention on Governing.com's daily newsletter, which I read for talking points to use in my Public Financial Management class at Penn's Fels Institute of Government. Right now, my classmates and I are learning how to apply the "Tiebout model" to everyday situations. This economic theory basically states that individuals will "vote with their feet," or move from one community to another, until they reach a place where they can get the most utility out of their taxpayer dollars. 

The model can be applied to this situation. Communities offer "baskets of goods" to taxpayers at a variety of different prices. With 21 counties, 324 municipal governments, 242 townships, 549 public school districts, and 276 special districts, New Jersey offers many baskets of high-quality services, but their sheer quantity has resulted in unusually heavy reliance on property taxes in the state. When fiscal obligations exceed the benefits of living or doing business in a municipality, households and firms will leave, as demonstrated by the Boston College study. 

One of the assumptions in the Tiebout model is that an "optimal" municipality size exists. Meaning that, for greatest economy of scale - or "best" average cost-per-unit of services delivered - there's a "best" size for a municipality. Here, I make the argument that if the recovery is to be a long and drawn-out process, or worse, only temporary and this trend can be expected to continue, then policymakers in New Jersey and elsewhere might do well to remember that what is simple is true: dust off those old microeconomics textbooks, and see for yourself.

-- Ana Liss, Graduate Research Intern