New Jersey's wealthiest pump up tax revenue: report

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011.

NEW YORK (Reuters) - New Jersey should capture an extra $914 million of tax revenue over the next two years, a fiscal monitor said on Tuesday, a promising forecast for a state struggling to close a $4 billion deficit.

Personal income taxes account for the lion's share of the increase: they should top forecasts by $1.45 billion, according to the nonpartisan Office of Legislative Services.

The rosier forecast for New Jersey's income taxes is part of a national pattern as the stock market's recovery is boosting the tax bills of wealthier individuals. This in turn aids New Jersey and other states -- from California to New York -- that rely heavily on income tax collections.

Unlike wealthy individuals, corporations are not incurring bigger tax liabilities, though a number of publicly traded companies are enjoying blooming profits.

New Jersey's corporation business tax could disappoint by $443 million, according to the report.

And despite the higher revenue forecast, New Jersey faces a host of fiscal problems, from its pension shortfall to dwindling cash reserves. Its credit was cut this year by Moody's Investors Service and Standard & Poor's.

Also, New Jersey's top court is weighing whether public schools are owed as much as $1.7 billion, and political analysts said the state's rising revenue could embolden the Democratic-led legislature to restore more of the cuts in Republican Governor Chris Christie's $29 billion budget plan.

Christie, who has a national reputation as a fiscal conservative despite skipping pension contributions, showed little inclination to change course.

"While New Jersey is seeing signs of economic recovery, it is important to keep moving forward on a sound fiscal path and not revert back to Trenton's out of control spending ways at the first sign of growth," Christie Spokesman Michael Drewniak said in a statement issued late Monday.

Like New York Democratic Governor Andrew Cuomo and New York City Mayor Michael Bloomberg, a political independent, Christie opposes raising income taxes because he fears this will drive high-income earners to move. In the tri-state area, only Connecticut Democratic Governor Dannel Malloy has boosted the top income tax rate -- but it is still about two percentage points below the top rates of New York and New Jersey.

The New Jersey report found an "extraordinarily high degree of association" between the performance of the S&P 500 Index and the tax bills of people with at least $1 million of income. This link explains why income tax revenue is rising despite a lackluster economic recovery, it said.

Between 2007 and 2009, New Jersey income tax revenue sank $1.7 billion and all but $400 million of that drop was due to falling tax bills from people whose incomes top $1 million.

"While the recession has had terrible consequences for many middle- and lower-income New Jersey residents, it was the loss of income for wealthier New Jerseyans that sunk our tax collections," the report said.

(Reporting by Joan Gralla; Editing by Diane Craft)