If such a plan were to become reality, the Garden State would tax contributions as they are made rather than, as at present, waiting until workers withdraw the money to impose state taxes, the Newark Star Ledger reported. Pennsylvania currently imposes K plan taxes when the contributions are made.
The newspaper said that the proposal is part of a wide range of options under consideration as state Treasury officials attempt to close the gap between what the state will take in and what it will spend in the fiscal year that starts in July.
Quoting an unnamed state administration source, the Star Ledger said the state has considered a 401(k) tax since 2001. The official said that one-quarter of all retirees move away from New Jersey and the state never receives any income tax when they withdraw from their 401(k) plans, according to the source.
The administration believes removing the state income tax exemption would not dissuade people from contributing to 401(k) accounts because they still would get to deduct the amount for federal tax purposes, the newspaper said.
Administration officials say the proposal would mostly affect those earning $100,000 or more because they make the biggest contributions to their 401(k) plans.
With the state staring at a potential deficit for the fifth straight year, acting Governor Richard Codey has already said he might have to cut taxpayer rebates, freeze increases in aid to municipalities and school districts and, as a “last resort,” raise income or sales taxes.