Murphy, a Democrat, announced the deal alongside Assembly Speaker Craig Coughlin, Senate President Steve Sweeney and Lt. Gov. Sheila Oliver.
For Murphy, the agreement fulfills a core campaign promise of raising taxes on the wealthy and also sets up a tax rebate to go out next year in the midst of his reelection campaign.
Murphy cast the tax changes as necessary, given falling revenues because of the coronavirus pandemic's effect on the state's economy.
"We know that over the course of this pandemic and frankly before it began that our middle class needed help and that countless families working hard to achieve their middle class dreams needed an extra push," Murphy said.
Stimulus talks: States plan for cuts as Congress deadlocks on more COVID-19 aid
The rebate would go to single people with at least one child and earning up to $75,000 and to families making up to $150,000, Murphy said. It would be means-tested, the governor said, so all those eligible may not receive the top rebate of $500.
The marginal tax rate would rise from 8.97% to 10.75% on income over $1 million.
Murphy, himself a wealthy former Goldman Sachs executive, said that he didn't hold a grudge against successful people but that it's time for the rich to sacrifice.
"Literally, by the way, pennies on their top dollar earned is a modest ask," he said.
The tax rebate was Coughlin's idea, according to Sweeney, and follows years of Sweeney sparring with Murphy over taxing the wealthy. Sweeney opposed the idea after earlier supporting. He argued the 2017 federal tax cut that slashed a tax deduction for local taxes hurt middle-class families.
"The pandemic hit, and things have changed," he said. "We have to face the reality that a lot of families are hurting."
Related: Murphy seeks tax hikes, some cuts, more debt in $40B budget
Murphy declined to go into detail about the rest of the budget but said he and legislators are close to finalizing a plan, though he ruled out a sales tax hike.
The twin proposals could cancel each other out since estimated revenue from the income tax increase is about $400 million, and the tax rebate would tally similarly.
Murphy estimated there would be "some amount" left over in the state budget, which he said would go to housing and other "basic stuff." The state constitution requires income tax proceeds to go into a fund to reduce property taxes, which are among the highest in the country.
Republicans rejected the agreement, saying leaders should be showing restraint and finding ways to spend less.
"Blink and you'll miss the next Trenton tax hike," said state Republican Chairman Doug Steinhardt said in a statement.
The deal comes as the Legislature and Murphy hash out a nine-month budget that is due by Sept. 30.
Officials extended the current fiscal year because of the coronavirus outbreak and must pass a balanced fiscal 2021 budget by the end of the month.
Last month, the state approved an October 1 gas tax hike of 9.3 cents per gallon.
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