Special Report: The Battle of the Budget
With the budget fight in New Jersey this year shaping up as one of the most contentious in state history, NJ Spotlight has put together this special package providing perspective on the major spending and revenue issues.
The battle over the budget in New Jersey this year promises to be one of the most contentious in modern state history, surpassed only by Democrat Brendan Byrne’s battle to pass the income tax almost 35 years ago, and perhaps by Democrat Jim Florio’s $2.8 billion tax increase 20 years ago.
Following a recession that’s considered the worst since the Great Depression, the state is now facing a huge budget deficit made even tougher due to a drop of federal aid from last year of $1.2 billion. What is likely to make the current budget battle even more contentious is that Republican Gov. Chris Christie is the first governor forced to pass a budget with both houses of the legislature controlled by the opposing party since Florio in FY1994.
With this as a backdrop, Gov. Christie is proposing a $2.8 billion cut in the actual state spending (both state and federal), including about $1.6 billion in the portion of the budget supported by state revenue. This which would be the largest such cut not only in dollars but also in percentage in modern state history.
This package of charts, some going back 12 years, is designed to provide perspective on some of the major spending and revenue issues in the budget.
When governors and legislators talk about the state budget, they are referring to the $28 billion to $33 billion raised each year through state taxes. But the budget they approve by June 30 each year also includes $8 billion to $13 billion in federal aid – New Jersey’s share of various programs approved by Congress -- and $4.5 billion to $5 billion in “other state revenue.” This “other state revenue” is mainly Transportation Trust Fund money for highway and mass transit projects that comes out of the gas tax and hundreds of fines and fees paid by citizens and businesses that are supposed to be dedicated to specific purposes, but that are often diverted to balance the budget as needed.
With federal aid and “other state revenue” added in, New Jersey’s annual state spending is actually in the $44 billion to $48.5 billion range. This is the actual amount of annual spending the governor and legislature allocate, and you cannot understand the budget process without understanding the interrelationship among state tax revenue, federal aid, and “other state revenue.”
Two examples are most important. First, when Democratic Gov. Jon Corzine said he cut the state budget from $33.6 billion in his second year to $30.8 billion in his third year to $29.8 billion in his fourth year, he did not mention that federal aid – particularly President Barack Obama’s federal stimulus money – was increasing by $4.5 billion at the same time. Total state spending dropped by $900 million in Corzine’s third year, but jumped by $1.8 billion in his fourth year to a record total of $48.5 billion.
Second, Gov. Christie’s budget proposal calls for New Jersey to spend $45.8 billion this year – a $2.8 billion cut that is by far the largest drop in total state spending in modern New Jersey history. There are two main reasons for the drop: Federal stimulus aid, which Christie and the legislature do not control, is dropping by almost $1.2 billion, mostly in funding that went to school aid last year, and Christie is proposing cutting school aid by $850 million as a result. And the temporary $1.1 million income tax surcharge on those making over $400,000 a year expired Jan. 1. While the Democratic-controlled legislature appears willing to extend it by one more year, Christie has said he would veto any extension because he believes the tax is driving high-income families to flee the state.
From the end of the administration of Republican Gov. Christine Todd Whitman through the second year of the Democratic Corzine administration, state tax revenue grew every year from less than $20 billion in FY2000 to more than $33.6 billion in FY2008, when the Great Recession hit.
This eight-year revenue increase represented not only economic growth, but also a major corporate tax increase and a hike in the top income tax rate from 6.4 percent to 8.97 percent for “half-millionaires” by Democratic Gov. Jim McGreevey, followed by an increase in the sales tax from 6 percent to 7 percent by Gov. Corzine. When the recession hit, Corzine imposed the 8.97 percent rate on those making $400,000, increased the rate to 10.25 percent for those making $500,000 and added a top bracket of 10.75 percent for those making $1 million or more. Nevertheless, state revenue plummeted from $33.6 billion in FY2008 to $30.8 billion in FY2009; it is expected to come in at $29.8 billion this year, and is projected by Gov. Christie to be less than $28.3 billion in the fiscal year that begins July 1.
Federal aid rose steadily from $5.6 billion in FY2000 to $8.5 billion in FY2008, with the biggest increase coming in Medicaid, the ever-growing 50-50 state-federal program that pays for nursing homes and institutional care for the elderly, mentally ill, developmentally disabled and other needy populations.
When President Obama took office in January 2009, his first initiative was to work with the Democratic Congress to pass a $787 billion federal stimulus package to try to pull the nation out of its deep recession. That legislation, coupled with earlier initiatives, jumped federal aid to New Jersey from $8.9 billion the previous year to $11.3 billion in FY2009 and $13.5 billion in FY2010. The stimulus was intended as a short-term solution to get the economy through the worst of the recession, and federal aid for the fiscal year that begins July 1 is scheduled to decline to $12.3 billion, with most of the cut coming from money that went to school aid this year. Federal aid is expected to drop at least $600 million more in FY2012, which Gov. Christie will have to calculate into that year’s budget.
State income revenues jumped from $7.2 billion in FY2000 to $12.6 billion in FY2008 before diving to less than $10.5 billion in FY2009, despite a surcharge approved by Gov. Corzine and his Democratic-controlled legislature raising the top rate to 8.97 percent on income above $400,000, 10.25 percent above $500,000 and 10.75 percent above $1 million in 2009 and 2010.
Democratic legislative leaders, unions and liberal groups argue that Christie should extend the so-called “millionaire’s tax” for one more year instead of cutting property tax rebates and school aid so deeply. Even after the repeal of the “millionaire’s tax,” New Jersey has one of the most graduated income taxes in the country, with individual income tax rates ranging from 1.4 percent on income up to $20,000, to 6.37 percent on $75,001 to $500,000, and to 8.97 percent on $500,001 and above. For families, the tax brackets double; the 6.37 percent bracket, for example, kicks in on family income of $150,001 and above.
As a result of the highly graduated tax brackets, New Jersey’s wealthiest 1 percent of taxpayers pay almost half the income tax, and as a consequence, New Jersey’s income tax collections fluctuate more wildly than most states depending on the vagaries of Wall Street and corporate bonuses. As one former state Treasury official quipped, “When Wall Street sneezes, the New Jersey state budget gets the flu.”
The New Jersey state sales tax was raised by Democratic Gov. Florio to 7 percent in FY1991, cut back by the Republican legislature elected in the anti-Florio tax backlash to 6 percent in FY1993, and raised back to 7 percent by Democratic Gov. Corzine in FY2007 after a budget showdown with the Democratic Assembly that led to a shutdown of state government.
Corzine’s increase also extended the sales tax to more than $400 million in services, recognizing that New Jersey’s sales tax, like most states, was outdated because it mainly taxed goods like automobiles and electronics, while the nation was moving increasingly to a service-based economy.
New Jersey and other states are losing billions of dollars in potential revenue because of Congress’s decision not to tax Internet sales, a decision that puts state-based retailers at a competitive disadvantage. Overall, New Jersey’s sales tax is one of the most progressive in the nation because it exempts food, clothing and other necessities.
Democratic Gov. McGreevey more than doubled corporate income tax revenues in his first budget in FY2003 by imposing a minimum tax on corporations even if they did not make a profit. This tax increase was regarded as so anti-business that Democratic Gov. Corzine and a Democratic legislature later repealed it. New Jersey’s top corporate tax rate of 9 percent is still one of the highest in the country.
CASINO AND LOTTERY REVENUES
New Jersey’s main sources of gambling revenues have posted opposite performance records. New Jersey lottery revenues have grown steadily from $736 million in FY2000 to an anticipated $953 million next year, boosted by the willingness of governors and legislatures to add new games and include the state in high-paying multi-state lotteries.
Casino revenues, however, have been plummeting from a high of $667 million in FY2006 to just $274 million anticipated in FY2011. The drop from FY2006 to FY2007 was a result of changes adopted by Democratic Gov. Codey and the legislature to try to make Atlantic City more competitive, but the recent slide is attributable to a combination of the recession and, more ominous, the explosion of new gambling competition from “racinos” in Delaware and Pennsylvania, along with the rise of Indian casinos in other states.
GASOLINE TAX AND MOTOR VEHICLE FEES
Gasoline taxes and motor vehicle fees have risen slowly over the past 12 years. New Jersey’s gas tax is 10.5 cents a gallon and one of the lowest in the nation; because it is a per-gallon tax, it does not rise with gas prices, which have soared in recent years.
Gas taxes are projected to bring in $558 million next year, just 10 percent more than in FY2000. Motor vehicle fees are projected to bring in $393 million next year, just 2.5 percent more than in FY2000. To put those increases in perspective, overall state spending and state tax revenues both rose almost 50 percent during that same time period.
New Jersey’s inheritance tax has been a relatively consistent revenue source, growing from $485 million in FY2000 to a high of $698 million in FY2008. It fell to a six-year low in FY2010, but Gov. Christie projects a rebound to $583 million in FY2011.
Many Republicans nationally and locally denounce the inheritance tax as a “death tax” and call for its repeal; some New Jersey Republicans argue that the exodus of wealthy taxpayers from New Jersey is partially a result of their seeking residency in states without inheritance taxes.
State aid to education, including both direct aid to school districts and state-funded benefit such as teacher pensions and employer Social Security payments, almost doubled from $6.14 billion in FY 2000, the sixth year of the Republican Whitman administration, to $11.13 billion in FY2010, Democrat Jon Corzine's fourth and final year.
In fact, going back 30 years, this overall state aid figure dropped only twice, once during Gov. Whitman's first term in the mid-1990s, and then only marginally. The rise in state aid to education has paralleled the overall rise in state spending, making up about one-third of state revenue.
However, Corzine's final-year increase, from $10.78 billion to $11.13 billion, was possible only thanks to a $1.1 billion infusion of federal stimulus aid that was part of the massive $787 billion federal stimulus package passed by President Obama and a Democratic Congress in 2009.
With the federal stimulus money for education gone and the state facing a deep budget deficit, Gov. Christie, in the budget he proposed in Spring 2010, cut direct state aid to school districts by $819 million and chose to make no contribution to teacher pensions this year. His cut in overall state aid to education, to a proposed $10.31 billion this year, is not only the largest single-year reduction in any year, but is far larger than any single-year increase. As a change in state aid, it is rivaled historically only by the increase that followed the passage of the state income tax under Democratic Gov. Brendan T. Byrne in the mid-1970s.