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What Battle of the Budget?

Christie gains Democratic consent to record cut in state spending.

Introduction

Three months ago, this year’s budget battle promised to be one of the most contentious in state history, with Democratic legislative leaders vowing to go to the mat to force Republican Gov. Chris Christie to extend the millionaire’s tax to avert deep cuts in property tax rebates, school and municipal aid and other programs.

But those who forecast a bitter impasse that would force the second shutdown of state government in four years were proved wrong when Democratic legislative leaders gave Christie just enough votes --four in the Senate and eight in the Assembly--to pass the biggest budget cut in state history.

The $28.364 billion state budget approved last night represents more than a $1.4 billion cut in the $29.8 billion state budget approved in Democratic Gov. Jon Corzine’s final year. That figure is sharply down from the $33.6 billion in state revenue appropriated and spent by Corzine and the Democratic Legislature three years ago in FY2008, before the Great Recession ravaged state tax collections. In fact, the $28.364 billion is the lowest state budget since Democratic Gov. Jim McGreevey’s FY2004 budget came in at $25 billion seven years ago. The cut is even more substantial in total state spending, which includes federal aid, the Transportation Trust Fund and various dedicated funds and fees. While Corzine’s final budget spent a record $48.5 billion, Christie’s first budget cuts total spending by $2.5 billion to $46.0 billion, the lowest level in four years.

Pushing Problems Into Next Year

In the end, the compromise $28.364 billion state budget that Christie and Democratic legislative leaders agreed to a week ago is $97.1 million higher than the budget Christie proposed in March, despite a further decline in state revenues projected by the non-partisan Office of Legislative Services in May. (Click here for a series of charts detailing the major differences between Christie’s original budget proposal and S-3000, the compromise budget bill that Christie and the Legislature agreed upon.)

The new budget anticipates a $101.2 million decline in revenues, but essentially pushes the cost of the $97 million in new spending and the problem of how to deal with the revenue drop into next year by lowering Christie’s projected $500.8 million surplus to $300.2 million. That figure amounts to just over a 1 percent surplus, well below the 2 percent or more that the bond rating agencies prefer. The small surplus means that if state revenues come in even marginally lower at any point next year, the Christie administration will have to make further mid-year cuts in spending because there is no real surplus to cushion the blow.

Overall, the Democratic-controlled Legislature made $215.6 million in changes to Christie’s budget, but decided not to force a budget shutdown over the major issues. Christie succeeded in passing a balanced budget while rolling back the millionaire’s tax, cutting state aid to school districts by $828 million and slicing $848 million in property tax rebates. Democrats will campaign hard on all three of these issues in the midterm legislative elections in 2011.

Democrats made their final changes in the Senate yesterday, restoring $7.5 million for family planning clinics cut by Christie, who is New Jersey’s first anti-abortion governor since the U.S. Supreme Court’s Roe v. Wade ruling legalized abortion. The bill passed the Senate by a 30-10 margin, sufficient to override an expected Christie veto; the $7.5 million state appropriation is expected to draw down $67.5 million in federal matching funds. The Democrats also switched $26.4 million from the state’s charity care program to expand Family Care coverage to 39,000 more working parents.

Small But Significant Restorals

Some of the most important budget restorations achieved by the Democrats did not involve large sums. It cost just $6.4 million to keep the Garrett W. Hagedorn Gero-Psychiatric Center open--a rare victory for the state’s public employee unions that Christie has attacked so vociferously. A $4 million appropriation from the New Jersey Cultural Trust's principal will keep the Old Barracks Museum fighting the Revolution in Trenton, the Battleship New Jersey afloat in Camden and the Newark Museum from having to make severe budget cuts. A $3.5 million appropriation will keep the State Commission of Investigation, an independent investigatory body created by the Legislature to probe corruption and waste, independent of the executive branch, a.k.a. the Christie administration. New Jersey’s public libraries, which were facing deep cuts, got a $4 million aid restoration. And a $1 million appropriation for New Jersey STARS will preserve the program that provides scholarships first to community colleges and then to four-year state colleges for high-ranking New Jersey high school seniors who agree to stay in-state for college.

Democrats also forced Christie to back down on his plan to eliminate the popular ban on Sunday sales in Bergen, which is expected to be a major issue in this November’s Bergen County executive and freeholder races. Christie anticipated Sunday shopping in Bergen would have generated $63 million in additional sales tax revenue, but agreed to use additional revenue expected from tax compliance and corporate audit programs to fill the gap.

A Bloodless Victory

In the end, the battle over the budget this year paled in comparison to Democrat Brendan Byrne’s fight to pass the income tax almost 35 years ago and Democrat Jim Florio’s $2.8 billion tax increase 20 years ago. Republican Governor Christie achieved a relatively bloodless victory, considering the fact that he was the first governor forced to pass a budget with both houses of the legislature controlled by the opposing party since Florio had to contend with a Republican legislature elected in an antitax backlash in his final two budgets in FY1993 and FY1994. This year’s budget battle came after a recession second only to the Great Depression in its impact this century, and with the state facing a budget deficit of historic proportions, exacerbated by an expected $1.2 billion reduction in federal stimulus aid. In response, Christie proposed a $2.8 billion cut in actual state spending, including both state and federal sources of revenue, which was by far the largest such cut not only in dollars but in percentage, and succeeded in winning Democratic acceptance of a $2.5 billion cut that left most of his cuts in place.

The following package of charts, some going back 12 years, provides perspective on some of the major spending and revenue issues in the budget.

State Spending and 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 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 for specific purposes, but 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 it's not possible to understand the budget process without understanding the relationship of all three areas.

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 Obama’s federal stimulus money--was increasing by $4.5 billion at the same time. Total state spending dropped by $800 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, the budget for the upcoming fiscal year agreed to by Christie and Democratic legislative leaders calls for New Jersey to spend $46.0 billion this year--a $2.5 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. First, 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. Christie is proposing cutting school aid by $850 million as a result. Second, the temporary $1.1 million income tax surcharge on those making over $400,000 a year expired January 1. While the Democratic-controlled legislature proposed a millionaire’s tax extension for one more year, Christie wasted no time in vetoing the extension because he believes the tax is driving high-income families to flee the state.

State Revenue

From the end of the Republican Whitman administration 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 and was projected to come in at $29.8 billion this year, and is expected by Christie and the legislature to be $28.364 billion in the fiscal year that begins July 1.

Federal Aid

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 his 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 $8.5 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 $12.4 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 Christie will have to calculate into that year’s budget.

Income Tax

State income tax 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 Governor 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 argued 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, but Christie vetoed the tax extension as soon as it reached his desk. 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; $1.75 percent on income from $20,001 to $35,000; 3.5 percent on $35,001 to $40,000; 5.25 percent on $40,001 to $75,000; 6.37 percent on $75,001 to $500,000; and 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 these highly graduated tax brackets, New Jersey’s wealthiest 1 percent pay almost half the income tax. 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."

Sales Tax

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 Governor Corzine in FY2007 after a budget showdown with the Democratic Assembly that led to a shutdown of state government. Corzine’s sales tax increase also expanded 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.

Corporate Taxes

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 multistate lotteries. Casino revenues, however, have been plummeting from a high of $667 million in FY2006 to just under $270 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 has been a combination of the recession and, more ominous, the explosion of new gambling competition from casinos in Delaware and Pennsylvania and 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 $572.6 million next year, just 13 percent more than in FY2000. Motor vehicle fees are projected to bring in $398.5 million next year, just 4 percent more than in FY2000. To put that gas tax increase in perspective, overall state spending and state tax revenues both rose almost 50 percent during that same time period. Motor vehicle fees available for use in the general state budget are projected to bring in $398.5 million next year, just 4 percent more than in FY2000. That figure, however, does not include $311 million in additional motor vehicle fees counted as "other revenue" that was shifted off-budget when the New Jersey Motor Vehicle Commission was created in FY2003; off-budget motor vehicle fees totaled just $27 million in FY2000.





Inheritance Tax

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 $587.7 million in FY2011. Many Republicans nationally denounce the inheritance tax as a death tax and call for its repeal, and some New Jersey Republicans argue that some of the controversial exodus of wealthy taxpayers from New Jersey is due to people moving to states without inheritance taxes.








School Aid

State aid to education includes 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. 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.


Municipal Aid - By Municipality

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School Aid - By School District





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.

Mark Magyar is an adjunct professor in the Rutgers University School of Labor and Management Relations. A former Statehouse reporter, government official and public policy institute director, he served as policy director for the independent Daggett for Governor campaign.



Mike Scott is a freelance artist who specializes in cartooning, editorial illustration and informational graphics. He has worked for The Courier-News and The Star-Ledger. His illustrations appear regularly in Inside Jersey magazine and his editorial cartoons appear on newjerseynewsroom.com

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