Republican Governor Chris Christie yesterday proposed a phased-in 10 percent income tax cut for every New Jersey taxpayer, but Democratic legislative leaders rejected the plan as a tax cut for the rich and said the governor should try to cut property taxes instead.
Christie’s surprise call in his State of the State speech for an across-the-board income tax cut runs directly counter to previously announced Democratic plans to reinstate a higher income tax rate for millionaires, which sets up a tax policy stalemate: Christie cannot implement an income tax cut without support from a sizable bloc of Democratic legislators, and the Democrats’ 24-16 control of the Senate and 47-33 margin in the Assembly falls short of the two-thirds majority needed to override the governor’s veto if they pass a millionaire’s tax increase again this spring.
Nevertheless, the battle over the income tax reflects a fundamental clash of political philosophies that promises not only to dominate the upcoming five months of debate over the next budget, but also to carry over into the 2013 campaign, when Christie will be up for reelection along with all 80 Assembly members.
“This was the Governor’s ‘Political Future’ speech, written with his 2013 reelection and national plans in mind,” Monmouth University political scientist Patrick Murray said, noting that Christie used the speech to stake out policy differences with Democratic legislative leaders “on issues where even if he doesn’t win in the legislature, he could win in the court of public opinion.”
Christie, fresh off a triumphant Oprah Winfrey interview over the weekend, is clearly aiming at a national court of public opinion as well. Christie pointedly noted that governors in Connecticut and New York have raised their top income tax rates, that California has proposed to raise its top rate by up to two percentage points, and that Illinois has raised its income taxes across-the-board, by 67 percent. All four states have Democratic governors.
Christie’s State of the State speech, boldly entitled “The New Jersey Comeback Has Begun,” promised to take New Jersey in a different direction -- “to reduce income tax rates for each and every New Jerseyan. In every tax bracket. By 10 percent across the board.” As part of that tax cut, he promised to fully restore the Earned Income Tax Credit for the working poor, which he cut during his first year in office.
The state income tax accounted for $10.5 billion – or more than one third -- of the $29.4 billion in state revenue in this year’s budget, and reporters immediately bombarded Democratic leaders after the speech with questions about where Christie could possibly find $1.05 billion in spending reductions to pay for the income tax cut in next year’s budget.
It turned out to be the wrong question.
What Christie failed to mention in his hour-long speech was that the 10 percent income tax rate reductions would be phased in over three calendar years – 2013, 2014 and 2015 – which would actually spread the fiscal impact over four budgets because state fiscal years run from July 1 to June 30. Consequently, Christie would only have to find $175 million in next year’s FY2013 budget, $350 million in additional cuts in FY2014 and FY2015, and the final $175 million in FY2016.
With Wall Street revenues bouncing back and the rest of the state economy slowly rebounding , state revenues were projected to grow by almost $1 billion in the current budget year compared to the year that ended June 30, 2011, and another large revenue increase is expected in the upcoming budget year. Consequently, a $175 million income tax cut could potentially be covered by revenue growth, although there are competing demands for that money, including a scheduled $550 million increase in state pension payments.
It was unclear yesterday if Republican legislative leaders had been fully briefed on all of the implications of Christie’s income tax cut before yesterday’s speech. “The governor laid out a plan, and we’ll sit down with the governor and run the numbers,” said Assembly Minority Leader Jon Bramnick (R-Union). “He’s not one to put something out there without knowing that the numbers work.”
While Assembly Speaker Sheila Oliver (D-Essex) denounced the Christie plan as “a return to the policy of the Whitman administration,” Christie’s plan for a 10 percent income tax over four years actually is less ambitious than Republican Governor Christine Todd Whitman’s income tax cut of 30 percent for lower and middle income taxpayers, 15 percent for upper middle income, and 7 percent for the wealthy, which she implemented in just two years in 1995 and 1996.
Oliver, Senate President Stephen Sweeney (D-Gloucester), and other Democratic legislative leaders cast Christie’s call for an income tax cut in class terms. Sweeney, who sponsored legislation vetoed by Christie last spring to reimpose an income tax surcharge on millionaires, contended that “under Christie, millionaires have been a protected class … the governor has put the interests of 16,000 millionaires ahead of the interests of 8 million New Jerseyans who make up 99.9 percent of the state.”
“Let’s be clear about this,” Assembly Majority Leader Louis Greenwald (D-Camden) argued. “Governor Christie’s income tax plan may sound nice, but it would save a family earning $50,000 per year just $80.50 and a family earning $100,000 per year just $275, all while a millionaires get a $7,265.75 tax break. Under this tax cut, middle-class families don’t save enough for a week’s worth of groceries, while millionaires save enough to go on an exotic vacation."
“The governor is once again missing the point,” Greenwald, a former budget committee chairman, said. “He continues to focus on tax breaks for the rich while middle-class families struggle with the highest property taxes in the nation. If the governor wants to cut a tax, let’s focus on finding a way to chop property taxes by 10 percent.”
Cutting property taxes by 10 percent would require the governor to find $2.5 billion in savings, however. Property taxes in New Jersey take in $25 billion, which is more revenue than income, sales, and corporate income taxes combined.
While Democrats focused on the class implications of Christie’s tax cut plan, the governor stressed the importance of income tax cuts to economic competitiveness. And while Christie’s call for an income tax cut in this year’s State of the State speech came as a surprise to most political observers, it shouldn’t have, Republican officials said.
Richard Bagger, the governor’s chief of staff who is stepping down at the end of this month after more than two years overseeing the governor’s agenda, noted that “cutting income taxes has been the governor’s goal all along. Over the last two years, he put New Jersey’s finances in a sound position to where we can now address our competitiveness as a state.”
Christie made it clear that he regarded his proposal for an income tax cut as an issue of economic competitiveness.
“Make no mistake. We are in a competition,” the governor said. “A competition for jobs -- among countries, yes, but also among states, In the last decade, two-thirds of all companies which moved jobs to a new location did not move to other countries -- they moved from one state to another.”
Citing income tax increases enacted or proposed in New York, Connecticut, California and Illinois, Christie declared, “In this environment, the best way to compete is to show a different direction. Let others choose tax increases. We choose responsible tax cuts to give our overburdened citizens real relief. And to help New Jersey grow.”
Christie dismissed in advance Democratic arguments that New York Governor Andrew Cuomo’s decision to enact new income tax brackets that “only raised taxes on the rich” should be followed in New Jersey, insisting that only “an across the board tax cut is fair.”
He also essentially declared victory in the battle to hold down property taxes, noting that the rate of increase in property taxes, which “had risen 70 percent in the ten years before I became governor,” had slowed because of the 2 percent cap on property taxes and interest arbitration awards he had teamed up with Sweeney and Oliver to enact.
Christie asserted that a recent Star-Ledger “headline said it all: ‘At long last, tax relief.’” He did not mention that the article noted that property taxes had risen 2.4 percent even with the cap, and Sweeney contended that they would have risen even higher if the legislature had approved the 2.5 percent cap that Christie had originally proposed.
Both Christie’s speech and the Democratic legislative leadership press conference that followed made it clear that the tax policy battle over whether income tax cuts or property tax reductions should take priority would be a matter of political debate through the next election.
Christie also reiterated his long-held positions on, particularly changes in the tenure laws, a revision of the school funding formula, an expansion of charter schools and the implementation of school vouchers in failing districts.
He won his biggest bipartisan applause, however, with his surprising call for a massive shift in state corrections policy to emphasize drug treatment for the nonviolent drug offenders who make up a third of the state’s prison population.
“Let us reclaim the lives of those drug offenders who have not committed a violent crime,” said Christie, who served seven years as United States Attorney for New Jersey before running for governor. “By investing time and money in drug treatment -- in an in-house, secure facility -- rather than putting them in prison.
“Experience has shown that treating non-violent drug offenders is two-thirds less expensive than warehousing them in prison. And more importantly -- as long as they have not violently victimized society -- everyone deserves a second chance because no life is disposable. I am not satisfied to have this as merely a pilot project. I am calling for a transformation of the way we deal with drug abuse and incarceration in every corner of New Jersey.”
Oliver and other Democrats immediately pledged their support for increased drug treatment for nonviolent offenders.