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Revenue Shortfall Fuels Debate Over Tax Cut

Democrats question how Christie can afford to slash income tax by 10 percent.

For Governor Chris Christie, the timing couldn’t be worse.

State Treasurer Andrew Sidamon-Eristoff

As the governor made a triumphal tour of the morning talk shows yesterday touting his State of the State call for a 10 percent income tax cut, his Treasury Department was preparing to release revenue numbers showing that tax collections for the first six months of the fiscal year had come in $325.7 million – or 3.2 percent -- short of projections.

News of the shortfall added fuel to the Democratic-Republican debate over the speed of New Jersey’s economic recovery, the likely growth of tax revenues, and whether the state could afford to cut an estimated $1.1 billion in income tax revenue from its tax base over the next four fiscal years.

Treasury Commissioner Andrew Sidamon-Eristoff emphasized that even with the shortfall, revenue collections were $305 million higher in July-December 2011 than they were in July-December 2010. “New Jersey’s progress toward recovery made the first six months of the fiscal year brighter than the first half of last year,” he said, subtly echoing Christie’s “New Jersey Comeback” theme.

Sidamon-Eristoff could have pointed out that the $325 million shortfall would have been a lot higher if the Christie administration agreed to go along with Democratic demands last June to add $289 million more to the official revenue estimates in order to provide increased state aid to schools, counties and municipalities, and an income tax break for senior citizens’ pensions.

But now that Christie has announced plans to implement a 10 percent income tax cut that will require more than $1.1 billion in revenue growth or budget cuts over the next four fiscal years to pay for it, the Republican Christie administration is suddenly more bullish on state revenues, while Democratic legislative leaders are the ones asking questions about over-optimistic revenue forecasts.

“The so-called ‘New Jersey Comeback’ appears to have very been short-lived. It’s entirely missing from this fiscal year’s revenue figures,” said Assembly Budget Committee Chairman Vincent Prieto (D-Hudson). “These new numbers are cause for concern.”

The state had expected to collect $10.206 billion of its $29.4 billion in revenue by the end of December, but only $9.881 billion has come in, leaving the state $325 million short. If that trend continued through the June 30, 2012, end of the budget year, state revenues would be down almost $900 million below projections -- which would wreak havoc with next year’s budget and with Christie’s plan to use projected revenue growth to pay for the first $180 million installment of his income tax cut.

Charles Steindel, the Treasury Department’s chief economist, noted that December income tax collections came in lower than expected for the federal government and other states too. Treasury officials noted last spring that income tax collections came in much higher than expected last December: Corporate executives pushed as much income as possible into 2010 because they were worried that the Bush tax cuts would not be extended into 2011 by President Obama and Congress.

“Key indicators do not now suggest that a dramatic change in outlook is warranted for the rest of the fiscal year,” Steindel insisted. In fact, state income taxes were up 3.8 percent and sales tax collections up 3.6 percent over the past six months, compared to the same period in 2010, mirroring federal Bureau of Economic Analysis income statistics showing monthly income growth holding steady at 3.5 percent to 4 percent higher than the previous year.

The problem for Christie and his Treasury team is that they will not know if the shortfall in revenues for the first six months is an anomaly or a trend until early May when they will be able to tally the millions of individual income tax returns that are filed by April 15. That’s more than two-and-a-half months after February 28, when Christie is scheduled to deliver his budget for Fiscal Year 2013 -- and the revenue projections on which they are based -- to the legislature.

New Jersey has one of the most sharply graduated income taxes in the nation, with the wealthiest 1 percent of taxpayers paying 50 percent of the total tax bill. That makes state income tax projections notoriously unreliable because the state relies so heavily on corporate bonuses and stock options. Or, as one former Treasury official said, “When Wall Street sneezes, New Jersey catches pneumonia.”

Whether the $325 million tax shortfall of the first six months of this fiscal year are just a sniffle or the first signs of pneumonia won’t be clear for months. But it is clear that the Christie administration has history on its side in expecting an eventual revenue surge, and its budget challenges are more manageable this year than they were in the two previous years.

New Jersey state revenue peaked at $33.6 billion in Fiscal Year 2008 before plummeting in the wake of the Great Recession to $30.8 billion in FY2009, $29.8 billion in FY2010 and $28.3 billion in FY2011, Christie’s first budget. Christie’s projection of $29.4 billion in increased revenue this year -- if achieved -- would represent a $1.1 billion revenue increase and a 3.7 percent growth rate.

Despite yesterday’s budget shortfall disclosure, several budget experts interviewed on background agreed that Christie could probably count on another $1 billion revenue increase for the upcoming year, and quite possibly for several years after that, even with the economy growing sluggishly at 3.5 percent to 4 percent, as it is now Historically, economic growth following past recessions in New Jersey has generally topped 6 percent or 7 percent annually, and it hit 8.5 percent in 2006.

Budget experts noted that the state hit its record revenue of $33.6 billion with state tax rates at their current levels -- before Democratic Gov. Jon Corzine added the higher income tax brackets for those earning over $400,000 a year, which Christie allowed to expire in 2010.

“State revenues are around $30 billion now, so we’re talking about a 10 percent shortfall from the $33 billion record of FY2008,” one budget expert noted. “Revenues tend to go up with aggregate income, and if we think revenues will grow 3 percent or 4 percent a year over the next several years, it is certainly plausible that state revenues would exceed the previous peak.”

Revenue growth at that level would give the governor and legislative leaders about $3 billion more to work with in the years ahead, but that doesn’t mean that there aren’t already claims on much of that additional revenue -- and if Christie has his way, $1.1 billion of that revenue will be eliminated through his 10 percent income tax cut.

The long-range budget challenges are daunting.

First, under the pension law passed by Christie, Senate President Stephen Sweeney (D-Gloucester), and Assembly Speaker Sheila Oliver (D-Essex) last year, the state has seven years to phase in its contribution to the pension system until it reaches full funding. The first budgeted payment of more than $400 million will be made in June, and that number will jump to more than $800 million next year, over $1.2 billion in FY2014, over $1.6 billion in FY2015, over $2.0 billion in FY2016, over $2.4 billion in FY2017 and over $2.8 billion in FY2018.

Second, New Jersey’s debt service on decades of borrowing to fund both capital projects and continuing operations is continuing to grow exponentially, and one budget expert projected that a $400 million increase in debt service payments might be needed in the upcoming budget, unless the Christie administration finds another refinancing option.

Third, the state is more than $1 billion short of providing full funding to its school aid formula, property tax rebates remain $2 billion below their height under Corzine, and municipal aid formulas are underfunded by upwards of $400 million. Christie has already signaled his dissatisfaction with the school funding formula, particularly for the 31 poorer school districts covered by the Abbott v. Burke legislation that receive 60 percent of all state school aid. He increased property tax rebates in last year’s budget and will be under pressure to do so again.

Fourth, Christie’s budget anticipated sizable savings from an overhaul of state Medicaid programs, but not all of those savings will likely be achieved. Depending on the results, Medicaid could require an increase of “hundreds of millions of dollars” again, according to one budget expert.

Fifth, while Christie’s refinancing of the state Transportation Trust Fund averted the need for the state to make contributions out of general revenues next year, the governor’s pay-as-you-go financing initiative will require state appropriations from the general budget at a level of $51 million in FY2014, $166 million in FY2015 and $281 million in FY2016.

Finally, if Christie is able to convince the Democratic-controlled Legislature of the merits of his income tax cut, the state will need to set give up $180 million in income tax revenue in the upcoming year, $360 million more in FY2014, an additional $360 million in FY2015 and $180 million more in FY2016 -- an aggregate of $1.1 billion by the final year of the cut.

Christie began his campaign for the income tax cut on TV and radio shows and at a town meeting yesterday, but he has yet to release full details of his income tax plan. That will come February 28, when he puts it in writing in his budget message.

Mark Magyar is an editor-at-large for NJ Spotlight.

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