Christie Team Underestimates Cost of Income Tax Cut
Pricetag would jump from $197 million next year to over $1.3 billion by FY2016.
Gov. Chris Christie’s proposed 10 percent across-the-board income tax cut will cost the state budget hundreds of millions of dollars more than previously acknowledged.
Budget documents and public statements by the governor and other administration officials pegged the cost of the phased-in income tax cut at $183.3 million in the first year and just under $1.1 billion when fully implemented.
But an NJ Spotlight analysis showed that the actual first-year cost of the income tax cut is $197.3 million and that the cost when fully implemented in Fiscal Year 2016 could easily top $1.3 billion.
The cost of the income tax cut is a crucial issue as Christie and Democratic legislative leaders debate the relative merits of an income tax cut that would provide a $7,265 tax cut to millionaires and an $80 reduction for families making $50,000 vs. the potential restoration of $1,000-plus property tax credits for most New Jersey homeowners.
Getting the cost figures right is also critical because Christie has been campaigning hard to persuade New Jerseyans that the state can afford to make a 10 percent income tax cut and still fund other needed programs, and because Democrats are already questioning the Christie administration’s optimistic assumption that revenues will jump 7.5 percent next year when income tax collections this year are only growing at half the expected rate.
A Treasury Department spokesman last night deferred questions about the discrepancy in income tax figures until the following day, and the governor’s spokesman failed to respond to an email.
The reason for the miscalculation was easy to see.
Inexplicably, as explained in a “fiscal note,” the spreadsheet showing the year-by-year budget impact of Christie’s income and business tax cuts used Fiscal Year 2007 and Fiscal Year 2008 tax data -- four-year-old numbers -- to calculate the size of the projected tax cuts, even though up-to-date Fiscal Year 2013 tax projections appear elsewhere throughout the official “New Jersey Comeback Budget Summary.”
Christie’s proposed 10 percent across-the-board income tax cut is scheduled to be phased in over three years -- 2013, 2014, and 2015. Because the state’s fiscal year runs from July 1 to June 30, the actual tax cut would be spread across four budget years, essentially providing taxpayers with a 1.67 percent income tax cut in the upcoming Fiscal Year 2013, 3.33 percent more in Fiscal Year 2014, another 3.33 percent in Fiscal Year 2015, and the final 1.67 percent in Fiscal Year 2016.
With the administration officially projecting $11.837 billion in income tax revenue in Fiscal Year 2013, calculating the actual first-year cost of the income tax cut to be $197.3 million -- rather than $183.3 million -- was a simple matter of multiplication and subtraction.
The $14 million discrepancy -- while embarrassing -- is not an earth-shaking matter in a $31.2 billion budget.
However, the administration’s calculations also “do not reflect projections of growth in tax bases, inflation, demographics, or dynamic scoring” – which, in Treasury-speak, means that their tax projections do not take into account the continued income tax and business tax growth they are counting on to balance future budgets. And those numbers add up when it comes to the fourth year of a fully implemented billion-dollar tax cut.
Christie’s budget chart shows the cost of the fully implemented 10 percent income tax cut to be $1.0998 billion, but that is a mythical figure based on what a 10 percent cut of some combination of 2007 and 2008 income tax numbers would have been at the time.
Taking the Christie administration’s $11.837 billion income tax projection for Fiscal Year 2013 and conservatively assuming 4 percent annual income tax growth over the following three years, the actual impact of Christie’s 10 percent tax cut on income tax revenue would be $1.335 billion in Fiscal Year 2016 -- $235 million more than the governor’s budget has estimated.
That growth estimate may actually be on the low side, considering the Christie administration’s projection of 6.3 percent income tax growth in Fiscal Year 2013. The Facing Our Future report issued by the Council of New Jersey Grantmakers and compiled by a bipartisan fiscal team that included former Republican and Democratic state treasurers and a former director of the state Office of Management and Budget projected income tax growth would be between 5.10 percent and 7.30 percent for the five budget years from Fiscal Year 2012 to 2016. If income tax revenue did grow an average of 6 percent, the cost of the income tax cut in Fiscal Year 2016 would be $1.410 billion.
Even in a $31 billion state budget, the difference between a tax cut that cost just under $1.1 billion and a tax cut that cost $1.335 billion is substantial. To put it in perspective, that $235 million is the total amount of state aid next year for William Paterson University, The College of New Jersey, Ramapo College, and Richard Stockton College of New Jersey combined. It would also be enough to raise the average property tax credit in New Jersey from $480 to $600.
It isn’t only Christie’s income tax cuts that are based upon 2007 and 2008 data and fail to take into account revenue growth. The projections on the impact of Christie’s business tax cuts, begun in Fiscal Year 2012, share the flaw.
Assuming a 4 percent average growth figure would raise the impact of Christie’s business tax cuts from the $662 million listed for Fiscal Year 2016 on the spreadsheet to $774.4 million – a $112 million difference. Once again, a 4 percent growth projection is conservative. The Christie administration is projecting 13.5 percent in corporate income tax growth for Fiscal Year 2013, and the Facing Our Future group projected corporate income tax growth to average between 8.08 percent and 9.79 percent for Fiscal Years 2012 to 2016.
Taken together, the Fiscal Year 2016 impact of Christie’s proposed income and business tax cuts, assuming a 4 percent growth rate, would total $2.110 billion -- almost $300 million more than the $1.812 billion figure projected on the Christie administration’s spreadsheet touting “Two Years of Pro-Growth Tax Relief.” Similar disparities would exist in Fiscal Years 2014 and 2015, again due to the failure to figure in projected tax growth.