The Numbers Game: Can NJ Afford Christie's Tax Cuts?
S&P gives thumbs down to the governor's revenue projections.
While Gov. Chris Christie took his campaign for a 10 percent income tax cut to CBS's "Face the Nation" yesterday morning, trouble continued to brew in the wake of Standard & Poor's thumbs-down verdict on Christie's budget and revenue projections.
Standard & Poor's questioned Christie's assertion that a $2.2 billion surge in state revenue would swell the Garden State's coffers in the upcoming fiscal year, enabling him to cut business and income taxes while paying for pensions, debt service, and other bills piled up by previous governors.
The critical S&P report raises the stakes for Christie and State Treasurer Andrew Sidamon-Eristoff as they await a similar report expected to be issued this week by Moody's, the second major credit rating agency. Meanwhile, the nonpartisan Office of Legislative Services prepares its own revenue forecast for review by the Democratic-controlled Senate and Assembly budget committees next month.
While Christie and Democratic legislative leaders have been sparring for the past six weeks over whether to cut income taxes or property taxes, the real question is whether New Jersey can afford a major tax cut at all.
When fully phased in four years from now, Christie's proposed income and business tax cuts would cut state revenue by more than $2 billion, while rising pension and debt service costs would add $2.7 billion in fixed budget costs.
It would take four consecutive years of booming economic growth to fill that $4.7 billion budget hole and cover other built-in spending needs -- and budget analysts are questioning how the Christie administration can be so optimistic in its revenue projections not only this year and next, but also for the next three fiscal years as well.
"For Christie to achieve what he would like to achieve would require annual revenue growth in the area of 5 percent, and while everyone would love for the governor to be right on this, we have to be prudent and plan for the likelihood that the economic rebound does not allow for that level of growth," said Raphael Caprio, professor of public policy at Rutgers University and a leading budget expert.
Christie insists that he's right and, further, that he's being responsible.
Asked by CBS correspondent Bob Schieffer on "Face the Nation" if New Jersey could afford a 10 percent income tax cut, Christie said, "We can afford it now because we made a lot of very hard decisions the last two years. We cut spending -- real spending, not projected growth, but real spending -- two years in a row in my first two budgets. What we've seen is some economic growth return to New Jersey, and we've continued to hold the line on spending."
Christie, who is often touted as a potential GOP presidential or vice presidential candidate, has come in for some criticism nationally from conservatives as a "RINO" -- Republican In Name Only -- over the spending increases in next year's budget. Christie's proposed $31.2 billion state budget would be the second-largest in New Jersey history, and his spending total of $49.474 billion in combined state, federal, and dedicated funds would surpass Democratic Gov. Jon Corzine's stimulus-fed final budget as the all-time-high.
But Christie yesterday focused on the impact that three years of tax cuts would have on New Jersey. "This is a state, Bob, that had 115 tax and fee increases in eight years before I became governor," Christie said. "People deserve to get some of their money back. We're doing it responsibly by the way -- 10 percent phased in over three years so we don't blow a hole in the budget and we have a way to adjust"– a tacit admission by the governor that he will have to wait for the May income tax numbers to see how well his administration's revenue projections for this year and next year will hold up.
Christie and Sidamon-Eristoff last week projected that state revenues for the current fiscal year would exceed the official forecast by $50 million by June 30 -- despite lagging $300 million behind projections for the first seven months – and that revenues would grow by $2.217 billion in Fiscal Year 2013. Those projections would represent a 7.5 percent growth rate, and the figure would be even higher if Christie were not proposing a $375 million increase in tax cuts.
Standard & Poor's, in its analysis of Christie's proposed $31.2 billion budget, sharply questioned those growth projections, asserting that New Jersey's "budget remains structurally unbalanced," and that "the economic assumptions that underlay the state's revenue forecast appear to be optimistic based on current and projected economic conditions at the state and national levels."
John Sugden-Castillo, the S&P credit analyst who wrote the Friday report, also questioned the state's increasing reliance on one-shot revenues and the decision to use $288 million from the projected end-of-year surplus to fund next year's budget, leaving "a limited financial cushion" of just $300 million -- less than 1 percent of the budget -- to "offset revenue shortfalls" if tax collections fall short.
Sidamon-Eristoff issued a statement asserting that "This governor has an unbroken record of creating responsible, balanced budgets without tax increases that have been built on solid, conservative revenue estimates. We think S&P should learn from its own experience and make more of an effort to avoid reaching premature conclusions."
While the credit-rating agencies and Democratic budget experts like Assembly Majority Leader Lou Greenwald (D-Camden) and Senate Budget Committee Chairman Paul Sarlo (D-Bergen) are questioning the accuracy of Christie's revenue projections, academic budget experts are questioning how the governor can afford to make the income and business tax cuts he has proposed and cover the rising costs of pensions, debt service, and other built-in state obligations at the same time.
Implementation of Christie's proposed income tax cut, combined with a series of business tax cuts approved last year, would take more than $550 million in revenue out of the state budget this year and cost the state more than $2 billion in lost revenue four years from now when the tax cuts are fully implemented in Fiscal Year 2016.
New Jersey's pension contribution costs would jump from $484 million to almost $2.9 billion over that same four-year period, while debt service would rise almost $350 million.
Covering the cost of the tax cuts, pensions, and debt service alone would require the equivalent of $4.7 billion in revenue growth over the next four years -- a 16 percent jump over the $29.7 billion in Fiscal Year 2012 revenue that the Christie administration still expects to collect by June 30 despite seven months of subpar tax collections.
Since 2000, the only four-year periods in which state revenue growth exceeded 16 percent were those in which Democratic governors passed major increases in corporate, income, or sales taxes.
Caprio served on a blue-ribbon bipartisan budget task force that warned last January that New Jersey tax revenues would be insufficient to meet state, county, and municipal budget needs over the next four years – and that was before Christie proposed any of his business and income tax cuts that would exacerbate the potential shortfall.
Former state Office of Management and Budget Director Richard Keevey and former state Treasurers Sam Crane and Feather O'Connor Houstoun were among the budget experts who served with Caprio on the task force convened by the nonprofit, nonpartisan Council of New Jersey Grantmakers to compare New Jersey's likely revenue growth with its budget needs through Fiscal Year 2016.
In Facing Our Future, Caprio and the other budget experts laid out two revenue scenarios. The "more aggressive" scenario projected average annual revenue growth of 5.15 percent, while the "slow to moderate" scenario forecast average revenue growth of 3.74 percent -- a growth rate that would be insufficient to cover the costs of Christie's income and business tax cuts and the state's pension and debt service obligations.
Based on studies by the Rockefeller Foundation, the National Association of State Budget Officers, and New Jersey's own OMB and Office of Legislative Services, the Facing Our Future fiscal team concluded that long-term growth "will be moderate at best" -- in which case Christie would have to slash government services or state aid to pay for his tax cuts.
However, the Fiscal Year 2013 budget Christie unveiled Tuesday went far beyond Facing Our Future's "more aggressive" scenario in its assumptions, projecting 7.5 percent overall growth despite $375 million in additional tax cuts -- the equivalent of an 8.7 percent revenue increase in a single year if there were no tax cuts.
During his Budget Address Tuesday, Christie said the projected revenue surge would fund $1.1 billion in new spending over the current year, including a huge increase in pension funding and more money for schools, colleges, tuition aid, and developmentally disabled and drug rehabilitation programs. The array of funding increases provided the political buildup for Christie's clarion call to the legislature: "Why not cut income taxes for all New Jersey now that our fiscal house is in order?"
Democratic leaders and state budget experts, now backed by Standard & Poor's, question whether the state's fiscal house is "in order."
In the short run, Caprio noted, any significant shortfall in current-year state revenues would create an immediate problem for next year's revenue estimates as well. "That would create real questions about just how much revenue growth we should reasonably expect in Fiscal Year 2013," Caprio said. "If state revenues are down $250 million this year, that's really a $500 million problem because your estimated revenue growth for next year starts at a lower base." And with state revenues already projected to grow 7.5 percent next year, it would be hard for the Treasury Department to justify adding another $250 million to its projection -- even if the governor does have the final say in certifying revenues for the budget.
If revenues do come in as Christie and Sidamon-Eristoff project this year and next year, it would mean that New Jersey's economy has fully bounced back in a single year to pre-recession Fiscal Year 2007 levels.
The problem would come in the three years that follow. Just paying for pensions, debt service, and Christie's business and income tax cuts would eat up $1.36 billion in Fiscal Year 2014, $1.23 billion more in Fiscal Year 2015, and $973 million in Fiscal Year 2016 – a total tab of $3.5 billion.
With Christie vowing to veto any tax increase, that $3.5 billion would represent most of New Jersey's potential revenue growth over that three-year period, and any remaining revenue will be needed just to cover basic increases in Medicaid, health insurance for retirees, and normal inflationary costs -- not to mention Christie's promise to increase pay-as-you-go funding for transportation capital projects from general revenues.
And while Christie's proposed income and business tax cuts would be fully implemented by Fiscal Year 2016, it would not be until Fiscal Year 2018 that New Jersey would begin covering the full cost of its pension obligation, at which time the annual cost of the state's pension contribution alone is expected to exceed $4 billion.
The combined cost of Christie's proposed tax cuts, coupled with the required spending on pensions, debt service, and other unavoidable costs identified by the Facing Our Future task force, would leave virtually no money for other policy priorities, such as restoring the remaining $350 million in school aid cut during Christie's first year or investing in creating world-class universities, which Christie identified as a campaign priority.
Greenwald and other Democratic leaders also have been arguing that the state cannot afford to cut both income taxes and property taxes, and that approval of Christie's income tax cuts would eliminate any chance of restoring property tax credits to the $1,000-plus levels provided during the last year of the Corzine administration. The reduction in those property tax rebates by Christie was largely responsible for a 20 percent increase in net property taxes since 2009.
Greenwald and Assembly Speaker Sheila Oliver (D-Essex) said Democrats would propose a property tax cut as an alternative to Christie's proposed income tax reduction.