Sandy Aid is Big Win, But Don’t Expect a Katrina-Sized Boom
Expert: Reconstruction will boost economy, but won’t put a dent in state revenue shortfall.
Yesterday’s House passage of $50.7 billion in additional Hurricane Sandy aid is indispensable to New Jersey’s and New York’s economic recovery, but it won’t provide the level of stimulus that transformed Louisiana’s economy in the wake of Hurricane Katrina.
In fact, the increased economic activity due to Sandy reconstruction over the next three years will not even offset the losses that occurred in the wake of the October 29 superstorm, said Joseph J. Seneca, university professor at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy.
Further, it isn't likely that the state budget will fully make up the tax revenue it lost in the aftermath of Sandy, Seneca said. The state budget still shows a combined shortfall of $549 million for Fiscal Years 2012 and 2013, even with December’s revenues exceeding projections by $23 million.
Nevertheless, New Jersey’s economy would have been devastated without the $25.1 billion in Sandy reconstruction and recovery expenditures that can now be expected after the U.S. House of Representatives’ reluctant passage of a $50.8 billion Sandy relief package yesterday, Seneca said.
Total federal aid for Sandy recovery now tops $60 billion, including a $9.7 billion flood relief measure approved earlier this month.
“We are grateful to those members of Congress who today pulled together in a unified, bipartisan coalition to assist millions of their fellow Americans in New Jersey, New York, and Connecticut at their greatest time of need,” Gov. Chris Christie said in a joint statement issued with Democratic Govs. Andrew Cuomo of New York and Daniel Malloy of Connecticut.
“We anticipate smooth passage when this package moves back to the Senate for final approval.” Yesterday’s vote came two weeks later than expected by Christie, who made national headlines with hisof fellow Republican House Speaker John Boehner (R-Ohio) for cancelling a scheduled New Year’s Day vote on the Sandy aid – an attack that angered conservatives as much as his repeated praise of President Obama for his leadership during the Sandy crisis the week before the presidential election.
Friends in High Places
Christie’s close working relationship with Obama paid dividends as the president provided full support for the Sandy aid package, which passed the GOP-controlled House 238-175 yesterday on the strength of a 190-1 vote out of the Democratic caucus. Rep. Rodney Frelinghuysen (R-NJ) served as point man in marshaling 48 GOP votes, mostly from the Northeast, to put the bill over the top. But 175 Republicans voted no, citing concerns that the spending would add to the deficit.
For the “kinder and gentler” Christie who emerged during the Sandy crisis and adopted the “post-partisan” mantle and rhetoric that Obama cloaked himself in early in his 2008 presidential race, approval of the full $60 billion package was critical.
Christie is running for reelection this fall with sky-high approval ratings, but he needs the massive federal aid to guarantee reconstruction of the Jersey Shore in time for the summer tourism season; to create construction jobs to cut into one of the nation’s highest unemployment rates; and to juice up the economy in a state that ranked 47th in economic growth in both 2010 and 2011.
In addition, the governor can now count on the Shore reconstruction to generate increased tax revenue, both to chip away at the current budget shortfall and to bolster his revenue estimates for the Fiscal Year 2014 budget that he is scheduled to unveil next month.
Midway through the House debate on the Sandy aid, Christie’s treasurer, Andrew Sidamon-Eristoff, released his December revenue report, showing that the administration hit its monthly revenue target for the first time since last February.
Still, overall revenues remain $425.9 million short halfway through the fiscal year on top of a $123 million shortfall left over from the previous fiscal year.
While the Sandy reconstruction work funded by federal aid and insurance payments is clearly a net positive, the increased economic activity is expected to have only a marginal effect on state tax collections over the next several years. And the overall impact of the construction on state economic growth at a macro level is likely to be less than originally expected.
“You really can’t compare it to Katrina,” said Seneca, who coauthored the Rutgers Regional Report on "The Economic and Fiscal Impacts of Hurricane Sandy in New Jersey: A Macroeconomic Analysis." “Four billion of the projected $25 billion in federal aid and insurance payments already occurred, and the size of the stimulus injection relative to our state’s economy is less than what was pumped into Louisiana.”
Estimates of the amount of money spent in Louisiana on reconstruction in the wake of Hurricane Katrina vary, but the Bayou State received the lion’s share of the $126 billion in federal aid appropriated to Louisiana, Mississippi, and Alabama.
In the first three-and-a-half years following Katrina, Louisiana received $51 billion in federal aid and another $25 billion in private insurance settlements.
That $76 billion stimulus represented 44 percent of Louisiana’s total Gross State Product of $171.46 billion in 2004, the year before Katrina. In contrast, the $25.1 billion that New Jersey is expected to spend on reconstruction over a three-year period represents just over 5 percent of New Jersey’s Gross State Product of $486.99 billion last year.
The three-year building boom that followed Katrina “came on a very small base and was a huge amount of money as a percentage of GDP for Louisiana compared to New Jersey,” Seneca noted. “Louisiana was rolling in money. That’s not going to be case here.”
New Jersey lost $11.7 billion of Gross Domestic Product largely due to slowed economic activity during the three weeks that followed the storm, but made up $4 billion of that loss during November and December on storm cleanup and reconstruction, Seneca said.
New Jersey Near the Bottom
Nevertheless, the $7 billion net reduction in expected GDP is likely to leave New Jersey mired once again near the bottom in percentage of economic growth for 2012. New Jersey’s GDP dropped from $482.1 billion in 2008 to $470.35 billion in 2009 during the Great Recession, and has rebounded slowly, climbing back to $480.4 billion in 2010 and hitting $486.99 billion in 2011. In both years, New Jersey ranked 47th nationally in economic growth.
The Rutgers study projects that the Sandy reconstruction will add $2.45 billion to baseline GDP growth this year, $1.69 billion in 2014, and $712 million in 2015 -- a $3.85 billion total increase in economic activity that does not come close to the $7 billion net loss from Sandy for the fourth quarter of 2012.
What's more, higher income tax rates and capital gains taxes on New Jersey’s wealthier taxpayers, and a 2 percent increase in payroll taxes for all wage earners as part of Congress’s fiscal-cliff agreement are likely to slow economic growth this year.
New Jersey has only regained one-third of the 250,000 jobs it lost during the Great Recession, and its unemployment rate hit a 35-year high in August at 9.9 percent before dropping to 9.6 percent in November. Overall, the Rutgers study projects job growth of 2,000, 5,600 and 4,900 jobs due to Sandy reconstruction over the next three years -- more than offsetting a net loss of 4,200 jobs because of Sandy in the last two months of 2012.
According to the Rutgers report, the impact on state revenues of the Sandy reconstruction is surprisingly small. And it is dwarfed both by the current $549 million fiscal deficit and by the increased state income tax revenues likely to be generated by wealthy taxpayers choosing to take bonuses, exercise stock options, or otherwise shift income into 2012 before higher tax rates took effect on January 1.
The study projects that the impact of Sandy reconstruction on state tax revenues will be just $22.7 million this year, $26.1 million in 2014, and $20.5 million in 2015 -- a $69.3 million bump that would not make up for the $82.2 million lost in 2012 because of Sandy. The $22.7 million figure for 2013 seems low considering that $13 billion of the $25.1 billion in total Sandy reconstruction activity is expected to occur this year, but increases in revenue due to construction are likely to be offset by reduced tax collections from tourism in Monmouth and Ocean counties -- especially early this summer -- Seneca said.
That's a far cry from the Louisiana experience following Katrina.
Louisiana officials cut their state budget by 10 percent immediately following the August 2005 hurricane in anticipation of lower tax collections in the wake of the devastating storm, but were surprised to find that their tax receipts soared past their original projections for that fiscal year. In addition, they grew much faster than the national average over the next three years as well, the Public Affairs Research Council of Louisiana reported.
The Louisiana Comeback
Louisiana’s growth was not surprising considering how large an increase in state Gross Domestic Product the post-Katrina construction spending represented, but it is also attributable to the state’s tax structure. Louisiana’s 7 percent sales tax was levied on virtually every consumer good, including food and clothing, giving the state the highest sales tax per capita in the South and the fourth-highest in the nation.
Sales taxes accounted for 58 percent of Louisiana’s tax revenue, and out-of-state construction workers were taxed just as hard as Louisianans. Furthermore, the proximity of the riverboat casinos anchored off New Orleans, where most of the work occurred, boosted casino revenues.
New Jersey’s sales tax, on the other hand, makes up just 25 percent of state revenues, and is driven largely by car sales, durable goods, and consumer electronics that residents are more likely to buy than out-of-state workers.
New Jersey’s first-year revenue growth compared to Louisiana also will be limited by the timing of the storm, the weather, and congressional inaction. Katrina hit in August -- more than two months earlier than Sandy -- and while construction work in New Jersey can be halted by winter weather, Louisiana contractors can count on working year-round.
Further, while President George W. Bush’s lackadaisical response to Katrina led Congress to approve the first billions of dollars in aid for the Gulf states by a simple voice vote just 10 days after the storm hit, it took Obama and the GOP-controlled House 67 days to agree to replenish a flood relief program about to run out of money for Sandy victims. It has taken 79 days -- and counting -- for a comprehensive reconstruction bill to get through the House.
State Sen. Barbara Buono (D-Middlesex), who is running for Christie’s seat, attacked the long congressional inaction as a “petty, political delay that put billions in recovery aid in jeopardy,” while U.S. Rep. Frank LoBiondo (R-NJ), whose districts include the Atlantic and Cape May County coastlines, said “a new caucus should be formed, the Hypocritical Caucus,” made up of all the Republican House members who got emergency disaster aid for their districts, but refused to vote for the Sandy bill.
The Rutgers study anticipates that most major mass-transit and wastewater treatment reconstruction projects will not begin until late 2013 and continue through 2014, delaying a lot of high-paying construction jobs and the tax revenues they represent. “Those big projects always take longer to get underway than expected,” Seneca noted. “All of those projects that were supposed to be shovel-ready [for the Obama stimulus package] still took a long time to get into the ground. We think our assumptions are reasonable.”
Sidamon-Eristoff’s assumptions about revenue growth for the current fiscal year got a much-need boost yesterday when Treasury’s revenue report showed a record $1.066 billion in income tax collections for the month of December, an extraordinary 19.8 percent rise over the $890 million collected the previous December. Overall, for the six months of the year, income tax collections are up $231 million -- or 5.6 percent -- over the previous year, and are now running $100 million, or 2.3 percent, ahead of projections after trailing slightly going into the month.
The Top 1 Percent
Because New Jersey’s income tax is one of the most graduated in the nation, the wealthiest 1 percent of New Jerseyans pay more than 40 percent of state income taxes, and some of the December increase may reflect wealthy taxpayers moving income into 2012 to avoid higher federal tax rates in 2013. The good December numbers definitely bolster Christie’s hopes for a positive “April surprise” in income tax collections.
“The growth we continue to see in income tax collections, the largest and most important revenue source for the state, is an encouraging sign that the fundamental strengths of the New Jersey economy are driving the recovery forward,” Sidamon-Eristoff said.
Sales tax figures for November were down just 1.4 percent, undoubtedly reflecting heavy purchases of home repair supplies, generators, and other taxable goods in the month immediately following Sandy. Sales taxes for the first five months of the year, however, remained 5.5 percent below projections. December corporation business tax and casino revenues both fell more than 20 percent short of projections, and even lottery sales came in 13 percent lower than expected.
The bottom line, said Senate Budget Committee Chairman Paul Sarlo (D-Bergen), is that “the December revenue report falls far short of fixing the serious gap between the Governor’s projections and actual revenues.”
“While the modest boost in income tax revenue is a positive sign, it is the only category that has even met projections. Most of the other major revenue categories continue to fall short and the bottom-line total, which is the most important figure, is far below his projections,” Sarlo said. “We are halfway through the fiscal year, and total growth is 1.5 percent, a small portion of the 8.3 percent the governor built into the budget and a fraction of the 12.7 percent growth needed to bring the budget into balance.
Sarlo renewed his request to Christie and Sidamon-Eristoff to lay out proposals to close the $549 million combined budget gap, but Sidamon-Eristoff’s refusal to meet with Sarlo’s committee indicates that those proposals will be made as part of the governor’s Budget Message to the Legislature next month.