Despite recent good news on the income tax and unemployment front, New Jersey still has a deep hole to fill financially this year and next, according to David Rosen, chief budget officer for the non-partisan Office of Legislative Services.
Rosen projects a $760 million revenue shortfall for Fiscal Year 2013 and 2014. And even though Gov. Chris Christie and Treasurer Andrew Sidamon-Eristoff disputed the OLS forecast, it appears as if Christie's wish for an election year tax cut will go unfilled.
"Right now, we have a revenue shortfall to fill," Senate Budget Committee Chairman Paul Sarlo (D-Bergen) said after the OLS and Treasury issued their latest revenue updates. "We still have a month to go, but I didn't hear anybody arguing for a tax cut."
It didn't help Sidamon-Eristoff's argument yesterday when he had to announce that he was eliminating $166 million in spending to make up for a current-year budget shortfall caused by a plunge in energy tax revenues that washed away April's strong income and sales tax numbers.
Yesterday's spending cuts came on the heels of a $405 million downward revision of Christie's original budget numbers that forced the administration to push $392 million in property tax rebates off from May until August, a sleight-of-hand budget maneuver that shifted the cost of the rebates from FY13 to FY14 to achieve a "one-shot" savings.
However, Rosen warned that the state is still facing more than a $300 million hole in its FY13 spending plan and upwards of a $455 million gap in its upcoming FY14 budget, even after Sidamon-Eristoff's spending cuts are factored in.
Christie, who has been pushing the Democratic-controlled Legislature to approve the first stage of a $1.6 billion four-year property tax credit program, lambasted Rosen again yesterday.
Speaking after an event in Lavallette, Christie said the mild-mannered budget analyst either did not know what he was doing or was playing politics -- implying as he did last year that the nonpartisan expert was a tool of the Democrats.
"The fact is he's dead wrong," Christie declared.
The problem for Christie is that Rosen's overall revenue numbers for last year and this year have been just about dead right so far.
With Sidamon-Eristoff's $132 million downward revenue adjustment yesterday, the $31.733 billion in total revenues that the Christie administration insisted on projecting in the FY13 budget are now down to $31.194 billion -- or just $28 million less than the $31.222 billon total that Rosen predicted last May 23 when he forecast that revenues for this fiscal year would come in $473.8 million short.
Unfortunately, Rosen is now projecting that his estimate from last May will prove to be too optimistic, and that this year's revenues will come in more than $850 million below Christie's original $31.733 billion budget number, creating a $300 million gap that would eat up most of the projected $410 million end-of-year surplus.
Furthermore, Rosen is predicting that the Christie administration's revenue forecast for next year will come in more than $455 million short.
The biggest difference between the OLS and Treasury estimates is over Internet gaming revenues, which Treasury claims will generate a $180 million win for New Jersey's Casino Revenue Fund while the OLS projects just $30 million in revenue.
Rosen and OLS staffers did a quick calculation during an interview yesterday, and noted that every New Jersey household would have to lose an average of $400 on Internet gaming next year to generate the $1.2 billion in online gambling needed to produce $180 million based on a 15 percent casino tax.
In addition, Treasury's $180 million revenue estimate assumed close to a full year of Internet gambling, but the comment period on Treasury's proposed regulation
does not end until late August, and Internet gaming cannot start until 45 days after formal adoption of the regulation, which would be mid-October at the earliest -- more than three months into the fiscal year.
When Sidamon-Eristoff said he did not know how many casinos were preparing to offer Internet gaming, Sarlo, the Senate budget chair, retorted, "If I was being held responsible for revenue forecasting, I would make sure I was on top of this $180 million. I think the $180 million number is a bogus number, to be as blunt as possible. It just doesn't make sense."
Sarlo was already in an exasperated mood. While Rosen, as is customary, came in with detailed revenue estimates for all of the 13 major taxes that were generated from Treasury's database, Sidamon-Eristoff and his staff showed up with a revenue sheet showing only income, sales and corporate business taxes, with all of the rest lumped together as "Other."
An incredulous Sarlo asked Sidamon-Eristoff for a detailed breakdown of his revenue numbers. "I'm not sure we have a clean copy," the treasurer replied. Sarlo stood up angrily and announced that the hearing would be adjourned for as long as it took Treasury to produce a detailed revenue sheet.
Fifteen minutes later, the hearing resumed with senators and reporters reading from and then correcting Xeroxed copies of Sidamon-Eristoff's handwritten markup of Rosen's revenue sheet.
"It was a very frustrating thing," Sarlo said, shaking his head after the hearing, "They were very ill-prepared. We're a coequal branch of government, and we're supposed to be working together on a budget. It was bizarre to be reviewing handwritten numbers" at a Senate Budget Committee hearing.
Other than the dispute over Internet gaming, the biggest area of disagreement between Sidamon-Eristoff and Rosen was over corporation business taxes, a notoriously difficult tax to forecast. Rosen is projecting that corporation business taxes will come in $107 million below Treasury estimates over the next two months and another $113 million below Treasury forecasts in FY2014 -- a $220 million difference of opinion that makes up almost 30 percent of OLS's projected two-year gap.
Rosen also predicts that transfer inheritance taxes will come in a total of $90 million below projections for the two years, that realty transfer taxes will be off $54.2 million, and that petroleum products, motor fuels, and alcoholic beverage excise taxes will be off significantly.
Rosen's sales tax forecast is a combined $62 million less than Sidamon-Eristoff's, but that difference is virtually insignificant on the state's second-largest tax, which is projected to bring in more than $8.2 billion this year and $8.6 billion next year.
Ironically, yesterday was a day when Rosen and Sidamon-Eristoff agreed more often than they disagreed on the two most important issues in New Jersey's revenue picture for FY13 and FY14 -- the surge in income tax revenues and the decline in energy taxes.
While most of the disagreement between Sidamon-Eristoff and Rosen on last year's revenue projections centered on the income tax numbers, the treasurer and the OLS chief came in just $33 million apart on their updated income tax forecast for the current budget year and a minuscule $9 million apart for FY14.
"The April Surprise this year is that there was no April Surprise," Rosen said. "Owing to the performance of the stock market in calendar year 2012 and the windfall from federal tax changes, we anticipated a very strong April for the Gross Income Tax and actual collections were a bit higher than expectations." In fact, both the OLS and Treasury are projecting final income tax collections for the year to come in within $20 million of the $12.173 billion projected by Christie in February, when he revised last June's income tax projection of $11.584 billion upward.
Rosen said it "is clear that a portion of this year's growth, reflected in strong December/January estimated payments and a 39 percent increase in the April final payments, constitutes a one-shot revenue resulting from high-income taxpayers seeking to realize income before the 2013 federal tax law changes."
Therefore, Rosen estimated the one-shot portion of the income-tax surge to be $250 million and projected income tax growth for the upcoming year to be 7 percent, or a net increase of $870 million. Based on the 17 percent rise in the stock market so far this year, Rosen would otherwise have projected 9.4 percent growth and a jump of $1.12 billion.
Sidamon-Eristoff, who identified the same surge of income tax payments from high income taxpayers, evidently made the same calculation because their income tax figures for FY14 are just $9 million apart.
Both Sidamon-Eristoff and Rosen cut projected energy tax revenues by a combined $350 million for the FY13 and FY14 budgets. It was the $183 million current year drop in the separate sales tax and corporation business tax charged on energy companies that forced Sidamon-Eristoff to make a series of end-of-year cuts in supplemental appropriations and program funding lapses totaling $166 million yesterday.
"This will be the second year in a row that the two energy-related taxes have confounded our expectations with what appear to be very large swings against state revenue," Sidamon-Eristoff said. Because the first $788 million in energy taxes is paid to municipalities as state aid, the state budget absorbs most of the year-to-year fluctuations in these energy taxes, he pointed out.
Rosen estimated that up to $50 million of the decline was due to lower energy taxes being paid by consumers who were without power during Sandy, but more of the drop was due to plummeting energy prices caused by an increase in the natural gas supply. In addition, consumer energy use has been dropping due to the installation of more energy-efficient appliances and the construction of more energy-efficient buildings.
"No good deed goes unpunished," Sen. Jeff Van Drew (D-Cape May) quipped, referring to the negative revenue implications of more efficient energy use.
Neither Rosen's nor Sidamon-Eristoff's revenue projections accounted for the potential loss of state revenues in the current budget if the state fails to capture $164 million in affordable housing monies held by municipalities that are the subject of a June 5 court hearing, or if it fails to receive a $120 million payment for privatization of state lottery sales.
Sidamon-Eristoff assured the committee that the lottery payment would be received "within days," but the affordable housing money is less certain, even if the state wins the court case. The state's community affairs commissioner recently conceded that "maybe it will not be $164 million, maybe it's $100 million, maybe it's $60 million, maybe it's $50 million."
The treasurer said, however, that the program cuts he had made increased the state's surplus to $410 million, and that this would provide an ample reserve for any shortfall in the affordable housing money.