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Christie, Buono Differ Sharply on Tax Cuts, Fiscal Challenges

In January 2012, Christie announced that the “New Jersey Comeback has begun” called for a 10 percent across-the-board income tax cut to be phased in over four years; the tax cut would have gone primarily to the wealthiest 2 percent of taxpayers because New Jersey has one of the most highly graduated income taxes in the nation. Christie justified the plan -- which would have provided an $8,970 tax cut to a millionaire and just $177.50 to a family earning $70,000 – by asserting that the plan was aimed at keeping “job creators” in New Jersey.

But Democrats, who had gone along with Christie the year before on a five-year business tax cut, balked, arguing that he should cut property taxes instead. Sweeney proposed a 10 percent property tax credit on state income taxes up to $1,000 that would benefit the middle class rather than the wealthy and cost the same amount as the Christie plan. Assembly Majority Leader Lou Greenwald (D-Camden) favored a 20 percent cut up to $2,000, with the additional cost to come out of reimposition of a millionaire’s tax.

Buono preferred Greenwald’s plan to Sweeney’s proposal, and has been charging for the past two years that Christie has been overinflating revenue projections to justify a tax cut -- first in 2012 when he was a potential candidate for vice-president and this year to support his reelection and a potential presidential run in 2016.

During her gubernatorial campaign, Buono has called for reimposition of a millionaire’s tax to fund increased property tax rebates, but Democratic legislators, particularly in targeted districts, have been running ads proclaiming their eagerness to work with Christie to implement Sweeney’s 10 percent property tax credit – with no mention of a millionaire’s tax.

The question has never really been about whether the state can afford the $250 million projected first-year cost of the tax cut if a reelected Christie and Democratic legislative leaders decide to commit themselves to doing so as part of the FY2015 budget that has to be adopted by June 30, 2014. “Any treasurer or OMB (Office of Management and Budget) director worth his salt can find $250 million in a $33 billion budget,” noted Rousseau, the former state treasurer. “The question is what happens in the ‘out years’ when the cost rises to over $1.6 billion, and is a tax cut the best use of the money if it is available?”

The question of whether New Jersey can afford to pay the $1.4 billion cost of the Sweeney property tax plan in FY2018 is inextricably linked not only with Christie’s handling of the state budget during his first four years in office, but also with the landmark pension and health benefits bill that both Christie and Sweeney point to as their greatest bipartisan triumph.

The Politics of Pension Reform

The 2011 pension and health benefits legislation not only split both the Democratic Party and the labor movement, but also shaped the politics of the 2013 gubernatorial race. When Christie became governor and Sweeney the Senate president in January 2010, New Jersey was facing a $40 billion long-term deficit in the pension funds that covered teachers, police, and state, county, and municipal employees, plus a $60 billion unfunded liability in retiree health care costs.

Retiree healthcare has been funded on a pay-as-you-go basis for 20 years, but the pension problem was caused by the failure of past governors and legislators to make the state’s annual contribution while at the same time voting to increase pensions and lower the retirement age.

Sweeney, an Ironworkers Union leader who had aroused the ire of the public employee unions in 2005 when he first suggested that government workers needed to pay more, pushed through legislation that not only required public employees to pay more toward their pensions, but also mandated large increases in healthcare payments that had always been collectively bargained in the past. The bill imposed a four-year ban on collective bargaining on public employee healthcare issues at the same time that Wisconsin public employees were occupying the state capitol to protest Republican Gov. Scott Walker’s clampdown on collective bargaining rights.

Buono and most Democratic legislators refused to go along because of the collective bargaining suspension, but Christie and Sweeney cobbled together a majority made up of Republicans and a cadre of Democrats aligned with South Jersey power broker George Norcross, Essex County Executive Joseph DiVincenzo, and Sen. Brian Stack, the Union City mayor. Buono was stripped of her post as Senate majority leader by Sweeney for her defiance, but could now count on the public employee unions to back her run for governor.

“For most public employees, the increases they would pay for their pensions and health benefits and the new 2 percent cap meant that they would effectively be taking a pay cut over the next four years,” noted Raphael Caprio, director of Rutgers University’s Local Government Research Institute.

Just as important for the future of the retirement system, the new law required the state to ramp up to full funding of its required contribution to the state’s pension plans within seven years -- a requirement that would eat up about $600 million a year of the normal increase in state revenues through FY2018 and create severe budget challenges for Christie.

Robbing Peter to Pay Paul

With pension reform in hand, Christie undoubtedly thought his budget problems were over in early 2012. Treasury officials forecast a surge in revenue growth that would enable Christie to cover the second $600 million pension payment, increase spending for services for the developmentally disabled and drug treatment for inmates, and still pay for the first year of the income tax cut he wanted to take to the Republican National Convention that summer.

But revenues fell short of Treasury’s expectations that spring and most of the following year, forcing Christie to amp up his reliance on dedicated fund raids and other “one-shot” nonrecurring revenues to cover annual pension payments and keep his budget in balance.

Click to enlarge.

In the past four years, Christie has diverted $1 billion in Clean Energy funds to the state budget, and his attempted diversion of $164 million in funds earmarked for the construction of affordable housing ended up in the state Supreme Court.

The governor also had to use more than $500 million from the state surplus to balance the last two budgets, leaving a $300 million surplus that represents less than 1 percent of the FY2014 state budget and is regarded as dangerously low by the rating agencies.

When revenues came up short last spring, Christie was forced to push off payment of $395 million in property tax rebates scheduled for May until August -- a maneuver that created a one-shot budget savings by pushing the payment into the following fiscal year.

Finally, Christie was forced to abandon his promise to provide significant pay-as-you-go funding for the Transportation Trust Fund when he had to divert more than $550 million in New Jersey Turnpike toll revenue earmarked for TTF to fill gaps in his last two budgets. As a result, Christie has relied more heavily on borrowing to pay for transportation construction projects than any previous governor, adding to a per capita state debt that is the third-highest in the country, according to the most recent State Budget Crisis Task Force report.

To fiscal experts, Christie’s need to rely so heavily on such maneuvers to balance his last two budgets raises real questions about the ability of the state to cover the cost of the 10 percent property tax credit on income taxes that the governor has been pushing, particularly with the state facing a June 30, 2016, deadline to come up with an $8 billion plan to renew the Transportation Trust Fund, the state’s universities needing billions in capital investment to compete with other states, and the State Budget Crisis Task Force identifying more than $100 billion in unmet infrastructure needs.

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