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Op-Ed: Only Real Shared Sacrifices, Not Rhetoric, Can Help End Fiscal Crisis

Surcharge on corporate taxes, rate increase on income over $1 million needed to escape budget emergency without further damage

gordon macinnes
Credit: NJTV
Gordon MacInnes

The jig’s up. For a couple of decades, New Jersey legislators and governors have pretended and promised, exaggerated and dissembled about paying for the public services we all demand.

Now the state of New Jersey is about to run out of cash. Finally, it’s time to stop pretending. We need to accept that the state has a revenue problem: year to year we don’t take in enough money to do things the public wants and needs. Like it or not, the fairest and most direct way out of the $800 million sinkhole recently acknowledged by the administration is to increase taxes.

There, I said it. Now let’s have an honest conversation about how to get our state back on track. Let’s not pretend that any proposal involving taxes is a satanic plot or left-wing conspiracy. Taxes are how we pay for what we need. Over the past few decades, New Jersey governors from both parties have raised taxes in times of crises. It wasn’t fun, but it was the responsible thing to do.

For years, New Jersey’s political leaders have gamed the electorate with sleights of hand. They promise clean energy, parks and preserves, affordable housing, aid for our towns and counties, dedicate funds for these laudable purposes, and then sweep the accounts into the general fund for whatever. New Jersey is out of gimmicks like that to meet the state constitutional requirement for a balanced budget. Both parties and both branches of government had a hand in digging the hole. It’s time to stop the finger-pointing and get back to serving the public.

Yes, these are tough times. New Jersey is way behind our neighbors, and the nation is coming out of the Great Recession. We lead the nation in home foreclosures and the percentage of us who are jobless for more than six months. Last year, we produced only 2,200 new private-sector jobs in an economy with 4.5 million workers. With all this economic misery, tax collections are way down. Now the administration says we’re short $1.1 billion in the $33 billion budget that closes June 30 and another $800 million in next year’s spending plan, which must be enacted by the end of June.

What to do?

In the long run, we need to step back and have a broadly representative, bipartisan commission take a look at New Jersey’s needs, assets, and tax structure and agree on a comprehensive tax reform plan that would bring stability, predictability, coherence, and fairness to taxes, spending, and investment. That is still the goal, but first we must face the current emergency frontally, quickly, and sensibly. We have to patch the holes and bail out the water before we can sail ahead.

Fortunately, there is a way to increase revenue without further harming the economic wellbeing of middle-class New Jerseyans who have spent the past few years suffering under higher property taxes, stagnant or declining wages, higher fees, and fewer public services.

Almost all of us have had to dig deep and sacrifice during this sluggish recovery. Homeowners with family incomes under $75,000 (about the state median) are getting property tax rebates that are half of what they used to be. Working families making under $50,000 got a 20 percent penalty via a reduction in the state Earned Income Tax Credit. Thousands of public employees we depend on -- teachers, police officers, and firefighters -- have lost their jobs as state aid to towns and school districts has been cut. Commuters pay far more in tolls and transit fares.

In short, middle-class and low-income New Jerseyans are still paying dearly for the recession and prolonged mismanagement of the state’s finances.

It is fair now to share the pain and sacrifice needed to deal with what can only be called an emergency. Two groups have benefitted from lower taxes over the past few years: those who report a million dollars or more in income and profitable corporations. To give the state some balance and time to dig out of its deep hole, these two groups should temporarily contribute a modestly higher tax payment for three years to balance the budget without going back on essential commitments.

According to the governor’s budget, corporations received a $540 million tax cut this year and are in line for a $617 million cut next year. On top of that, companies will get $230 million in various tax subsidies this year, an amount likely to increase dramatically in the next decade or two as more of the massive amounts of subsidies awarded this decade -- over $3.5 billion so far -- come due.

The promise was that business-tax breaks would create jobs, increase state revenues, and bring prosperity back to New Jersey. But as we’ve seen, jobs are beyond scarce and prosperity seems like a mirage. It should be clear now that the promise was based on a myth and a failed economic philosophy. Tax cuts don’t build strong economies; smart investment in public assets does. But here’s the problem: we can’t make those investments without the revenues to pay for them. Asking these corporations to share in the sacrifice is the least we can do. An 18 percent surcharge on the corporate business tax for 2015 would produce $450 million for the state. In the second year, the tax would be reduced to a 12 percent surcharge and then 6 percent in the final year, raising an additional $450 million over the two years.

Meanwhile, households reporting $1 million or more in income -- the top four-tenths of one percent -- have saved approximately $2.5 billion over the past four years after a 2009 increase in their state income tax bills expired.

The promise here was similar: these “job-creators” would generate economic growth if they could keep more of their income, and the gains would trickle down to all New Jerseyans. This promise, too, was built on longstanding myths about the power of tax cuts that, once again, have failed to deliver. Instead, gaps between the very rich and the rest of us continue to grow (today’s income inequality in New Jersey hasn’t been seen since the Roaring ‘20s), with all of the gain in family incomes since the end of the Great Recession having gone to the top 5 percent.

Again, calling on these very-very-very-well-off households to share in the pain is the least we can do. Increasing the tax rate to 9.86 percent from 8.97 only on their taxable income over $1 million would raise about $400 million in the first year (applied to incomes in tax years 2014 and 2015) and about $265 million more in each of the second and third years. The proposed hike is just half of the increase that expired in 2009.

We need to do this because New Jersey is falling apart. Our working families are disproportionately harmed by the decline. The fund for improving our roads, bridges, trains, and buses will run out of money next year and with it the means to prevent another winter of potholes and delays. The state has shifted the cost of higher education from all of us to families of college students. We are not investing in educational programs that we know work -- like high quality preschool -- closing the door of opportunity to thousands of children.

It’s time the burden is shared by all of us. That’s the only path towards firmer fiscal ground and a brighter economic future for the entire state.

Gordon MacInnes is president of New Jersey Policy Perspective. He served as the assistant commissioner of the New Jersey Department of Education and was a member of the New Jersey State Senate and General Assembly. He also directed the New Jersey Network and was the first director of the Fund for New Jersey. He's also a current member of the Rutgers Board of Governors, though his opinions expressed here represent his views and NJPP's views only."

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