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Transportation Funding Debate Revolves Around Economic Impact of Tax Cuts

Democrats argue infrastructure upgrades are key to fiscal growth; Republicans contend dropping ‘death taxes’ will encourage wealthy to stay in NJ and invest in state’s growth

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How intrinsically linked is the economy to transportation projects? That’s what the state Legislature is expected to begin debating when lawmakers return to Trenton on a regular basis following next month’s Assembly elections.

At issue is the role tax policy can play in boosting the economy. The discussion this year comes as Democrats who control the state Legislature want to increase New Jersey’s gas tax to help generate the up to $2 billion annually that will be needed to sustain the state’s Transportation Trust Fund, which is on course to run out of money by the end of June.

They argue that more investment in infrastructure is needed to foster commerce and economic growth.

But Republican leaders – bolstered by Gov. Chris Christie, who can veto any tax hike – are pushing hard for a major tax cut. They’re targeting New Jersey’s estate and inheritance taxes, arguing that the elimination of the two “death taxes” will keep wealthy individuals from leaving the state, which in turn will lead to more investment and jobs.

And the Republicans are adding a new wrinkle to the tax-cut debate this year, saying their consideration of the gas-tax hike Democrats favor will come only in exchange for support from Democrats for the tax cut they’re seeking.

It’s not entirely clear what will happen when lawmakers resume a normal schedule following next month’s Assembly elections, but a gas-tax hike in exchange for tax-cut trade-off is expected to get serious bipartisan consideration heading into the new year.

Tax revenues still lagging

New state-by-state tax-revenue data might give reason for caution to those anxious to cut taxes in New Jersey as other states that have reduced taxes in recent years are still struggling to reach their pre-recession revenue peaks. And the proposed tradeoff also has its share of opponents in New Jersey, with those on the left and right coming out against in recent weeks.

This isn’t the first time that Democrats who control the Legislature have wrestled with calls for tax cuts made by Christie and other Republicans in recent years as the state has struggled to recover jobs lost to the last recession. Christie successfully lobbied Democrats in 2011 to authorize a series of phased-in business-tax cuts that they argued were necessary to help businesses get back on their feet. The cuts included technical changes to the tax code that benefit small businesses and incentives to encourage more business investment in New Jersey, such as changing the single-sales factor formula.

Although New Jersey’s unemployment rate has improved some in recent months, the state economy still hasn’t fully recovered.

Christie also pushed lawmakers in 2012 to adopt a 10 percent income-tax cut as a way to boost economic growth. That cut, he said, could have been instituted in phases to cushion the blow on the budget.

But Democrats, concerned about revenue shortfalls, never signed off on the tax cut -- and maybe it’s a good thing they didn’t.

According to a NJ Spotlight analysis of tax collections and budget projections since then, had Democrats authorized the income-tax cut Christie favored there would be nearly $1.4 billion less in revenue available for the current fiscal year’s $33.8 billion budget.

Fiscal woes would have been worse

Combined with the $660 million currently being sacrificed to the business-tax cuts, the total lost revenue to the tax reductions would have been roughly $2 billion for a budget that already didn’t have enough funds available to fully cover the state’s pension contribution or prevent a New Jersey Transit fare hike.

“We’d be much worse off, obviously,” said Gordon MacInnes, president of New Jersey Policy Perspective, a liberal think tank based in Trenton that opposed the income-tax cut.

For Democratic legislative leaders entertaining the Republicans’ push this year for rolling back the estate and inheritance taxes, the impact could be similar, even if a cut were to be phased in over a few years, given the two taxes are expected to generate $755 million in revenue during the current fiscal year.

But Erica Jedynak, state director of the conservative Americans for Prosperity organization, said tax relief here is long overdue. She also said “it’s immoral and unjust” for New Jersey to levy taxes on assets upon death “which have already been taxed throughout that person’s life.”

The estate tax, as the name suggests, is levied against someone’s estate upon death in New Jersey if it surpasses a threshold of $675,000, which is the lowest trigger for an estate tax among U.S. states. The inheritance tax is typically paid by those who are left a bequest by someone who is not a direct relative, although estates can also arrange to prepay an inheritance tax.

Death and taxes -- and more taxes

New Jersey is one of only two states that tax both, something opponents of the two taxes says is forcing high net-worth residents to leave for other states, taking their big incomes and businesses with them.

“Death should not be a taxable event, and the state should not be putting families here in the position of having to sell a family farm or business in order to pay this tax,” Klemens said.

Meanwhile, at 14.5 cents, New Jersey’s gas tax is the second-lowest in the country and it hasn’t been increased in over two decades. Gas prices are relatively low right now compared to recent years, and transportation advocates say now is a good time to act to shore up the trust fund, which also leverages federal matching dollars for road, bridge and rail projects throughout the state.

“There is a desperate need to fund transportation in New Jersey and the best way to do it is a gas tax,” said Jeff Tittel, director of New Jersey’s Sierra Club.

Former Gov. Tom Kean Sr. told Politico New Jersey in a recent interview that swapping revenue from the estate and inheritance taxes for new transportation dollars from a gas-tax hike would be a “win-win.”

It was Kean Sr., a Republican, who created the Transportation Trust Fund in 1984.

Politically, the tradeoff also makes sense for Christie, who as a 2016 GOP presidential candidate has signed an anti-tax pledge that allows him to accept a tax hike only if it’s part of a broader deal that involves coinciding reductions elsewhere.

Christie’s office didn’t respond to a request for comment for this story.

But around the country, several states that have cut taxes or reduced fees coming out of the last recession are among those still struggling to balance their budgets as revenues have not fully recovered to the levels experienced before the economic downturn, according to new data released by The Pew Charitable Trusts.

For New Jersey, where the business-tax cuts have been fully phased in, the Pew data indicate revenue collections during the first quarter of 2015 were still roughly 10 percent below the pre-recession peak in the last quarter of 2007. In all, New Jersey was one of 27 states still collecting less in taxes than their respective pre-recession peaks.

“Tax revenue has recovered in states such as California, Illinois, and Minnesota, which raised taxes after the recession,” Pew said in the latest update to its “Fiscal 50” research tool. “Collections remain below their previous peak in states such as Florida, Kansas, North Carolina, Ohio, and Wisconsin, which cut taxes or fees since the recession.”

The Pew research, however, didn’t cover a $200 million tax-revenue windfall that New Jersey enjoyed after income-tax returns were collected in April 2015, and tax-collection figures for the first quarter of the current fiscal year, which began July 1, are not yet available.

MacInnes, the think-tank president, is urging lawmakers to fix the Transportation Trust Fund in a way that doesn’t link the remedy to a tax reduction somewhere else. A report by his organization released last month determined only one in 10 estates in New Jersey is subject to the estate and inheritance taxes, with most of the revenue coming in from those with estates worth over $1 million, which is almost 10 times the median net worth of New Jersey households.

“It’s all based on the fictional premise that the problem we have is our taxes are too high,” MacInnes said.

Klemens, from Americans for Prosperity, also opposes such a tradeoff, but for different reasons.

“We’re opposed to any deal that conflates the death taxes and the gas tax,” she said. “It’s comparing apples to oranges.”

“Lowering taxes and restraining spending are the only way we’re going to turn New Jersey’s economy around and make it a vibrant and inviting place to live again,” she said.

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