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$1.6 Billion Doubt Shadows Christie’s Sales-Tax Plan

As worries about blowing a hole in the state budget persist, governor’s sales-tax scheme finds few new supporters

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When Democrats in the Senate put the brakes on Gov. Chris Christie’s proposal to renew state transportation funding with a gas-tax hike paired with a reduction of the sales tax, they raised doubts about whether the state could afford to cut the sales tax. By some estimates, a reduction of just 1 percentage point would slice at least $1.6 billion out of the budget.

The administration wasn’t able to ease the senators’ fears by providing a report or study to demonstrate how the sales-tax cut could benefit the state economy and possibly generate new revenue. Instead, the accuracy of numbers provided by the governor about potential taxpayer savings from a slight reduction of the sales tax was immediately questioned. In fact, it appears as if the governor’s calculations may have overlooked a few critical factors, thus inflating the size of the savings that would be delivered to New Jersey families.

Now, a week after Senate leaders shelved a vote on the sales-tax option and let the finance plan for the state’s Transportation Trust Fund expire, doubts about whether Christie’s numbers really add up still remain, and may have grown even stronger.

Business-lobbying groups and other organizations that have laid out a detailed rationale for a less-costly transportation-funding proposal based on phasing out the estate tax say they have not been moved by Christie’s call for a sales-tax cut.

And it’s still unclear what happens next and whether a compromise can eventually be reached as roadwork and other state-funded infrastructure projects across the state are shut down beginning at midnight thanks to the political impasse.

Before leaving last week for a vacation to Italy, Christie, a second-term Republican, pushed for cutting the sales tax by one percentage point in exchange for a 23-cent gas-tax increase that’s needed to replenish the TTF by saying it would represent the first broad-based tax cut for New Jersey residents since 1994. He also said it would result in a net win for taxpayers, something that was embraced by lawmakers in the Assembly in a late-night vote last week that approved the tradeoff.

A little more than $1 billion in new revenue would be generated by increasing the per-gallon gas tax by 23 cents to 37.5 cents, but the sales-tax cut would generate $1.6 billion in overall savings for taxpayers by going down to 6 percent from 7 percent -- according to the administration’s math. By Christie’s estimates, the average household would save more than $200 a year in the long run.

“Every New Jerseyan will get a tax cut, and we will fully fix the state’s transportation infrastructure,” Christie said during a news conference in the State House last week.

He also said the tax-cut plan, which would involve increasing thresholds for state income-tax exemptions for sources of retirement income likes pensions and 401(k)s, had won the support of the influential conservative anti-tax group Americans for Tax Reform. But liberal groups immediately questioned Christie’s analysis, saying the state’s higher-income residents would see the most benefit from the proposed sales-tax cut.

Christie’s calculation of the average household’s projected savings also left out two key factors that made the proposed cut seem to appear more generous. His administration has estimated a $220 increase in average household costs from the proposed gas-tax hike, and $435 in savings from the proposed sales-tax reduction. But those calculations don’t account for businesses that foot some of the overall sales tax burden in New Jersey or for residents from other states who come here to buy goods subject to the sales tax. Under Christie’s scenario, a household would have to spend more than $43,000 on goods and services that aren’t exempt from the sales tax to see the $435 in savings he’s talked about.

But before leaving for his own vacation, Assembly Speaker Vince Prieto (D-Hudson) stressed the need to pass a TTF renewal proposal that could ultimately win Christie’s support. He also said while the proposed estate-tax phase out would mostly benefit the wealthy, cutting the sales tax would be more progressive because residents at all income levels would see some savings.

“I think it’s a smart approach because it’s a tax break that you’re giving to 9 million residents,” Prieto said on the Assembly floor shortly before holding a rare after-midnight vote to approve the sales-tax cut.

Prieto also pointed to a recent study that indicated for every $1.00 in spending on transportation in New Jersey the economy would benefit from a $2.35 return. Under the Assembly bill, the TTF would be renewed for an 8-year term, with $16 billion in total spending. The Senate version calls for a 10-year, $20 billion renewal. Current state TTF spending totals $1.6 billion annually.

economic impact

But the study Prieto referred to counts on some of those economic benefits, nearly $40 million, coming in from the sales tax at the current, 7 percent level.

According to the Washington, D.C.-based Tax Foundation, a group that studies tax policies at the state level, New Jersey right now has 24th highest average sales-tax rate, counting both state and local levies. And while some state sales-tax rates are lower than New Jersey’s, local sales taxes aren’t permitted at all in New Jersey, helping the state do better in the overall comparison.

New Jersey is also largely in line with its neighbors when it comes to the average combined sales tax. New York’s average combined rate is higher, at 8.49 percent, while Pennsylvania and Connecticut have slightly lower average combined rates of 6.34 percent and 6.35 percent, respectively, according to the Tax Foundation. The group also says state-to-state comparisons should take into account differences in products and services that are subject to the sales tax. New Jersey is one of the states that does not levy sales taxes on what are considered essentials, like clothing, food, and drugs.

But New Jersey is out of line with neighboring states when it comes to its levying of the estate tax. New Jersey has the lowest estate-tax threshold among any state at $675,000, and is far below the federal threshold of $5.45 million, according to the Tax Foundation.

That’s why groups like the New Jersey Business & Industry Association have been pressing for lawmakers to phase out the estate tax as they also consider the gas-tax increase. Earlier this year, NJBIA released a detailed study of outmigration that was paired up with its own survey of member businesses to help make its case. The group argues that it hurts all residents in New Jersey when companies close their doors and leave to avoid paying the estate tax, a claim that liberal organizations say is overstated.

Still, the business groups this week have remained committed to the estate-tax option even after Christie inserted the sales-tax option into the transportation-funding debate last week.

“Our members tell us they don’t anticipate relief from the sales tax (cut),” NJBIA President Michele Siekerka said yesterday. “We’re advocating that estate-tax relief must be part of any equation.”

Also pulling its support for the gas-tax increase in the wake of the emergence of the sales-tax option was the New Jersey Restaurant and Hospitality Association. It too is emphasizing the need to address the estate tax.
“This tax makes it financially challenging to pass down a business to family members and creates hardships for our state’s restaurant and hospitality industry,” said Marilou Halvorsen, the group’s president.

Siekerka said a big sticking point also remains the overall cost to the state budget of cutting the sales tax. The nonpartisan Office of Legislative Services has estimated the reduction would cost at least $1.6 billion, while the estate-tax option has a more modest $890 million price tag even though it also includes a number of other proposed cuts, including a new state income-tax deduction for charitable contributions.

She also spelled out a possible compromise scenario that NJBIA could live with, and one that could eventually end the impasse in Trenton. Instead of fully phasing out the estate tax in exchange for the gas-tax increase, the threshold could be lifted up to the current federal exemption level. The state income-tax exemption on retirement income could also be raised to help seniors from being forced to leave the state, while the sales tax could be cut by 0.5 percent instead of the full 1 percent. That would cut the overall cost of the tax-cut package roughly in half, she said.

“We think that’s a compromise that gets everybody what they’re looking for,” Siekerka said.

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