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Municipalities Skittish Over Murphy Administration’s Tweaks to Current Budget

Treasury officials say, not to worry, it’s just an accounting adjustment but local officials fear for their bottom line

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Gov. Phil Murphy’s administration has made a number of technical changes to the state budget for the current fiscal year, which have largely gone unnoticed. But one of those budget adjustments has been generating some concern among municipal-government leaders since it affects a major source of revenue they rely on to help hold down property taxes.

First, the Murphy administration has revised all the projections for the state’s major sources of tax revenue for the remaining months of the 2018 fiscal year, resulting in a more optimistic outlook for income-tax collections. However, the administration lowered other tax projections, including corporate taxes.

One positive outcome of the budget adjustments is reflected on the spending side of the ledger as the Murphy administration has boosted the razor-thin surplus account. The fiscal 2018 spending plan, signed by former Gov. Chris Christie last July, had only $435 million in surplus, but Murphy added another $350 million.

Changing how energy-tax receipts are counted

But the most noteworthy change is the Murphy administration’s decision to begin counting $788 million in energy-tax receipts as an “on budget” state revenue item. The funds have traditionally been treated largely as a pass-through that gets transferred each year to municipalities for property-tax relief. Officials from the Department of Treasury are stressing that the accounting adjustment is only being made to increase budget flexibility, and that it will not have any impact on the bottom line for the local governments. Nonetheless, it’s become a new source of anxiety for the New Jersey League of Municipalities, which fears it will make it easier for the state to hold onto the funds – as has happened a number of times in the past.

Most of the recent attention regarding budget matters has gone to tax hikes in Murphy’s $37.4 billion budget proposal for fiscal 2019. But his administration has made a series of more subtle adjustments to the budget for the current fiscal year that was inherited from Christie. They involve resetting both revenue and spending projections in the run up to June 30, which is when the current fiscal year will come to a close.

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On the revenue side, the biggest change involves the income tax, where the projection was upgraded from $14.4 billion to nearly $15 billion. That increase could have been even higher based on how well the income tax has been performing in recent months, but Treasury officials think at least some of the higher collections were influenced by the recently adopted federal tax-code overhaul. They suspect some taxpayers likely rushed their tax payments into the 2017 calendar year to avoid a new cap that’s been placed on the federal deduction for state and local taxes that’s known as SALT.

The sales-tax projection for fiscal 2018 was also upgraded by the Murphy administration, from $9.7 billion to $10.3 billion. But that change reflects the aforementioned moving of $788 million in energy-tax receipts “on budget,” meaning the forecast would otherwise have been lowered. The forecast for the corporate-business tax was downgraded, from $2.375 billion to $2.2 billion, and the projection for a host of other, smaller tax sources was also lowered, from $8.25 billion to $7.96 billion.

A ‘flexibility’ problem

On the spending side of the ledger, the budget adjustments also take into account $368 million in what are known as lapses, which is a catchall term used by Treasury for revenues that are freed up when individual line items end up not being spent or turn out to be less costly than called for in the original budget. Those lapses have helped the Murphy administration increase the budget surplus to $786 million, a change that should provide Treasury with a bigger cushion to offset any revenue shortfalls that could occur in the remaining months of fiscal 2018.

Other changes on the spending side include the addition of nearly $70 million to the original appropriation for snow removal as a particularly cold and stormy winter season has now lingered into spring.

The “flexibility” mentioned as a result of shifting the $788 million in energy-tax revenue is meant to give the Murphy administration more freedom because the state revenue pie in recent years has become more dominated by income-tax collections, which are constitutionally dedicated to funding only property-tax relief. That has put a strain on the budget’s general fund to cover spending on other key priorities, like hospital aid and operating support for New Jersey Transit. The budget’s flexibility problem has only gotten more difficult for Treasury officials to navigate since the sales-tax rate was reduced, the estate tax phased out, and lottery revenues are now dedicated to the public-employee pension system.

Sore spot

The full $788 million will still be provided to the municipalities, Treasury officials said, and overall state aid is remaining flat.

“Bringing Energy Tax Receipts on-budget is simply an accounting mechanism designed to give the state more General Fund flexibility,” Treasury spokeswoman Jennifer Sciortino said. “This change will have absolutely no impact on municipal revenues.”

Still, League of Municipalities officials have expressed concern that there will be no guarantee the revenues will remain at the current distribution levels in future years as an on-budget item. The energy-tax receipts were already a sore spot for local-government leaders as they were routinely raided by the state to balance its own budget during the Great Recession.

“We will strongly oppose any proposal that would change the Energy Tax Receipts Property Tax Relief program from a dedicated source of municipal funding, which the State can only reduce at some risk to its own revenues, to another discretionary aid program, which the State could reduce at any time, without danger of any repercussions,” the league said in a recent online post.

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