Found Money: Officials Argue About Budget Windfall

Mark J. Magyar | May 18, 2011 | Budget
Democrats and Republicans clash over how much income tax revenue will be generated by the Garden State's millionaires -- and how to spend it

Credit: NJ Spotlight
David J. Rosen, chief budget officer of the Office of Legislative Services (OLS)
The annual Battle of the Budget yesterday turned into the Battle of the Bulge, as the Christie administration and legislative budget experts sparred over just how big an increase in state income tax revenue New Jersey could expect from the hundreds of millions of dollars earned by Garden State millionaires in the recent Wall Street recovery – and over how to spend it.

David J. Rosen, chief budget officer for the nonpartisan Office of Legislative Services (OLS), told the Assembly Budget Committee yesterday morning that state tax revenues would be $913 million higher than Gov. Chris Christie anticipated in his March budget message. The surplus, he explained, comes courtesy of a huge two-year surge in income tax revenues, which would more than make up for a decline in corporate tax revenues in fiscal years 2011 and 2012.

But state Treasurer Andrew Sidamon-Eristoff, testifying before the same committee yesterday afternoon, insisted that the state’s two-year net revenue gain would be just $511 million. He immediately announced that Christie wanted to put an additional $253 million into the ailing state pension system this year and $225 million into increasing property tax rebates in next year’s budget.

gross millionaires
As he did with the $506 million he promised to put into the pension system during his budget speech, Christie — through Sidamon-Eristoff — said he would only put the additional money into the pension system and property tax rebates if the Democratic-controlled legislature adopted the substantial changes in pensions and health benefits for public employees that he has demanded.

Close to Accord

Sources yesterday said Christie and Democratic Senate President Stephen Sweeney (D-Gloucester) were close to agreement on a package of pension and health benefit changes. These would achieve a substantial portion of the $323 million in benefit savings Christie plugged into his budget proposal for fiscal year 2012, which begins July 1.

Christie administration officials scrambled over the past several days, sources said, to steal a march on Democratic legislative leaders by staking out a spending plan for the new revenue that would be politically attractive in an election year in which all 40 Senate and all 80 Assembly seats are up for election.

The Christie plan laid out by Sidamon-Eristoff yesterday gives the Democratic Legislature $400 million less to spend in an election year. And just in case anyone had forgotten, the treasurer made sure to point out that it doesn’t matter what the nonpartisan Office of Legislative Services thinks the revenues are, but what the administration believes they will be. “I remind you that the governor does certify revenue numbers under the Constitution,” Sidamon-Eristoff stated.

An Unusual Move

Christie’s quick effort to lay out how he wanted the $500 million spent was an unusual move. Typically, the governor and legislative leaders meet to discuss their options. But Christie has not been shy to use the bully pulpit, and his proposal to put more money into the state pension system will please those who believe the state should get its fiscal house in order. Meanwhile, his proposal to put more money into property tax rebates will be hard for Democrats to oppose in an election year.

Assembly Budget Committee Chairman Louis Greenwald (D-Camden) noted that the increase in rebates “Is not going to lower property taxes…. While I support a $225 million increase in rebates, that won’t make up for the $1 billion increase in property taxes over the past year.”

Sidamon-Eristoff said the additional money would raise the average rebate for senior citizens earning up to $150,000 and for the disabled from the $270 provided in this year’s budget and $540 originally proposed by Christie in his budget speech to an average of $810. Non-senior homeowners earning up to $75,000 would receive an average of $660, up from $220 this year and the $440 originally proposed in Christie’s budget speech.

Linking the increase in property tax rebates to the Democrats providing enough votes to pass the pension and health benefit changes he wants is an escalation in Christie’s budget year blackmail. It provides a further boost to his effort to circumvent the collective bargaining process that has determined health benefits in the half century since New Jersey’s public employees won the right to unionize.

Unfair Practices

The Communications Workers of America recently filed an unfair labor practices lawsuit challenging Christie’s refusal to bargain over the issue in favor of negotiating with Sweeney to attempt to reach a compromise on legislation to force public employees to pay more. While most Democratic legislators are opposed, a Christie-Sweeney compromise could be adopted by adding a handful of Democratic votes to those of the Republican minority in the Senate and Assembly.

Much of the debate yesterday afternoon focused on sparring between Sidamon-Eristoff and Democratic legislators who questioned why they should not once again consider imposing the surcharge on income tax earned by millionaires that Christie vetoed last spring. The tax would have raised $475 million for the current year’s budget, the treasurer estimated, and most likely $500 million more next year.

Democratic legislators such as Assemblyman Coutinho (D-Hudson) noted that unemployment remains over 9 percent and is still expected to be 8.3 percent, based on Sidamon-Eristoff’s projections, at the end of 2012. Wages for average workers are stagnant, consumer spending is soft, but millionaires made hundreds of billions of dollars more last year.

Sidamon-Eristoff countered that the income tax surcharge on those earning over $500,000 drove wealthy residents to leave New Jersey, and that another surcharge would hasten the exodus.

Rosen’s morning testimony underscored just how heavily New Jersey relies on the wealthy for its income tax receipts. The respected budget forecaster projected that state income tax receipts would be $633.9 million higher than Christie had originally forecast for fiscal year 2011 and $811.7 million higher for fiscal year 2012 — a $1.45 billion two-year jump that would dwarf the $442 million expected decline in corporate tax revenues over original projections.

“What is clear to us now, but was less clear back in March, is the extent to which the collapse of the income tax during this recession was focused at the high end,” Rosen said. “Between 2007 and 2009 the total charged tax for all resident taxpayers declined by $1.7 billion. Of this amount, $1.3 billion was a decline in tax liability for people with incomes over $1 million. In contrast, taxpayers below $500,000 accounted for only $228 million of the decline.”

“The takeaway from these facts is that while the recession has had terrible consequences for many middle- and lower-income New Jersey residents, it was the loss of income for wealthier New Jerseyans that sunk our income tax collections. We knew that the wealthiest one-half of one percent who pay about one-third of the income tax were important, but we had not anticipated that the decline in their fortunes would account for more than three-quarters of the revenue decline,” he said. “And it is the flip side of that coin that is appearing in our revenue projections now.”

Sidamon-Eristoff acknowledged during an interview that he expected state income tax and other revenues to continue to climb in fiscal year 2013, but he said it still made sense to be cautious because the recovery from this recession has not followed normal patterns.

He said during his committee testimony: “We believe that one of the clearest lessons of the last three years of uncertain and volatile revenue collections in New Jersey is this: Caution and discipline must temper revenue forecasts, or the State risks building expectations for higher spending that cannot be sustained and opens itself to yet another potential budget crisis that would have to be addressed under the worst possible conditions.”

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