The Politics of the Budget

Mark J. Magyar | February 17, 2012 | Budget
Christie got his way on his first two budgets. Will this be the year Democratic leaders say 'No'?

Despite being a Republican Governor with a Democratic-controlled legislature, Chris Christie got the budgets he wanted during his first two years in office. But if Democratic legislative leaders are to be believed, that’s going to change this year.

The Fiscal Year 2013 budget that Christie will unveil Tuesday poses less of a fiscal challenge than Christie’s first two budgets, but Christie raised the political stakes by calling for a 10 percent income tax cut heading into his reelection year.

Democrats quickly pounced on the proposal as a tax cut for the rich, with Assembly Majority Leader Lou Greenwald (D-Camden) pointing out that millionaires could go on an exotic vacation with their $7,265 tax cut, while a family of four making $50,000 couldn’t buy a cart of groceries with the $80.50 it would receive.

Nevertheless, Christie has vowed to make the first stage of the income tax cut the political centerpiece of his budget, setting up a bruising four-month contest with Democrats who want to dedicate any extra revenue to property tax cuts that would benefit the middle class more.

The battle over this year’s budget, particularly the “class struggle” over Christie’s income tax cut plan, will play out in a politically charged atmosphere.

Senate President Stephen Sweeney (D-Gloucester), Senators Richard Codey (D-Essex) and Barbara Buono (D-Middlesex) are among the leading contenders for the Democratic gubernatorial nomination to face Christie in 2013. Sweeney and Codey may be mortal enemies, but they have every incentive to work together to make sure that the Democratic legislative majority refuses to pass Christie’s income tax cut, denying the governor yet another YouTube triumph heading into his reelection year.

Meanwhile, Christie’s rock star status as a potential Republican vice presidential candidate — or even as a presidential nominee in the unlikely event that the GOP convention deadlocks — guarantees that his efforts to cut the income tax will draw national media attention.

Ironically, the $150 million to $180 million in potential revenue that Christie would need to give up to pay for the first installment of his phased-in income tax cut is not the biggest fiscal challenge the governor faces.

The first problem is actually this year’s budget. State revenues for the first six months of the budget year (July 1-December 31, 2011) were projected to be $10.207 billion — a 6.6 percent increase over the $9.576 billion that came in during the first six months of the previous fiscal year. However, only $9.881 billion came in — $325.7 million less than expected.

Ominously, virtually every major state revenue source was down, including income, sales, business, and inheritance taxes, and casino and lottery revenues, and December was by far the worst month, with revenues down $178 million — a 7.4 percent drop over projections.

Compounding this year’s problem is the Obama administration’s denial of $107 million in in-state claims for Medicaid reimbursement for providing health services for decades to low-income New Jerseyans who were wrongly denied coverage under Medicare. That $107 million one-shot was part of $300 million in projected Medicaid savings Christie used to balance this year’s budget.

While income tax revenue is often volatile and 60 percent of income tax revenue comes in during the second half of the fiscal year, Christie will not know until May if an unexpected income tax surge or a sudden boost in corporate taxes will be enough to make up for the $325 million revenue shortfall and the $107 million Medicaid loss. Last May, New Jersey did have a revenue surge that added $250 million to last year’s budget coffers and encouraged Christie to raise revenue forecasts for this year by an additional $300 million — the amount the state is currently short. Considering New Jersey’s 9 percent unemployment rate and a state economy that is growing slower than neighboring states’ and the nation’s, however, New Jersey is just as likely to see revenues continue to come in below projections as to rebound.

Christie, however, however, will have to make revenue projections in his Tuesday budget speech — and presumably he will assume a sufficient rebound in revenues to bring him close to this year’s $29.7 billion budget projection, plus a healthy enough revenue increase — at least 3 percent – to fund his budget priorities for next year.

Unlike past years, when Christie’s political budget priority was to prove that he could hold the line on spending, this year he has been going from town meeting to town meeting insisting that the state can afford to cut income taxes by more than $1 billion over the next three years while continuing to fund school aid, pay down pensions, and meet all of the state’s other budgetary priorities.

As a result, it is in Christie’s political interest to project robust revenue growth, while Democrats led by their budget committee chairmen, Senator Paul Sarlo (D-Bergen) and Assemblymen Vincent Prieto (D-Hudson), can be expected to issue Cassandra-like warnings of budgetary doom.

This is the exact opposite of the fiscal positions taken by the two sides last spring when Christie and his treasurer, Andrew Sidamon-Eristoff, were more cautious in their revenue projections than the Democrats, who wanted to use more optimistic projections by the non-partisan Office of Legislative Services to increase spending on school and municipal aid, property tax rebates and other programs. If they had persuaded Christie to go along, the current budget shortfall would have been $200 million higher through December.

In the end, it is Christie who has the power under the New Jersey Constitution to certify the final revenue numbers in June. And it is Christie who will have to deal publicly with any mistake during the spring of 2013, just months before he has to stand for reelection in November.

If Christie does face a budget shortfall at the end of the current year in June, he does have a short-term solution in hand. He could always push the $484 million pension payment due this fiscal year back a month or more into the next fiscal year. Christie is required by the pension reform law he signed to make the payment during Fiscal Year 2012, but the fiscal impact to the system of a short delay would be negligible, assuming the payment is made and that Christie and the legislature adhere to the schedule set in the law of increasing payments steadily over the next six years until the state is fully meeting its annual pension obligation by paying a projected $3 billion a year starting in Fiscal Year 2018.

New Jersey’s pension system is currently $42 billion in the hole as a result of Democratic and Republican governors and legislatures skipping state payments for most of the past 15 years, with two years of payments by Democratic Gov. Jon Corzine standing out as the lone exception.

Christie’s budget speech Tuesday should include a pension payment of between $900 million and $1 billion, a $420 million to $484 million increase that could eat up close to half of projected state revenue growth.

Even if the Obama administration eventually relents on New Jersey’s Medicaid claim, state Medicaid spending would have to grow by $107 million next year just to stay even with this year’s spending level. With healthcare costs continuing to rise, an overall $200 million to $300 million increase in the cost of Medicaid and health care benefits for state employees is likely.

Debt service on decades of state borrowing is also projected to rise by as much as $300 million to $400 million, although fiscal experts noted that the state could always refinance its debt yet again to reduce the budget bite.

Municipal officials are expecting state aid to be frozen once again, and school officials are waiting anxiously to see what Christie decides to do about school aid. Currently, the state’s school aid formula is underfunded by about $1 billion. The governor cut school aid across-the-board by 5 percent in his first budget, then restored one-fifth of that cut last year.

Much to his chagrin, Christie was forced to add $477 million in funding for the 31 urban school districts covered by the Abbott v. Burke court case last year. Christie’s complaints about waste and high per-pupil costs in urban districts in his State of the State speech and town hall meetings, and his open support for the push by Senator Michael Doherty (R-Warren) to increase state aid to suburban school districts has some school advocates worrying that he will seek to cut aid to urban districts in order to provide more aid to the suburbs. Such a move would send the school funding issue back to the New Jersey Supreme Court, but one that Christie hopes would include his two new nominees, potentially changing the political makeup of the seven-member high court.

Some superintendents told New Jersey Spotlight earlier this week that state officials had hinted that they could expect a 2 percent increase in school funding next year, although others said they were told to expect no increase.

Christie could also seek to increase property tax credits as part of his budget speech to inoculate himself against Democrats arguing that he should cut property taxes instead of income taxes. Net property taxes actually rose 20 percent during the first two years of Christie’s administration, largely because Christie’s average property tax credit of $240 in 2011 paled in comparison to the $1,037 average property tax rebates paid out in 2009 under Democratic Gov. Jon Corzine. Christie increased average property tax credits to $480 in 2012, and could choose to do so again in order to make his income tax cut more palatable.

There has also been some speculation that Christie could push the state’s property tax credit payments from the spring in this fiscal year to the fall in next year’s budget to create a doubled one-shot property tax credit — and therefore a bigger net property tax reduction — on calendar year 2012 property taxes heading into the 2013 election. Doing so could create some cash-flow problems for the state treasury, but it could put property tax credits on a payment cycle in which they would be reflected on second-quarter tax bills — serving as just-in-time property tax relief for November elections like the property tax rebate checks that Democratic and Republican governors mailed out for decades until Christie and Sweeney teamed up to end the practice two years ago.

Ironically, the first installment of Christie’s income tax cut will be not be reflected as a budget item at all, but as a reduction in state income tax projections for the upcoming year over what those collections would be without the first one-sixth of the income tax cut kicking in during the first six months of 2013. By phasing in the income tax over three calendar years from 2013 to 2015, Christie is able to spread out the budget impact over four state fiscal years, which run from July 1 to June 30.

Based on projected income tax collections of $11 billion, Christie’s tax cut would actually cost the state treasury about $180 million in the first fiscal year, $360 million more in Fiscal Year 2014, $360 million on top of that in Fiscal Year 2015 and finally another $180 million in Fiscal Year 2016 — at which point the state would be taking in $1.1 billion less in income tax revenue.

Senate Minority Leader Jon Bramnick (R-Union), however, suggested during a Senate budget hearing at the end of January that Christie’s income tax cut would not end up costing the state that much in lost revenue.

Bramnick invoked the supply-side economic argument that the tax cut would stimulate economic investment and thereby spur economic growth, which would then lead to increased income tax and sales tax collections and other revenue increases.

He noted that state income tax revenues continued to grow during the Republican Whitman administration when income tax rates were cut on a sliding scale from 30 percent in the lower and middle brackets to 15 percent for upper-middle-income and 7 percent for the wealthy.

Democrats noted, however, that Whitman’s tax cuts took place during the mid-1990s when the state and national economies were soaring, and not in a period of sluggish growth following a deep recession.

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