Three months ago, Gov. Chris Christie’s budget was in deep trouble. His revenue forecasts for FY2012 and FY2013 had come up a total of $750 million short. Standard & Poor’s had downgraded New Jersey’s revenue picture from “stable” to “negative,” and nobody knew what the real budget impact of Hurricane Sandy would be.
Today, however, thanks to a surge in income tax payments by wealthy taxpayers cashing out before federal tax hikes and cashing in on a bull market, it’s clear that Christie has dodged what could have been a major fiscal nightmare heading into his November reelection.
Yes, the Republican governor had to downgrade his revenue forecast for the year by $406.3 million and push off paying $396 million in property tax rebates until August, giving Democrats ammunition for the fall campaign. And yes, he did have to give up the income tax cut that was the centerpiece of last year’s budget speech.
But it could have been a lot worse.
Christie’s bold projection of an 8.3 percent revenue surge in FY2013 was built on assumptions of a broad-based “New Jersey Comeback,” an economic boom that would transform a state that had the fourth-highest unemployment rate in the nation and had ranked 47th in economic growth for two years in a row.
Christie’s bullishness led him to certify a budget built on more than 25 percent growth in corporate taxes and realty transfer fees, an 18 percent jump in casino revenues, 15 percent more from the lottery, 13 percent higher inheritance taxes, a 6.1 percent jump in sales taxes, and 5.7 percent in income taxes.
Eight months into the fiscal year, corporate taxes, inheritance taxes and casino winnings are all running lower than last year, and even motor vehicle and gas taxes are down, reflecting a weak economy. But despite an unemployment rate that still ranks among the highest in the nation, New Jersey’s income tax collections are soaring.
In fact, Sidamon-Eristoff now expects income tax collections to grow by 9.4 percent and to exceed original projections by $406.5 million, while all other taxes combined are expected to come in a combined $811.9 million below expectations, reflecting the state’s sluggish economic growth.
It is just the latest example of the disconnect between New Jersey income tax collections and the overall economy in a state whose highly progressive income tax structure and heavy reliance on healthy Wall Street financial markets creates its own boom-and-bust state budget cycle.
Despite the lack of a “New Jersey Comeback,” Christie is cashing in on the Wall Street boom in both his current FY13 and his FY14 reelection year budget.
As David Rosen, the Office of Legislative Services’ chief budget officer, said in his 2011 budget testimony, “the performance of the stock market is the factor which drives the volatility of our income tax,” and the market is soaring.
The Standard & Poor’s 500 stock index not only closed out the year at 1,426. 19 — up from 1,257.6 at the end of the previous year and up from 903.25 at the close of 2008 in the middle of the Great Recession nosedive — but also reached an all-time high of 1,551.18 last week.
The December and January income tax numbers — and the final 2012 calculations that will undoubtedly provide a positive “April surprise” next month — were boosted not only by the stock market run-up, but also by the protracted fiscal-cliff negotiations between the Obama administration and the GOP-controlled House.
Wealthy taxpayers in New Jersey and other states pushed hundreds of millions of dollars of income into 2012 to avoid paying higher taxes in 2013 and future years. On January 1, the top tax bracket on individuals earning over $400,000 and families above $450,000 rose from 35 percent to 39.6 percent, and capital gains taxes jumped from 15 percent to 20 percent.
Both Sidamon-Eristoff and Rosen said it would be difficult to separate out the one-time fiscal-cliff windfall from the normal bonuses and capital gains that accompany a bull market in New Jersey’s income tax collections.
But the treasurer was sufficiently confident last month that 2013 would be another good year for upper-income New Jerseyans to count on another 6.5 percent income tax increase over and above this year’s newly anticipated 9.4 percent gain.
Watching Wall Street
It’s easy to see why Sidamon-Eristoff — and Rosen, for that matter — focus more on the Wall Street tea leaves than on unemployment statistics or salary growth for the average worker.
New Jersey’s approximately 16,000 millionaires paid $2.289 billion — or 26.4 percent — of the $8.686 billion in income taxes collected in 2010, the last year for which the Department of Treasury provided its detailed Statistics of Income report.
Overall, the top 20 percent of taxpayers, who make over $100,000, paid $7.263 billion, or more than 85 percent of total income taxes that year.
However, 2010 was a good, but not great, year for the stock market.
In 2007, just before the stock market tanked in the Great Recession, New Jersey’s millionaires enjoyed record income of more than $55 billion and paid $3.605 billion in state income tax. That represented 35.4 percent of the total $10.168 billion in income tax charged to state residents. As in 2010, those earning over $100,000 paid almost 85 percent of all state income taxes.
New Jersey’s reliance on the wealthiest 1 percent to pay a high percentage of a tax that makes up about 40 percent of the total state tax base is the biggest reason for the extreme volatility of the state’s tax system.
As Rosen noted, 75 percent of the sharp decline in New Jersey’s revenue collections that caused such budget problems in 2009 — Democratic Gov. Jon Corzine’s last year — was due to “a recession of the rich” caused by a plummeting stock market.
New Jersey’s progressive income tax and its high proportion of high-paying jobs in the financial sector makes its stare budget more susceptible than almost any other state to the twists and turns of Wall Street, and makes revenue forecasting in New Jersey a dicier proposition than in other states that rely on broader income-tax bases and predictable broad-based sales taxes.
The Lowest of the Low
Most states, including New York, have significant income tax rates kick in at $25,000 or less, but not New Jersey, whose effective income tax rate on those earning under $75,000 is the lowest of any of the 43 states that have a state income tax.
It didn’t start out that way. New Jersey’s original 1977 income tax, pushed through by Democratic Gov. Brendan T. Byrne under a school-funding order from the state Supreme Court, was a virtual “flat tax,” with a 2 percent rate on income under $20,000 and 2.5 percent above that – not much different from the 3.07 percent flat rate that Pennsylvania currently imposes on both families and individuals.
Each of the five elected governors that succeeded Byrne made changes in the state income tax structure that made the system more progressive and thus increased reliance on wealthy taxpayers.
Facing a budget shortfall, Republican Gov. Thomas H. Kean increased the top rate to 3.5 percent on income over $50,000 in 1983 after failing to persuade the Democratic-controlled Legislature to impose a 5 percent sales tax on gasoline instead.
Eight years later, Democratic Gov. Jim Florio doubled the top income tax rate as part of a $2.8 billion tax package that inspired a tax backlash that cost him his governorship and Democrats control of the Legislature. Florio’s tax plan for the first time imposed higher rates on individuals than families, with new 5.0 percent rates kicking in on family income over $70,000 and individual income over $35,000, a 6.5 percent bracket for families over $80,000 and individuals over $40,000, and a new top rate of 7.0 percent on families over $150,000 and individuals over $75,000
Republican Gov. Christine Todd Whitman, elected after promising an income tax cut, actually increased the progressivity of the tax system further by cutting income taxes by 30 percent for families earning under $70,000 and individuals under $35,000, but only 10 percent for families making over $150,000 and individuals over $75,000; those in the narrow bracket in between got a 15 percent cut.
Democratic Gov. Jim McGreevey, facing a budget crisis after the stock market bubble burst following 9/11, imposed a new “half-millionaire’s tax” bracket of 8.97 percent on both family and individual income above $500,000 — a substantial hike over the 6.37 percent that the top rate was reduced to under Whitman.
Corzine, facing a huge reduction in state revenues as a result of the Great Recession and its accompanying stock market plunge, pushed through a one-year income tax surcharge for 2009 that raised the rates to 8.0 percent on family and individual income above $400,000; 10.25 percent over $500,000; and 10.75 percent over $1 million.
Christie vetoed a Democratic legislative effort to extend the higher Corzine rates in 2010 and vetoed two subsequent attempts to reimpose a “millionaire’s tax” to fund property tax relief or senior citizens programs.
But Christie’s proposal last February to cut income taxes by 10 percent across the board over a four-year period, which would have disproportionately benefited the wealthy because of New Jersey’s highly progressive tax structure, went nowhere in the Democratic-controlled Legislature.
Alternative proposals advanced by Senate President Stephen Sweeney (D-Gloucester) for a 10 percent property tax credit worth up to $1,000 on income taxes and by Assembly Majority Leader Lou Greenwald (D-Camden) for a 20 percent property tax credit worth up to $2,000 would have made the state’s income tax structure even more progressive. In fact, Sweeney’s plan would have virtually eliminated income taxes altogether for most low-income homeowners and Greenwald’s would have just about wiped out income taxes for middle-income families making up to $70,000.
Christie ultimately shelved his income tax cut in favor of Sweeney’s proposal, but Democratic legislative leaders balked at approving any tax cut when Christie’s revenue projections for FY12 and FY13 failed to come in as scheduled.
Despite officially reducing his revenue projections by $406.3 million in his February 26 Budget Message, Christie hasn’t given up on the possibility that a late income tax surge could enable him to meet his original revenue projections.
If he does, however, Senate Budget Committee Chairman Paul Sarlo (D-Bergen) made it clear that his first priority would be paying the $396 million in property tax rebates to seniors making up to $150,000 and non-seniors earning up to $75,000 out of the current budget, instead of kicking back the payments and the cost to August and the next fiscal year.
Christie can campaign for an income tax cut at his town meetings, as he threatened during his budget
speech, but any real tax cut will have to wait until next year.