Treasury vs. OLS, Round 2: Rosen Warns of $637 Million Revenue Gap

Mark J. Magyar | April 5, 2013 | Budget
For second straight year, OLS budget expert projects lower revenues than Sidamon-Eristoff

Credit: Amanda Brown
David Rosen -- Legislative, Budget, and Finance Officer for the OLS.
This time last year, Gov. Chris Christie dismissed David Rosen, budget officer for the nonpartisan Office of Legislative Services, as the “Doctor Kevorkian of the numbers” for daring to suggest that his revenue estimates were overinflated by $537 million.

So what is he going to call Rosen this year, now that the OLS fiscal expert is projecting an even larger $637 million gap over the next 15 months?

Rosen and Treasurer Andrew Sidamon-Eristoff both expect strong income and sales tax growth over the next several months. But they offered conflicting estimates of likely state revenue collections for the last three months of Fiscal Year 2013 and for next year’s FY 2014 budget at a testy hearing of the Assembly Budget Committee. Democratic and Republican members sparred repeatedly over how much the state’s economy was really improving and whether Rosen’s or Sidamon-Eristoff’s revenue predictions last year were closer to the mark.

Pressing the Democratic-controlled Legislature for an income tax cut, Christie started out in February of last year projecting $32.1 billion in state revenues for FY13, revised his revenue projections down to $31.7 billion in May after several months of subpar revenue collections, then conceded in his February budget speech this year that he expected revenues to come in $406 million short at $31.3 billion — about where Rosen predicted they would come in.

Yesterday, however, Rosen told the budget panel that he now expects revenues over the next three months to come in $302.4 million below Christie’s latest revised forecast — a projection that would wipe out the surplus in this year’s budget — and that revenues for Christie’s FY14 election year budget would come in $334.8 million below his and Sidamon-Eristoff’s expectations.

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Rosen emphasized that he was not being a “pessimist,” noting that to hit his own revenue projections for the remainder of FY13, “revenue growth has to be twice as strong in the last quarter as it was for first three quarters. If you use the administration numbers, revenue growth has to be three times as strong.”

Rosen and Sidamon-Eristoff are both banking on an acceleration in the collection of income and sales taxes, which together make up two-thirds of total state tax collections. But it is really a surge in income taxes paid by the 20 percent of New Jerseyans who earn over $100,000 in taxable income that closed what looked like a potential billion-dollar budget gap just four months ago.

In fact, as Sidamon-Eristoff pointed out twice, both he and Rosen now expect the state to exceed his projection of 8 percent income tax growth for FY13, which was regarded by both OLS and Democratic legislative leaders as the most wildly optimistic of the Christie administration’s revenue projections.
While the administration projected $11.767 billion in income tax collections last June, Rosen now expects income tax collections to reach $12.075 billion this year, and Sidamon-Eristoff is projecting a final total of $12.175 billion.

Some $150 million to $250 million of that income tax gain is due to wealthy taxpayers pushing dividends, bonuses, or capital gains income into the final month of 2012 to avoid an increase in the top federal income tax rate from 35 percent to 39.6 percent and an increase in the capital gains tax from 15 percent to 20 percent as part of the federal fiscal-cliff negotiations, Rosen said.

Sidamon-Eristoff said the unexpected fiscal-cliff surge in income tax collections, which will show up almost entirely in this month’s income tax collection figures, does constitute a one-shot revenue injection for the state, and both he and Rosen reduced their income tax projections for next year to 6.5 percent growth from what otherwise most likely would have been an 8 percent growth projection.

“As a very rough estimate, we suspect that the federally induced change in income realizations may have enhanced Gross Income Tax revenues by nearly one-and-a-half percent in Fiscal 2013, while reducing growth by a comparable amount in Fiscal 2014,” Sidamon-Eristoff explained.

Fueling the income tax surge even more than the fiscal-cliff one-shot has been a red-hot stock market whose Standard & Poor’s 500 Index rose 13 percent in 2012 and has gone on to new highs in the first three months of this year. As Rosen noted, New Jerseyans making over $100,000 pay 84 percent of the state’s highly progressive income tax, and the top 2 percent of taxpayers pay 40 percent of the total.

As a result, New Jersey income tax collections rise and fall with the S&P 500 Index, Rosen said, and do not reflect how the 80 percent of New Jerseyans making under $100,000 are doing. New Jersey’s effective income tax rate for those earning under $100,000 actually ranks 43rd in the country, and is the lowest of any state that has an income tax.

“Here is a factoid that underscores both the dependence of the Gross Income Tax on higher income taxpayers and the volatility of their income,” Rosen said. “In 2008 when the market collapsed, the Gross Income Tax dropped 17.8 percent in FY2009. To have produced an equivalent GIT loss from taxpayers earning under $100,000 would have required each of those 1.9 million tax filers to lose all of their income.”

The surge in income tax collections that resulted from the stock market rise and the federal fiscal cliff partially offset generally dismal FY13 tax collections in most other areas, including corporate business taxes that Sidamon-Eristoff now expects to come in $334 million below expectations and Rosen $416 million below administration projections. Both agree that sales tax collections will end up $216 million short, even with healthy growth through the end of the fiscal year. Overall, Rosen was proved right, Assembly Budget Committee Vincent Prieto (D-Hudson) noted.

“Now that it’s proven you were more correct than the administration, did you get any sort of an apology?” Prieto asked Rosen.

“I have not, have not sought an apology, and have not expected one,” replied Rosen.

Rosen, who has rarely responded in any way to Christie’s personal attacks, yesterday pointedly criticized Sidamon-Eristoff’s Treasury Department for its unprecedented lack of cooperation with OLS compared to previous Democratic and Republican administrations.

“The relationship between OLS and the Executive changes from time to time, but we are at the point of the least collaborative in the 15 years I’ve been here,” Rosen said. “There are not a lot of people here who do revenue forecasting. I always felt it was helpful for the handful working on it to share their thoughts to come up with better understanding. We have made that offer to this administration for the past two years, and they have not been interested.”

As a result, Rosen said, OLS has no way of judging how Treasury arrives at its projections. For example, the Christie administration’s current budget includes $180 million next year in increased casino revenue due to Internet gambling, but OLS has no way of assessing what that $180 million is based on, Rosen said. If Treasury fails to provide further information by May, OLS will revise that revenue estimate downward, he warned.

Compared to Sidamon-Eristoff, Rosen is expecting $98 million less in income tax revenue in FY13 and $108 million less in FY14, and $82 million less in corporate business tax revenue in FY13 and $88 million less in FY14. The disagreement in the OLS and Treasury estimates on those two taxes account for $376 million of the total $637 million difference in revenue projections. A $76 million disagreement on inheritance taxes, $55 million on realty transfer taxes, and $40 million in casino taxes unrelated to Internet gaming make up most of the remaining difference.

Rosen’s tax growth percentages for FY14 actually track Sidamon-Eristoff’s fairly closely, but Rosen starts from a tax base that is $302 million lower because he expects FY13 revenues to come in short by that amount. As Rosen pointed out several times, he fully expects New Jersey to participate fully in the nation’s current economic growth, and like Sidamon-Eristoff, he expects state revenues to increase more rapidly than the growth in Gross Domestic Product, as it usually does, because of the graduated nature of New Jersey’s income tax.

Sidamon-Eristoff expressed satisfaction that “New Jersey’s economy is clearly growing. Not only have Fiscal Year 2013 cash collections begun to hew more closely to our original projections, but there is a growing body of macro-economic data — everything from rising payrolls and impressive gains in car sales and housing permits to an increase in business filing activity, the rising stock market, and record levels of personal income — that is trending favorably.

“Just recently, for instance, the Federal Reserve Bank of Philadelphia noted that New Jersey’s rate of growth from February 2012 through February 2013 was 3.1 percent, faster than the national average and faster than all but one state in the Northeast quadrant of the country,” he pointed out.

But that growth hasn’t translated into a reduction in the state’s unemployment rate, which was 1.4 percent above the national average in 2012. While New York State has gained back all of the jobs lost during the Great Recession of 2007 to 2009, New Jersey has regained just 40 percent of the 250,000 jobs lost and is unlikely to reach pre-recession employment levels until at least 2016.

Sidamon-Eristoff said the high unemployment rate was partly due to New Jersey’s high level of labor force participation — the percentage of unemployed New Jerseyans actively seeking work is higher than the national average, he noted.

Charles Steindel, Treasury’s chief economist, conceded that he expects the state’s unemployment rate, which stood at 9.3 percent in February, to hover around 9 percent for the remainder of 2013, and to be in the high 8 percent range in 2014.
“Our job growth is quite competitive,” Steindel said, but “our unemployment rate is trailing our neighbors.”