Explainer: Why It’s So Hard to Project Next Year’s Tax Collections in NJ

Mark J. Magyar | February 25, 2014 | Budget, Explainer
And why it’s important for the state to try to accurately estimate revenues - -and how politics comes into play

Not so long ago, few New Jerseyans except members of the Senate and Assembly budget committees, a handful of budget reporters, and David Rosen’s family and friends knew who David Rosen was.

That was before Gov. Chris Christie blasted Rosen as the “Dr. Kevorkian of the numbers” after the soft-spoken budget analyst for the nonpartisan Office of Legislative Services dared to disagree with the ambitious revenue projections announced by the Christie administration.

Christie’s vitriolic attack on Rosen underscores the importance of revenue projections in the annual budget-making process.

It also highlights the tendency of governors and their treasurers to push their revenue projections to the limit to meet the political and budgetary needs of their administrations.

This frequently puts the tax collection forecasts of Christie and other governors on a collision course with the revenue projections provided by OLS budget directors like Rosen, who are required to be politically neutral because they serve Democratic and Republican legislators equally.

The governor always gets the last word, because the New Jersey Constitution gives the governor alone the power to certify revenue estimates for the upcoming budget year. But that doesn’t mean that Christie and previous governors had to like it when Rosen and his predecessors warned that they were overestimating revenues — especially when OLS budget directors proved right more often than not.

Why the Revenue Estimates Matter: The revenue estimates certified by the governor for the upcoming fiscal year determine how much state revenue the administration has to spend – and whether it has the extra $200 million it needs to provide an increase in school aid, a larger property tax rebate or a tax cut.

The Forecasting Process: It is remarkable how accurate – and how similar — the revenue forecasts provided by Treasury and OLS analysts often prove to be, considering that they are projecting tax collections four to 16 months in advance, not knowing what that fiscal year’s economy or stock market will do. Over the past eight years, Treasury and OLS revenue forecasts have generally differed by less than 1 percent, a New Jersey Policy Perspective analysis found, but a 1 percent difference on a $32 billion budget is $320 million – which is larger than the current year’s budget surplus.

The revenue forecasting process brings together detailed analysis of tax-collection trends since the last budget was adopted in late June and in previous years, historical experience in how quickly tax revenues rose or fell coming out of or going into previous recessions, and any special circumstances, such as an increase in federal funding due to approval of a stimulus package.

When in doubt, they rely on the “SWAG” system – “Scientific Wild-Assed Guessing,” which is what wily oil industry analysts dubbed their method for picking offshore drilling leases.

Checking the Numbers: The governor and state treasurer release their preliminary revenue estimates in February or March on the day the governor delivers his annual budget message. These revenue estimates are projections of how much the state will collect in taxes in the next fiscal year, which runs from July 1 through June 30.

In early April, the Senate and Assembly budget committees meet to listen in the morning to the treasurer present his updated revenue forecast, which usually differs little, if at all, from the estimate contained in the budget.

The OLS budget director follows by presenting his own revenue estimates later that afternoon. Both Treasury and OLS will present individual projections for each of the 16 largest taxes, and will explain the reasons for their estimates.

Both the treasurer and the OLS budget director return to the committees in late May, after the critical April revenue report has come in showing whether income tax receipts for the previous calendar year met or fell short of expectations. State income taxes make up about 35 percent of state revenues, and an “April surprise” could force the treasurer to find several hundred million dollars to balance the current year’s budget or produce such a large surplus that it takes all the worry out of the budget for the upcoming year.

Based on the April numbers, the treasurer and the OLS budget director present revised revenue estimates in late May for the upcoming fiscal year, which will begin July 1. If their revenue estimates differ widely – as has been the case in the last two budget years, where the OLS forecasts were about $400 million lower than Treasury’s – the budget committees in the Legislature will try to persuade the governor and treasurer to lower their revenue estimates somewhat.

But in the end, the governor and treasurer get to certify the final revenue numbers for the budget, and OLS’s budget director does not offer any critique of the final numbers, holding off on any further comment until the first monthly revenue figures for the fiscal year are released in mid-August.

Getting It Right Is Easier Said Than Done: Projecting gas-tax receipts is relatively easy because they vary little from year to year, and sales taxes rise and fall with the economy, particularly with car sales, which make up a disproportionate percentage of sales-tax receipts because food and clothing are exempt from the sales tax in New Jersey.

But New Jersey’s largest tax is the income tax, and the income tax is harder to predict in New Jersey than in any state in the nation.

The reason for the extreme volatility of New Jersey’s income tax is twofold: First, New Jersey’s income tax relies more on the wealthy than in any other state; less than 2 percent of the state’s population pays more than 40 percent of the income tax. New Jersey already had a highly graduated income tax when Gov. Christine Todd Whitman’s income-tax cuts wiped out 30 percent of the tax bill for most New Jerseyans making under $100,000 and Gov. James McGreevey’s tax hike raised the state’s top rate to 8.97 percent for the wealthy. Second, New Jersey’s wealthiest 2 percent get much of their income from corporate bonuses, stock options and capital gains, so New Jersey’s income tax receipts yo-yo up and down with the stock market.

Usually, when Treasury and OLS differ by several hundred million dollars on their revenue estimates, most of the difference is over the income tax.

How “Dr. Kevorkian” Got His Name: Because revenue estimates are an inexact science, treasurers can usually give governors what they want – or at least an extra $300 million or $400 million if they need it – and still defend their revenue estimates with a straight face.

As Billy Hamilton of State Tax Notes told the Tax Foundation in his perceptive analysis of Christie’s attack on Rosen: “The temptation is always there for the people involved in trying to make a budget work to engage in a little magical thinking when it comes to the revenue outlook. After all, predictions about the future are just that– prediction –and predictions can be optimistic or pessimistic, depending on how the tea leaves are read.
Independent forecasters have no stake in the results other than being as accurate as possible, while governors and legislatures are susceptible to the temptation to fudge the future just a bit to tidy up the budget math.”

That’s what happened in the spring of 2012, when Christie’s treasurer, Andrew Sidamon-Eristoff, came in with exceedingly optimistic revenue estimates that enabled Christie to declare a “Jersey Comeback,” increase state funding for school aid and a slew of other programs, and call for a 10 percent across-the-board income- tax cut he could take into the Republican National Convention that summer.

However, Rosen projected in late March that Sidamon-Eristoff was not only $392 million too optimistic on his numbers for the upcoming year, but that he had a $145 million hole in the current year budget. When Sidamon-Eristoff showed up at the budget committees in May and announced sheepishly that he would be relying on borrowing and other “one shot” revenues to plug what he admitted had grown into a $676 million budget gap, Rosen declared that he was still $627 million short.

It was Rosen’s second salvo – not his first – that led Christie to brand him the “Dr. Kevorkian of the numbers.” It was an apt nickname: Rosen’s report effectively administered euthanasia to the governor’s hope for a tax cut that year.

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