Analysis: Tax Amnesty Eyed As Part Of $1.4 Billion Budget Solution

Mark J. Magyar | May 5, 2014 | Budget, More Issues
Christie’s budget options to plug combined FY14-FY15 gap include pension changes, aid shifts and fund raids

Former Gov. Jon S. Corzine
Five years ago, Gov. Jon Corzine’s Treasury Department opened up envelopes containing more than $200 million in checks in a single day en route to a record $725 million tax amnesty windfall that not only solved a current-year budget crisis, but enabled the Democratic-controlled Legislature to restore property tax rebates it had previously cut.

Now, with the state facing an $807 million deficit in the current Fiscal Year 2014 budget and at least a $600 million reduction in the proposed $34.4 billion spending plan for FY15, legislative analysts — and undoubtedly Christie administration officials — are exploring whether New Jersey should consider yet another tax amnesty as part of a comprehensive strategy to plug the combined $1.4 billion budget gap without politically painful cuts, sources confirmed.

Cash-strapped state governments are turning increasingly to tax amnesties to balance their budgets, the Council on State Governments reported Louisiana raised $295 million and Connecticut $180 million last fall, and the Massachusetts, Mississippi, and Nebraska legislatures are among those currently considering broad tax-amnesty legislation.

Estimating what another tax amnesty would raise is difficult, said David Rousseau, who supervised the 2009 tax amnesty as Corzine’s treasurer. “I don’t see how you could book more than $150 million to $200 million,” said Rousseau, who now serves as budget analyst for New Jersey Policy Perspective.

Implementation of a tax amnesty this year would come just five years after the 2009 amnesty — compared with a seven-year gap between Corzine’s 2009 and Gov. Jim McGreevey’s 2002 amnesty — and Corzine’s 2002-2009 amnesty years included a mid-decade Wall Street boom. However, a $300 million to $400 million windfall would not be out of the question in fall 2014, given the results in states like Connecticut and Louisiana, whose $19 billion and $25 billion budgets are smaller than New Jersey’s.

Rousseau originally projected only $100 million, then $200 million, for the Great Recession tax amnesty of 2009, and was surprised when $752 million came in.

Any tax amnesty would most likely be part of the solution for the FY15 budget problem, rather than the current FY14 shortfall: Not only would it be exceedingly difficult — if not virtually impossible — for the state to put together a tax amnesty program before the June 30 end of this fiscal year, but such a hurried program would bring in less revenue. Clearly, the state needs to maximize revenue for both budget years.

While the state Constitution requires the FY14 budget to be balanced by June 30, Treasurer Andrew Sidamon-Eristoff is really dealing simultaneously with a combined $1.4 billion budget shortfall for the two fiscal years whose solutions are inextricably intertwined because of the most “one-shot” options to plug the FY14 shortfall would make the FY15 budget situation worse.

Sidamon-Eristoff is putting together a revised fiscal plan to present to the Legislature no later than the May 21 Assembly Budget Committee hearing that will most likely include a reduction of at least $600 million from the original $34.4 billion budget proposed for FY15 to correspond with the drop in FY14 revenues announced last week.

Gov. Chris Christie said there is “nothing off the table,” and said that while he was prepared to work cooperatively with Democratic legislative leaders on budget solutions, he was also ready to implement unilateral cuts, if necessary, as he did in 2010.

Like Sidamon-Eristoff and other Christie administration officials, legislative leaders have been exploring potential budget options, but the solutions — especially for the FY14 budget — are limited. Furthermore, the most likely solutions — including a tax amnesty — are likely to raise further questions by the three bond-rating agencies, which have criticized the state’s continued reliance on one-shot budget maneuvers to prop up its “structurally imbalanced budget,” and its [link:|growing pension, retiree healthcare, and debt-service costs.

Considering the one-shot budget maneuvers he had to make to balance an earlier $694 million current-year deficit in March, Sidamon-Eristoff is unlikely to find much more than $100 million or so in real spending cuts to make in FY14.

Christie is opposed to tax increases, and cuts to school aid, homestead rebates, and other popular programs are unlikely to be considered for FY15.

That means the most likely budget-balancing options are going to be more one-time budget maneuvers, pension changes, or debt restructurings that compound future fiscal problems.

Among the most probable options are:

  • Pushing off a sizable chunk — $600 million, for example — of the $1.558 billion pension payment scheduled to be made at the end of June into the following fiscal year, thus creating a one-shot savings of $600 million to help fill the current $807 million budget gap. With interest rates low, the state could then borrow that $600 million in a short-term note and make the pension contribution just a week later than expected — in the same way that past governors borrowed each summer to cover the cost of homestead rebates.
  • The pension shift would solve the state’s FY14 problem, but add $600 million to the FY15 gap — unless the state did the same thing the following year, as the Christie administration did with its shift of about $400 million in homestead rebate payments from May to August to fill a hole in its FY13 budget. The shift in the pension payments would violate the provisions of the 2011 pension law, which made the payment of pensions on the agreed-upon seven-year ramp-up to actuarially required funding a “contractual right,” but the full FY14 pension payment would be paid before any union lawsuit was decided.

  • A similar maneuver would be to shift the state’s last $75 million higher-education aid payment from June to early July, which could force some of the state’s colleges and universities to borrow money on short-term notes to cover payroll, or to shift the state’s school aid payment of about $400 million from May — if it has not already been issued — to early July, which could cause the same problem for some of the state’s school districts. The June school aid payment was already shifted permanently to July by McGreevey. Once again, making the shift permanent would create a one-shot for FY14 without affecting FY15.
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  • Shifting some of the one-shots or diversions of dedicated funds used to balance the budget in FY15 to FY14 if the money is already available, and increasing the FY15 diversions from dedicated funds with remaining balances, such as the Clean Energy Fund, which was mostly spared in Christie’s original budget.
  • While pushing pension or state aid payments into the following fiscal year or shifting one-shots or diversions of dedicated funds from FY15 to FY14 would solve the immediate FY14 problem, the tax amnesty option is the only proposal — other than a tax increase, which Christie would oppose — that would actually add a major infusion of revenue for the FY15 budget.

    That doesn’t mean it would be an easier option for Christie and Republican legislative leaders to swallow.

    Nineteen Republican legislators, including current Senate Minority Tom Kean (R-Union), voted against the Corzine tax amnesty, and Christie, then the GOP nominee for governor against Corzine, not only opposed the bill, but criticized it as symptomatic of Corzine’s fiscal mismanagement.
    “It is now clear that Jon Corzine has no control over the budget or our government,” Christie told The New York Times. “He promised four years ago to change the way Trenton budgeted, but this budget uses billions in one-shot gimmicks — including this latest tax amnesty windfall — that will have to be made up in future budgets. This kind of haphazard governing by chance just doesn’t cut it when we’re facing 8.8 percent unemployment, skyrocketing property taxes and, real pain for all middle-class New Jerseyans.”

    Now, of course, Christie is defending his own reliance on one-shot budget maneuvers, including a retroactive $93.7 million cut in the state’s pension payments and a tobacco bond restructuring that traded $400 million in future revenues for a $92 million upfront cash payment that were part of the solution to a $694 million hole in the FY14 budget that was patched in March.

    Christie, as a former U.S. Attorney, also has criticized repeated reliance on tax amnesties as a bad practice that encourages tax evaders to wait for the next amnesty to pay up.

    New Jersey has had four tax amnesties, collecting $87 million in 1987 under Republican Gov. Tom Kean; $244 million in 1996 under Republican Gov. Christine Todd Whitman; $277 million in 2002 under Democrat McGreevey; and $725 million under the Corzine initiative in 2009.

    Nationally, as in New Jersey, tax amnesty has not been a partisan issue and presumably would not conflict with Christie’s 2016 presidential ambitions.
    Louisiana Republican Gov. Bobby Jindal, who is also frequently mentioned as a potential contender for the GOP presidential nomination in 2016, is relying on $295 million collected in a tax amnesty last fall and another $100 million expected from a followup tax amnesty next fall to bolster his FY15 budget, with the tax amnesty money helping to pay for the first increase in higher-education funding since he took office.

    Significantly, Louisiana, like New Jersey, ran a tax amnesty program in 2009, so its combined 2013 and 2014 amnesty revenue surge would cover the same five years of delinquent taxes as a New Jersey program implemented this fall.

    Kentucky, Republican presidential frontrunner U.S. Sen. Rand Paul’s home state, and Texas under Gov. Rick Perry, ran tax amnesty programs in 2012. GOP Gov. Rick Snyder ran an amnesty in Michigan in 2011, and the GOP bastions of Alabama and Arizona joined New Jersey, Louisiana, and eight other states in using amnesties to close deficits in 2009. Mississippi and Nebraska, both GOP strongholds, are currently considering amnesty programs, as is Democratic Massachusetts.

    Connecticut, under Democratic Gov. Daniel P. Malloy, who has sparred publicly with Christie over issues of tax policy, is coming off a two-month tax amnesty that ran from September 16 to November 15 and collected $180 million. The broad-based amnesty offered individuals and businesses the opportunity to apply for a 75 percent interest reduction and waived all penalties.

    “It is important that all Connecticut taxpayers pay their fair share, and the amnesty program allowed delinquent taxpayers to come forward in record numbers to do the right thing,” Connecticut Revenue Services Commissioner Kevin B. Sullivan said in announcing the results. “Amnesty programs return more to the state on behalf of all taxpayers than would likely be realized through the expense of usual collection efforts. We can now focus enforcement on those who have failed to come forward.”

    California’s $4.3 billion tax amnesty windfall in 2005 remains the record, but Pennsylvania under Democratic Gov. Ed Rendell pulled in $261 million in 2010 with an aggressive TV and radio campaign, call centers, and other best practices patterned after the 2009 Corzine initiative.

    Rousseau said it takes time to properly market a tax amnesty program, and it isn’t just the creation of a TV and radio advertising campaign, but sending out mailings to companies.

    “There’s absolutely no way you could do it this year,” Rousseau said. “If you wanted to do it, you would need to be ready to go in September, market it through October, and set up a window for people to pay October 15 to December 15, for example.”

    With that timetable, he said, the Treasury Department would know whether it met its tax amnesty revenue target midway through the budget year, and would have time to make any midyear budget adjustments needed if revenues fell short or to include any surplus in developing its budget for FY16.