State’s Tax Revenues for First Quarter Offer Reason for Cautious Optimism

Five percent hike bodes well for budget, but quirk in calendar, change in reporting method may skew numbers

The latest tax-collection figures released by New Jersey’s Department of Treasury suggest that the state budget was in decent shape after the first quarter of the new fiscal year.

But the numbers offer some reason for caution moving forward.

The good news is that overall tax collections through the first three months of the fiscal year that began July 1 were growing by nearly 5 percent compared to the same period during the prior fiscal year. That put revenues after the first quarter comfortably ahead of the projected 3.4 percent growth-rate goal that Gov. Chris Christie’s administration has set for the full fiscal year, which ends June 30.

Tax collections appeared even better for the month of September — an important early month in the budget year because of quarterly payments that come due – with a full 7 percent rate of revenue growth compared to September 2014.

That success, however, was boosted this year by a quirk in the calendar that gave September 2015 one extra pay period compared to September 2014, a point that Treasury officials made clear in a news release that accompanied the tax-collection figures issued Friday.

“Year-to-date totals are encouraging, especially in the important month of September, and recent collections have exceeded initial estimates from the department,” said Robert Romano, the state’s acting treasurer. “However, we remain mindful that it is still very early in the fiscal year and we must carefully monitor the volatility of some of the state’s major revenue sources.”

Treasury’s monthly tax-collection reports, though highly technical in nature, are important because they help demonstrate whether the overall state budget is operating on target, ahead of projections, or running with a shortfall.

Since New Jersey’s constitution requires a balanced budget, any shortfalls must be made up with cuts or other offsetting adjustments by the time the fiscal year ends on June 30.

Making the revenue goal is necessary this year because Christie, a second-term Republican, boosted spending by about $1 billion to $33.8 billion in the budget he signed into law in late June.

In recent years, when Christie’s fiscal goals haven’t been met, his administration has been forced to delay property tax relief payments, reduce budgeted contributions into the public-employee pension system, and rely more heavily on borrowing for transportation projects to keep the budget balanced.

Despite the promising early news on tax collections, it’s not exactly clear how well Christie’s latest budget is situated after the first three months of the fiscal year. That’s because Christie, who is now seeking the GOP’s 2016 presidential nomination, has changed the way the state issues its monthly revenue reports.

Under a policy he began last year, the reports now focus more heavily on growth-rate measurements for each tax source and tax collections overall. That format replaced the side-by-side comparisons of tax collections to actual budget targets for each tax source in precise dollar amounts that prior administrations from both parties had been using.

For example, the latest revenue report indicated that the state collected $2.28 billion in income-tax revenue during the first three months of the new fiscal year, growing by 8 percent above the $2.1 billion collected during the first quarter of the prior fiscal year.

The 8 percent growth rate looks good compared to the projected 3.9 percent growth rate Christie has set for the income tax through June 30, and the projected 3.4 percent growth rate established for all state tax collections for the 2016 fiscal year.

[related]But left out of the revenue report under Christie’s new format is exactly how $2.28 billion compares to the exact dollar amount that Treasury expected to collect from the income tax during the first quarter of the new fiscal year.
Since Christie changed the reporting format those details have only been released by Treasury in response to public-records requests.

In addition to the income tax, other revenue sources that doing better than their year-end growth rates through the first three months of the fiscal year included the sales, motor fuels and inheritance taxes. Falling behind projected growth rates during the first quarter were the corporate-business, casino, realty transfer and tobacco taxes.

Christie’s administration stopped providing the more-detailed side-by-side revenue comparisons last year in the wake of a series of credit-rating downgrades issued by major Wall Street rating agencies following several state budget shortfalls.

Those credit-rating downgrades – all three major rating agencies have lowered the state’s debt grade by three steps during Christie’s tenure — have left New Jersey with the second-worst credit rating among U.S. states, behind only Illinois.

But there has also been some more promising news for New Jersey’s budget this year, including a $200 million tax-revenue windfall the state enjoyed after April income-tax collections were tallied.

And Christie doubled the size of the state’s budget surplus fund when the new fiscal year began July 1. Maintaining only slim reserves can leave a state more vulnerable to revenue volatility and shortfalls, and in recent years New Jersey has compared poorly to other U.S. states in rankings of budget reserves as a share of overall spending.

This year, all of the rating agencies have left New Jersey’s debt grade unchanged, although Fitch Ratings offered a positive sign, moving New Jersey’s credit outlook from “negative” to “stable.”