Opinion: Funding Tax Fairness with Increase to State Sales Tax

Andrew Sidamon-Eristoff | June 13, 2016 | Opinion
It’s not likely to gain much traction, but boosting the state sales tax could go a long way to easing the Transportation Trust Fund crisis

Andrew Sidamon-Eristoff
It’s show time, Trenton. At some point during the coming fiscal year, which begins in July, the state will lose both the legal authority and the fiscal capacity to issue more Transportation Trust Fund Authority bonds to fund new transportation capital projects. Although the Christie administration no doubt has already identified options to continue funding some new projects temporarily, it’s clearly time for our leaders to identify significant budget savings or new sources of dedicated revenue to finance new projects on either a bonded or a pay-as-you-go basis.

Predictably, the public debate has taken on a distinct “you go first … no, you go first” quality. Democrats in overwhelming control of the state Legislature generally favor a hike in motor fuels taxes but have been reluctant to post actual legislation for a vote absent Gov. Chris Christie’s firm commitment to jump off the same political cliff at the same time.

Christie, in turn, has signaled that he might be willing to accept an increase in motor fuels taxes that is coupled with offsetting “tax fairness” such as eliminating the estate tax. Lawmakers in both parties have seized on the beguiling notion of “tax fairness” to propose, variously, an increase in the Earned Income Tax Credit, an increase in the income tax exemption for retirement income, a new income tax credit for gas purchases, and allowing deductions against the state income tax for charitable donations.

If we indeed need to raise revenue, increasing the motor fuel taxes is an obvious target. Last adjusted in 1988, our rates are currently the second-lowest in the nation, behind Alaska, and it makes intuitive financial (not to mention political) sense to tie a tax on motor fuels to financing transportation capital projects. Besides, nonresidents traveling through our state pay some 20% to 30% of the tax.

So far, so good. Except that no one seems to be addressing the proverbial elephant in the room: As a practical matter, how can we responsibly combine an increase in the motor fuels taxes with significant offsetting tax reductions and still have enough new revenue to finance the TTF? We need approximately $720 million a year in net new resources to finance a five-year capital program at $2 billion per year (more if we’re adding a pay-as-you-go component). Since our motor fuels and Petroleum Products Gross Receipts taxes are expected to generate just over $760 million next year, we are looking at something approximating a 100 percent increase in motor fuels taxes before generating whatever extra revenue would be necessary to offset “tax fairness” tax cuts. Moreover, and more ominously, the tax cuts under discussion would reduce either general fund or Property Tax Relief Fund revenue while the tax increases would generate dedicated revenue; this mismatch could drive a very serious budget shortfall.

Yes, it’s clearly possible for creative budget makers to front-load revenue increases and backload the impact of tax cuts to achieve revenue neutrality over a period of time, while generating positive cash flow sufficient to finance bonds over the next few years. Possible, but not great public policy. And that kind of fiscal engineering doesn’t obviate the serious budget issue noted above.

Sometimes it’s helpful in a political debate for a world-weary someone on the sidelines to offer a presumptively dead-on-arrival alternative as a means of broadening the parameters of debate and providing the protagonists with more political “running room” to explore compromise. So, in that spirit and with apologies to those who believe that the TTF-related tax policy debate is already too complicated, I will suggest that our elected leaders consider raising the state sales tax to offset any forthcoming “tax fairness” tax cuts while separately increasing the motor fuels taxes to finance the TTF.

In essence, I am suggesting a revenue-neutral tax policy rebalancing that would trade a small increase in the sales tax for a variety of offsetting tax cuts.

Raising the sales tax offers several advantages over other potential tax increases: the capacity to raise significant revenue from a small increase applied to a broad base, a minimal impact on New Jersey’s competitive position, and relative fairness.

New Jersey’s state sales tax is currently 7 percent. Raising it a quarter percent to 7.25 percent would generate approximately $340 million extra per year, enough to “purchase” a range of significant tax cuts that would otherwise hobble the state’s general fund-supported budget. A 0.1-cent increase to 7.1 percent would yield approximately $137 million: That’s still enough for a meaningful increase in the retirement exemption, for example.

A modest sales tax increase would not do irreparable harm to New Jersey’s competitive position. I have argued for years — mostly to deaf ears — that our highest priority in state tax policy should be to avoid being a notorious (negative) competitive outlier in our region. Hence my vociferous objection to our ridiculously low death tax exemptions and to raising our already-highest-in-the-region income tax rates.

But sales taxes are a different story in our region. With local option taxes, the sales tax rate in New York City is currently 8.875 percent while rates in much of the rest of New York State are 8 percent or higher. The statewide rate in Pennsylvania is currently 6 percent, but the rate in Philadelphia is 8 percent and an ongoing state budget crisis has prompted serious proposals to increase the statewide rate in Pennsylvania to 7.25 percent (9.25 percent in Philly). Delaware doesn’t have a sales tax, so a modest increase in New Jersey will do little to enhance that state’s already significant competitive advantage.

A modest sales tax increase would also be relatively “fair,” regardless how one defines that elusive concept in the context of tax policy. Although it’s true that general broad-based sales taxes are more “regressive” than graduated income taxes, the New Jersey sales tax is notably “progressive” among sales taxes thanks to its liberal exemptions for unprepared food, household paper products, medicine, and clothing.

All that said, I appreciate that the chances of this governor and Legislature agreeing to raise the sales tax by any amount at all are roughly equivalent to the chances that the Devils will win the Stanley Cup next year. Technically possible, but unlikely. But it’s worth considering the possibilities.