Too Soon to Talk TTF Compromise, but if Christie Budges Will Sweeney Follow?

Chase Brush, John Reitmeyer | September 20, 2016 | Budget, Transportation
Meanwhile, several alternative have emerged, including a hybrid solution that incorporates cuts to estate and sales taxes

TTF Slow Moving Vehicle
The seemingly endless struggle to find new revenue for the state Transportation Trust Fund may have inched closer to resolution in the past week, as Gov. Chris Christie apparently moved away from his firm position on a sales-tax cut. It remains to be seen if Senate President Stephen Sweeney will move toward him as well, or whether the state Legislature will look instead to short-term measures and wait for a new governor to be elected to solve the TTF problem long-term.

For much of the summer, as the political gridlock over renewing the TTF has dragged on, there have been only two options competing for support in the Legislature.

There’s the plan favored by a bipartisan group of lawmakers in the Senate, which combines a 23-cent gas-tax hike with a series of targeted tax cuts, including a phasing out of the estate tax, and there’s the TTF proposal backed by Christie, which features a 23-cent gas-tax increase and a significant — and costly — reduction of the sales tax.

But now several new potential solutions have emerged amid ongoing TTF discussions, including a hybrid option that would incorporate changes to both the sales tax and the estate tax. No deal appears to be imminent this week, and the Senate leader remains concerned about things like the long-term cost of any package of possible tax cuts. Still, the hybrid option that’s been put on the table according to a detailed fiscal analysis obtained by NJ Spotlight seems to indicate the Republican governor is now open to a compromise with lawmakers after previously seeking to reduce the sales tax by a full percentage point and lobbying GOP lawmakers to dig in against attempts by Sweeney (D-Gloucester) to generate override-proof support for the Senate alternative.

The new talk of possible compromise is offering some renewed hope that a deal can eventually be reached as thousands of construction workers remain on the sidelines due to an ongoing shutdown of state-funded road, bridge and rail projects.

But for those who want nothing to do with the horse-trading approach to renewing the TTF, a key lawmaker in the Assembly has put forward yet another option, a bill that would see the state fund the TTF for the next two years with $3.2 billion in borrowed money. That proposal has already won praise from liberal advocates who see it as a least-worst option, but a former GOP senator and longtime proponent of state fiscal restraint who now serves in Congress is raising questions about whether New Jersey can legally take on such debt without first getting voter approval. New Jersey is already one of the nation’s most indebted states, and heavy borrowing has also been at the heart of the ongoing fiscal problems in Puerto Rico, as well countries in South America like Peru.

The bipartisan TTF renewal plan that emerged out of the Senate in early June calls for phasing out New Jersey’s estate tax over several years and allowing larger amounts of income from pensions and other retirement accounts to be shielded from state income taxes. The TTF proposal put forward by Sens. Paul Sarlo (D-Bergen) and Steve Oroho (R-Sussex) would also increase the state Earned Income Tax Credit from 30 percent to 40 percent of the federal version of the tax credit. It came together after months of behind-the-scenes analysis by lawmakers and their aides who looked at issues like outmigration and regional competitiveness as New Jersey has struggled to generate impressive revenue gains in recent years.

Sen. Joseph Kyrillos (R-Monmouth) is among the handful of GOP lawmakers who have supported the Sarlo-Oroho plan, and he continued to tout its benefits last week during a confirmation hearing for acting state Treasurer Ford Scudder.

“Do you think if we cut the sales tax by a point that it would change behavior in New Jersey and create jobs and motivate the economy?” Kyrillos said.

The Office of Legislative Services has estimated the Senate’s proposed tax cuts would cost the state budget’s general fund nearly $900 million in lost revenue as the changes take hold over several years. By immediately hiking the gas tax from 14.5 cents to 37.5 cents, the state would also generate nearly $1.2 billion in new annual revenue for the TTF, which is an “off-budget” account. That would allow for a reauthorization of the trust fund for another 10 years, increasing annual spending on road, bridge, and rail infrastructure to $2 billion compared to the $1.6 billion that has been allocated for roughly the last decade.

Christie countered the Senate’s proposal in late June with his own call for a 23-cent gas-tax hike, but instead of targeted tax cuts, Christie asked lawmakers to cut the state sales tax from 7 percent to 6 percent and to also adopt the higher state income tax exemptions for pensions and other retirement accounts. The governor’s plan would cost the budget a full $1.8 billion once fully phased in, according to OLS estimates.

Lawmakers in the Assembly initially voted in favor of Christie’s proposal, but the Senate failed to consider it before the TTF’s last five-year finance plan expired on June 30. Senate President Stephen Sweeney (D-Gloucester) and other senators cited concerns about the impact the proposed sales-tax cut would have on an already shaky state budget. Since then, the governor, Sweeney, and Assembly Speaker Vince Prieto (D-Hudson) have failed to find a solution to the disagreement even as an estimated 3,000 construction workers have been idled due to the ongoing construction shutdown ordered by Christie in early July.

But the fiscal analysis obtained by NJ Spotlight last week indicates the governor and leaders in the Assembly have been exploring several new ideas, including one possible solution that features both a .5 percentage point sales-tax cut and a lifting of the state’s estate-tax threshold from $675,000 to $2.5 million. The same option also proposes more modest changes to the Earned Income Tax Credit and state retirement-income exemptions, with a total estimated price tag of $1.3 billion.

“This is all part of ongoing negotiations,” Prieto said in a statement. “Nothing is final, and estimates for all sorts of plans being discussed vary almost daily — but I can assure everyone this, I’m working to find a viable solution that can become law.”

Asked about a TTF solution that takes elements of the broad-based tax cut sought by Christie and the targeted cuts crafted in the Senate, Joseph Henchman, vice president of legal and state projects for the conservative Tax Foundation, called the proposed cuts “all moves in a good direction.” But he also said New Jersey, which consistently ranks near the bottom in the Washington, D.C.-based organization’s annual business-climate rankings, is due for a more thorough, long-term review of its tax policies.

“New Jersey is almost like a, ‘Where do you start?’ question,” Henchman said.

Gordon MacInnes, president of New Jersey Policy Perspective, a liberal think based in Trenton, has also called for a wider review of state tax policies, but he said he has deep concerns with the hybrid option that’s up for discussion. Though the impact on the budget would be less than the governor’s original proposal, it would still leave the state with a significant budget hole at a time when the Christie administration has already been underfunding the annual contribution into the public-employee pension system and aid to public schools, MacInnes said.

“Reckless and dangerous are fair words to describe this proposal,” he said.

MacInnes said a better option is a bill just introduced by Assemblyman John Wisniewski (D-Middlesex) that would see the state borrow $3.2 billion to renew the TTF for the next two years, giving lawmakers a chance to negotiate a better long-term deal with Christie’s successor once the governor’s second term runs out in early 2018.

Wisniewski’s bill would also address the concerns of Democrats who are worried about the impact tax cuts could have on the state budget and the concerns of Republicans who oppose hiking the gas tax. But it would also put the state on the hook for about $180 million in debt payments for the next 30 years, with no clear source of revenue in place to cover the payments.

U.S. Rep. Leonard Lance (R-7th) said he believes such debt can only be authorized by voters thanks to a ballot question approved in 2008 that he authored when he was serving in the state Senate. Known as the “Lance amendment,” the ballot question prohibited future borrowing without voter approval if no clear source of revenue is in place to cover the debt.

“My amendment was designed to make that (restriction) airtight,” Lance said. Wisniewski could not be reached yesterday for a response.
As the TTF talks continue to play out, there are also political implications for those trying to hammer out a deal. The governor, for example, is leaving office in early 2018 after serving two full terms, so he’s likely to be less concerned about leaving a budget hole than securing a legacy of big tax cuts.

“I think that Christie got this sort of gift, in terms of the tax cut, and said ‘Of course, this is my legacy,’” said Matt Hale, a political-science professor at Seton Hall University. “And he’s not going to have to find a way to fund it down the road, because he’s gone.”

By contrast, Sweeney is widely considered to be readying for a run for governor next year, meaning he could soon have to deal directly with the budget impact of the proposed tax cuts or of not fixing the TTF at all for the long-term.

“If someone is running for governor, there is the recognition that if nothing happens and the current situation stands, or a larger hole is created in the state budget by reducing some of the tax, than that’s going to make the job of the next governor more difficult than it’s going to be anyway,” said John Weingart, associate director at the Eagleton Institute of Politics at Rutgers University.