Republicans have long claimed that tax cuts generate economic growth, while Democrats argue it takes more government investment in key areas like infrastructure to achieve the same goal. New Jersey, with its Republican governor and Democratic legislature, is now about to test both strategies.
After more than three months of false starts and bitter disagreements, Gov. Chris Christie and Democratic legislative leaders say they have struck a deal to renew the state Transportation Trust Fund, one that features both a 23-cent gas-tax increase and a series of tax cuts that will total more than $1 billion.
The bipartisan deal now set to go before lawmakers as early as Wednesday will reinfuse the TTF with $16 billion in state funds over the next eight years, boosting annual spending on the state’s road, bridge, and rail infrastructure by $400 million. Federal matching dollars will also help create a multiplying effect that Democrats say will provide a big boost to a state economy that is still struggling to fully recover from the Great Recession.
On the tax-cut side, the TTF compromise calls for a slight reduction of New Jersey’s 7 percent sales tax, which is a major source of revenue for the annual state budget. It will also lead to the elimination of the estate tax, another significant revenue generator. Tax breaks for the working poor, veterans, and retirees living off pensions and other sources of fixed income are also planned as part of the deal announced by Christie, Senate President Stephen Sweeney, and Assembly Speaker Vince Prieto during a news conference on Friday afternoon.
Christie and other Republicans say the tax cuts will provide relief to the state’s overburdened taxpayers, and business-lobbying groups say they will spur investment and economic growth. But liberal groups are already criticizing the deal, saying it will benefit mainly the rich while costing the state budget billions of dollars in lost revenue at a time when everything from education to safety-net programs is already being underfunded.
The TTF compromise brings to an end a bitter political impasse that began at the end of June when the trust fund’s last five-year finance plan ran dry. It will also mean construction workers who have been sidelined since July, thanks to a shutdown of state-funded infrastructure projects that Christie ordered, can soon go back to work.
“I’m sorry it took so long, but we all have strong personalities and sometimes it just takes time to get together,” Sweeney (D-Gloucester) said during the news conference.
While many of the finer details of the agreement were still being worked out through the weekend, the 23-cent gas tax increase that’s at the heart of the deal will bring New Jersey’s per-gallon gas tax up to 37.5 cents. The increase is likely to go into effect at the start of November, though that detail has also yet to be finalized.
New Jersey’s gas tax is the second-lowest the country, behind only Alaska. Politicians in Trenton have not voted to increase the tax, which right now includes both a 10.5-cent levy on gasoline sales and a 4-cent wholesale charge on gross receipts, in nearly three decades. Instead, the TTF has piled up billions of dollars in debt to sustain annual spending.
If voters approve a proposed constitutional amendment that will appear on the ballot this November, all of the money raised by New Jersey’s fuel taxes after the increase goes into effect — an estimated $1.2 billion — will be dedicated to funding transportation projects.
The TTF deal, along with planned new borrowing, will allow annual state infrastructure spending to reach the $2 billion mark, something Sweeney and Prieto (D-Hudson) prioritized during the negotiations with Christie, saying such spending will spur economic growth.
“This couldn’t come soon enough,” Prieto said. “That’s what we need, we need to invest, we need to put people back to work.”
Also included in TTF deal are several other top Democratic priorities, including plans to double transportation aid for municipalities and counties, fully fund light-rail expansion projects in Bergen and Gloucester counties, and upgrade New Jersey’s freight-rail infrastructure.
For Christie, meanwhile, the key to the deal is the tax cuts, which he repeatedly insisted on as a tradeoff for the gas-tax increase that Democrats had been seeking for over a year. The planned sales-tax reduction will bring New Jersey’s 7 percent levy down to 6.875 percent at the start of 2017, and a second phase of the cut calls for the rate to drop again, to 6.625 percent, at the beginning of 2018.
“This is the first broad-based tax cut for all New Jerseyans since 1994, which is much-needed,” Christie said Friday.
Still, the sales-tax portion of the deal also signifies a substantial concession for Christie since he had been seeking a full 1 percent reduction, and at one point had convinced Prieto to go along with that plan even though it would have cost the state budget at least $1.6 billion in lost revenue. Even scaled back to a little less than a half of 1 percent, the sales-tax cut, could cost the budget between $550 million and $600 million once fully phased in, according to initial estimates.
New Jersey’s estate tax will also be phased out by the time Christie leaves office in early 2018 under the TTF deal. The current $675,000 exemption will be lifted to $2 million at the beginning of 2017 and then eliminated altogether on January 1, 2018. But New Jersey’s inheritance tax, which is levied on those who inherit assets from estates, will remain in place.
Getting rid of the estate tax has been a major goal of business-lobbying groups who say it holds back investment and regularly drives business owners and other wealthy residents out of the state.
The TTF compromise “begins the process of arresting that trend,” said Michele Siekerka, president of the New Jersey Business & Industry Association.
Other tax cuts included in the deal will result in New Jersey’s Earned Income Tax Credit being increased from 30 percent of the federal to 35 percent of the federal credit, and state income-tax exemptions for pensions, 401(k) plans, and other sources of retirement income rising over the next four years to $100,000 for married couples filing jointly and $75,000 for individual filers. Those exemptions right now are set at $20,000 for joint filers and $15,000 for individuals.
A new state income tax exclusion for veterans will also be created under the deal, with all who have received honorable discharges allowed to claim it. Though the specific details have not been released, an earlier version of the credit that was a part of the negotiations put the value at $3,000.
Official financial projections have not yet been released, but prior estimates prepared by analysts from the Office of Legislative Services indicate the total impact of the tax cuts once fully phased in could be at least $1.3 billion by 2021. That total would be slightly more than the $1.2 billion that will be generated each year by the increased gas tax, and since the TTF is an off-budget account, it will leave a hole in the state budget unless the increased spending and tax cuts produces a groundswell of economic growth.
Though only the Earned Income Tax Credit increase will begin right away, the OLS estimates also indicate the biggest loss of revenue in raw dollars will come from the estate-tax phase out and the sales-tax reduction, meaning those with large estates and free-spending habits will likely see the most savings. That’s something liberal advocates criticized immediately after the deal was announced on Friday.
Analilia Mejia, director of New Jersey Working Families, called the deal “massively disappointing.”
“The state stands to lose billions in the long-term, siphoning critical funds from education, the environment, and all other priorities the state may have had,” Mejia said.
Jon Whiten, vice president of New Jersey Policy Perspective, a liberal think tank based in Trenton, said the tax cuts would “disproportionately benefit well-off New Jerseyans while decimating the state’s ability to pay for essential services, promised obligations and other critical investments.”
But others praised the agreement, including officials from New Jersey’s construction industry. Industry experts had previously said the shutdown ordered by Christie in July had led to the loss of at least 3,000 jobs.
“This deal provides an essential, dedicated, and long-term source of revenue for the TTF that ensures our transportation system can compete in a 21st century economy, and will help us to avoid another catastrophic transportation shutdown,” said Greg Lalevee, chairman of the Engineers Labor-Employer Cooperative.
“This is the kind of long-term thinking that New Jersey has desperately needed on transportation infrastructure,” said Robert Briant, chief executive of the New Jersey Utility & Transportation Contractors Association.