First Quarter FY2017 Tax Collection Could Be Harbinger of Budget Year

Tax changes associated with the gas-tax increase expected to help revenue at first — until cuts kick in

Disappointing tax collections have beset four out of New Jersey’s last six state budgets, and now the spending plan for the current fiscal year is facing its first big test. A report detailing the state revenue haul over the first quarter of the current fiscal-year budget is due to be released by Gov. Chris Christie’s administration at any time.

A poor report that shows tax collections are running behind the budget’s only modest projected growth rate would likely indicate the start of a bad trend coming on the heels of the $600 million in spending cuts that Christie was forced to make in May to keep the state from running in the red.

But strong tax collections could have the reverse effect, helping to restore confidence in the budget, especially after lawmakers just last week approved a package of costly tax cuts as part of the deal to renew the state Transportation Trust Fund.

Nationally, tax-collection data released in recent weeks showed states as a whole have been struggling this year to match the revenue growth they’ve enjoyed over the past few years, with many experiencing some recent declines. Whether New Jersey will be among those forced to downgrade growth forecasts for the current fiscal year remains to be seen.

The $34.5 billion spending plan that Christie signed into law for the fiscal year that began on July 1 calls for tax collections to grow by 3.6 percent through the end of June 2017. Christie had originally forecast a bigger expansion, but he scaled back the spending outlook by about $300 million in May in the wake of the $600 million shortfall.
So far, the early revenue reports for the first two months of the fiscal year showed some positive signs, with tax collections through August running well ahead of the growth target at nearly 7 percent, according to the state Department of Treasury. The news was particularly positive for the month of August, with monthly tax collections hitting $1.931 billion, up from the $1.795 billion in revenue that came in during the same period the prior fiscal year.

But analysts don’t know for sure whether this year’s improvement has been caused by a humming economy or just a quirk in the income-tax schedule since there was one extra withholding period this year in August. Some state taxes are also collected with a lag, so there is typically a shifting of revenues over the first few months of the fiscal year as the accounting process plays out. All of those issues should largely be cleared up once the first-quarter report is released by the Treasury this month.

The latest state revenue snapshot released by the nonpartisan Office of Legislative Services also pointed to the significance of Treasury’s first-quarter tax-collection report, noting that in in September the state usually “books more revenue than the months of July and August combined.”

The tax-cut package that lawmakers approved as part of the broader TTF deal on Friday is also sure to have an impact on the current fiscal-year budget, but initial OLS projections indicate it could actually help in the short-term.

Legislation passed by both the Senate and Assembly — which Christie is expected to sign into law — calls for the 7 percent state sales tax to be lowered by nearly a half percentage point to 6.625 percent, and for New Jersey’s estate tax to be eliminated. Those cuts will be made in two phases through January 1, 2018.

Other planned tax-policy changes in the TTF deal include an increase of the Earned Income Tax Credit for low-wage workers; an increase of the state income-tax exemptions for pensions and other sources of retirement income; and the creation of a new $3,000 income-tax credit for New Jersey veterans. In all, the tax cuts are projected to cost close to $1.4 billion in lost revenue once fully phased in by 2021.

But in the short term, the TTF deal should help the budget thanks to a 23-cent gas-tax increase that will raise about $1.2 billion annually for transportation spending over the next eight years. That will free up about $350 million in sales-tax revenue that would have been diverted from the budget into the TTF, which is an off-budget account that’s dedicated to funding transportation projects. Meanwhile, the tax cuts are only projected to cost the budget an estimated $164 million during the current fiscal year.

The budget could also benefit before the fiscal year runs out from Christie’s decision to end a reciprocal income-tax agreement with Pennsylvania beginning on January 1, 2017. The agreement, which has allowed residents of each state to file income taxes where they live instead of where they work, could generate as much a $180 million for New Jersey’s budget due to differences in the two states’ income-tax rates and other factors. Last month, Moody’s Investors Service, a major Wall Street credit-rating agency, called the looming policy change a “credit positive” for New Jersey (By contrast, Moody’s yesterday labeled the TTF deal a “credit negative”).

Still, states as a whole have had a difficult go of it so far this year, according to a report released last month by the New York-based Nelson A. Rockefeller Institute of Government. State revenues were up just 1.6 percent during the first quarter of 2016, and preliminary data indicated tax collections dropped by a little more than 2 percent during the second quarter of 2016, said the authors of the report, fiscal analysts Lucy Dadayan and Donald J. Boyd.

“The outlook for state budgets in the 2016-17 state fiscal year, which began on July 1st in 46 states, remains gloomy,” they said in the report.

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