A booming stock market usually bodes well for New Jersey’s budget but, despite a recent Wall Street hot streak, there’s some growing concern about whether a new round of spending cuts will be needed before the state closes its fiscal year in a few months.
Gov. Chris Christie’s administration right now is holding firm to its latest revenue forecast for fiscal year 2017, but new projections released this week by the nonpartisan Office of Legislative Services suggest that tax collections could come up short by as much as $223 million when the fiscal year ends on June 30.
The gap would be relatively small considering the current state budget totals nearly $35 billion, and much better information about the health of the FY2017 spending plan will be known in a few weeks, after the Department of Treasury tallies April income-tax returns.
But this year, there’s also a new element of uncertainty for revenue forecasters, thanks in part to President Donald Trump’s election in November.
Though only advisory in nature, the OLS revenue estimates can serve as a signal that budget trouble is looming. In fact, at this time last year the gap between the OLS forecast and Treasury’s was a seemingly modest $73 million, but by the end of May, the state was facing a $600 million budget shortfall.
Christie promised to clean up NJ’s messy finances
That was just the latest budget miss for Christie, a second-term Republican who promised as a candidate to clean up the state’s messy finances. In all, four of the state budgets Christie has drafted since taking office in early 2010 have needed to be fixed with midyear cuts, while two benefitted from revenue windfalls. And since the state constitution requires a balanced budget, all shortfalls must be addressed with cuts to avoid a running deficit.
As a candidate last year, Trump promised that he would reduce federal taxes, and while he’s yet to make good on that campaign pledge, there’s still an expectation that some form of tax reform will be enacted by the federal government in the coming months. But whether Trump does actually come through on that promise doesn’t really matter for New Jersey’s budget as much as whether taxpayers —especially those who made good investments as the stock market soared in 2016 — had a strong belief that Trump would come through.
If enough taxpayers held back their capital gains from 2016 to 2017 in the expectation that they would be benefitting from a future federal tax break, that would result in less income-tax revenue for New Jersey’s current fiscal year budget because the state’s July to June budget cycle straddles the two tax years.
Included in the less-optimistic OLS revenue forecast for the remainder of FY2017 is a prediction that there will be some type of a “Trump effect.” Even though both agencies are projecting overall growth in income-tax revenue between the 2016 and 2017 fiscal years, the OLS is forecasting $140 million less than the Treasury is right now.
“Tempering OLS’ expectations for a robust April are concerns about how taxpayer behavior might have been influenced at the end of the calendar year 2016 by discussions of future federal tax reductions following November’s election results, which some analysts believe might have deferred as much as 10 to 20 percent of capital gains from 2016 into 2017,” said Catherine Brennan, the chief of revenue, finance and appropriations for the OLS.
‘Reverse fiscal cliff’?
The state experienced a similar effect in 2013, when looming federal-tax increases tied to “fiscal cliff” negotiations involving then-President Obama’s administration and the Congress influenced taxpayers to report their capital gains before the new rates went into effect. That helped to swell the state’s coffers before the 2013 fiscal year ended, but the Treasury underestimated the impact heading into the next fiscal year, and Christie faced a $1 billion revenue shortfall in 2014. He closed the gap by slashing that year’s planned public-employee pension contribution, a violation of his own signature pension-reform law that was ultimately allowed by the state Supreme Court.
Yesterday, state Treasurer Ford Scudder walked members of the Senate Budget and Appropriations Committee through his agency’s latest revenue estimates, which were last revised in late February to account for a round of tax cuts that went into effect on January 1 as a result of the deal that Christie struck with lawmakers last fall to renew the state Transportation Trust Fund. He pointed to an overall healthy state economy that was boosted by a banner year for job growth in 2016 as a reason for optimism.
But asked specifically by committee chairman Paul Sarlo (D-Bergen) about concerns there could be a “reverse fiscal cliff” as the state’s FY2017 income-tax collections come in this month, Scudder said it’s a “worthy discussion,” but not something that his agency is expecting will occur.
“We’ve had this discussion internally and we’re pretty confident there was not a reverse fiscal cliff,” Scudder said.
Since the November presidential election, the stock market was up 10 percent through the end of the year, with volume up substantially, the treasurer said. Estimated tax payments that were due in January were also up about 10 percent over payments made at the same time in 2016, he said.
$500M surplus account
“We believe people were taking gains and that will show up in unearned income, and will show up in April tax returns and June estimated payments,” Scudder said.
Still, if Scudder ends up being wrong, the state maintains a surplus account to hedge against risk, including from revenue forecasting or unforeseen spending needs. This year, the surplus account measures just under $500 million, a total that’s expected to be carried over into the FY2018 budget.
But Frank Haines, legislative budget and finance officer for the OLS, warned members of the committee about other elements of risk in Christie’s FY2018 spending plan, which banks on a decent amount of revenue becoming available from sources other than state taxes. That list includes revenue from legal settlements and the expected sale of state assets. In fact, the Treasury is assuming $325 million will be raised through asset sales, including from the state’s participation in an auction of broadcast licenses that was held earlier this year by the Federal Communications Commission.
The OLS, meanwhile, is also projecting tax collections to come up $213 million short of the Treasury’s current estimate for FY2018.
“I think it’s safe to say we should be concerned about what we have in surplus,” Haines said.