High-Tax Connecticut a Cautionary Tale for New Jersey?

John Reitmeyer | October 19, 2017 | Budget
Despite increasing taxes, the Nutmeg State has suffered budget shortfalls and credit-rating downgrades. What lessons can NJ learn from its neighbor?

tax sources carousel
If New Jersey policymakers are convinced the state will be able to address its longstanding public-employee pension-funding problem with only tax hikes, a new report points to neighboring Connecticut — where business, sales, and income taxes have all been raised in recent years — as a cautionary tale.

Despite its bevy of tax increases, Connecticut has still been hit with a flood of shortfalls and credit-rating downgrades in recent years as the state, like New Jersey, has struggled to keep up with growing pension obligations, according to the report, which was released by a newly formed group called The Garden State Initiative.

The 15-page report also warns that raising the income-tax rate for even just the highest earners in New Jersey — something that has been hotly debated during this year’s gubernatorial election — threatens to increase the volatility of a state revenue stream that is already linked heavily to the success of New Jersey’s wealthiest residents.

Led by Regina Egea, a former high-ranking member of Gov. Chris Christie’s administration, the new group that released the report promises to bring a free-market and research-driven voice to ongoing state public policy debates on issues related to fiscal and economic policies. The report, comparing Connecticut’s fiscal issues with New Jersey’s, is just the first that the group hopes to issue in the coming months and years, Egea said in an interview yesterday. “Definitely in it for the long-term,” she said.

Underfunded pensions

New Jersey has been underfunding its public-employee pension obligations for well over a decade, through the administrations of both Democratic and Republican governors, who’ve consistently decided to spend the money on other priorities, cut taxes, or do both. With an unfunded pension liability that now measures at least $50 billion, New Jersey has suffered through a series of credit-rating downgrades in recent years that have left it with the second-worst debt grade among U.S. states, behind only Illinois.

But now not far behind New Jersey is Connecticut, a state that Stephen Eide, the author of the new report, describes as having a similar fiscal profile as New Jersey, with relatively wealthy residents, high tax rates, and significant obligations owed to retired public employees.

While Christie, a second-term Republican, was able to convince Democrats who control New Jersey’s Legislature to enact a series of tax cuts during his tenure — including a reduction of the sales tax and a phase-out of the estate tax — in Connecticut, where the governor is a Democrat and the Legislature is also controlled by Democrats, a series of tax increases have been passed in recent years, the report said. They include increasing the income tax rate for the wealthy, hiking the sales tax, and establishing a surcharge on high-earning corporations.

But Connecticut has still faced significant budget deficits, and its governor and lawmakers have been deadlocked for months on how to address the latest gap. Big companies like General Electric and Aetna have also decided to leave Connecticut in recent years, suggesting the tax hikes, the state’s unstable finances, or a combination of the two issues, are making other places look like a better deal to corporate executives.

‘Tax hangover’

Eide said in an interview yesterday that his comparison of the two states revealed a sort of “tax hangover” that even Democratic lawmakers are recognizing as they try to address the state’s budget problems.

In this year’s gubernatorial contest in New Jersey, Democratic frontrunner Phil Murphy has been promising to boost, in phases, both pension contributions and state aid for local school districts. Part of his plan to bring in new revenue to cover those commitments includes an increase in taxes on those who earn more than $1 million. Meanwhile, Republican Kim Guadagno, Christie’s longtime lieutenant governor, has suggested the state needs to adopt the recommendations of a special benefits-study commission that called for reducing employee healthcare benefits and freezing the current pension system.

But Guadagno has also frequently distorted Murphy’s fiscal plan by not clarifying that the income-tax hike he’s proposing would only impact the state’s millionaires, and that the higher rate would only apply to their earnings over the $1 million threshold. She’s also falsely claimed that he plans to hike other taxes, like the sales and estate taxes, even though Murphy’s fiscal plan does not call for any changes in those areas.

Click to expand/close
Eide noted in his report that lawmakers in Connecticut eventually raised the sales tax and made even more income-tax changes as the budget deficits mounted. His report also highlights how much both states currently rely on income-tax collections to sustain spending, with 40 percent of total revenues coming from the income tax in New Jersey, and 53 percent in Connecticut.

NJ’s business-tax climate is dead last

The report, which Eide said “is just kind of a way of saying ‘Look before you leap,’” was released just as New Jersey once again placed dead last in the Washington, D.C.-based Tax Foundation’s annual comparison of the business-tax climates of the states.

Egea, a former state Treasury Department official who also served for more than a year as Christie’s chief-of-staff, said that despite the fiscal challenges, she believes New Jersey can improve its standing in the state-by-state rankings. “Of course, we can, we just have to want to,” she said.

And in a letter posted on the new group’s website, Egea promises the nonprofit organization is ready to offer “alternative, intellectually honest solutions” to the state’s public-policy challenges.

“Our goal at GSI is to offer timely, useful and, yes, even at times provocative alternatives to the standard ‘tax more and spend more’ mantra that plagues our state,” she said.