State budget advisers say that for all of New Jersey’s fiscal problems, they see a number of steps the state can realistically take that have the potential to improve New Jersey’s notoriously poor standing. They include increasing funding for the public-employee pension system, padding rainy-day budget reserves, and reducing the use of one-time revenue gimmicks.
Although much of its advice has been heard before, Gov. Phil Murphy’s budget transition committee did have some additional recommendations. (The new Murphy administration appointed a transition committee made up of experts and stakeholders for each of the state’s largest issues with the goal of helping the governor chart the transition from the Christie to Murphy administrations with ideas from those most familiar with the subject.) This report was focused on the state budget.
But with Murphy’s first state spending plan due out in a little over a month, it remains to be seen whether a Legislature that is controlled by fellow Democrats will be willing to go along with everything in the report, including recommendations related to tax increases that would bring in more cash to help pay for the lofty budget goals.
In fact, there are already signs that some of Murphy’s Budget Transition Advisory Committee’s more noteworthy proposals could be facing a bumpy ride in the State House.
For example, Senate President Steve Sweeney (D-Gloucester) has been throwing cold water on a proposal to hike New Jersey’s top-end income-tax rate on earnings over $1 million, citing the impact recent federal tax-policy changes that were signed into law by President Donald Trump could have on the broader state economy. A number of lawmakers have also shown a reluctance to rush to legalize recreational marijuana use in New Jersey this year. Murphy discussed both of those tax-policy changes often on the campaign trail last year, and they are among the recommendations made in the transition report), which was released on Friday.
Republicans, meanwhile, want Murphy to seriously consider ways to reduce costs, including by making changes to public-employee benefits, and a key GOP voice on budget issues faulted the transition panel yesterday for giving that issue little attention.
During former Gov. Chris Christie’s eight-year tenure, New Jersey’s credit rating was downgraded on many occasions by major Wall Street credit-rating agencies, leaving the state with one of the lowest debt grades of any in the U.S. In their frequent downgrade notices, the rating agencies often highlighted New Jersey’s record of underfunding the public-employee pension system and maintaining budget reserves that represented only a small percentage of overall spending. They also faulted the Christie administration at times for using one-time revenue-collection measures to close budget gaps instead of relying more on stable and recurring sources.
Tackling ‘one-shot gimmicks’
The transition advisory report on budget issues includes several recommendations that relate directly to those issues — “revisit the current pension payment plan, and commit to (a) long-term plan for increasing the State’s Rainy Day Fund,” and to reducing a “reliance on non-recurring revenues and other one-shot gimmicks.”
The report goes on to suggest the Murphy administration pursue several other fiscal reforms that the Democratic-controlled Legislature has tried to enact in recent years, only to be blocked by the Republican Christie. They include revising the revenue-forecasting process to increase reliability, and performing long-term, multiyear financial planning and debt-affordability analyses.
But the report also echoes promises Murphy made on the campaign trail last year while discussing fiscal policy, including his proposal to hike the top end marginal income-tax rate on earnings over $1 million from 8.97 percent to 10.75 percent to bring in more revenue for things like the pension system. While the report concludes that such a tax increase should be pursued, it also suggests the Murphy administration should keep a close eye on whether the higher rate leads to increased outmigration among high-income residents who make up a hefty portion of the overall revenue base.
“The State must continuously monitor outmigration data from annual tax returns to course correct if raising this tax results in declining revenue,” the report said.
Although he’s previously sponsored legislation seeking to enact the exact same millionaire’s tax that Murphy is now proposing, Sweeney, the longtime Senate leader, has been casting doubt on whether it makes sense to pursue such a tax hike now, in the wake of the federal tax overhaul. The changes enacted by Trump include a new cap on the previously unlimited federal deduction for state and local taxes known as SALT. Sweeney has asked Sens. Paul Sarlo (D-Bergen) and Steve Oroho (R-Sussex) to do a bipartisan assessment of how the federal tax changes could impact the state economy, and the state’s overall tax structure.
“We need to have a sophisticated understanding of the impact before we consider any tax increases or take other actions that would have a significant impact on public finances,” Sweeney said in a statement yesterday.
“I want to get all of the facts so that we make informed decisions on tax and fiscal policies,” the statement continued. “We need to know how we can mitigate the negative impact of the federal tax plan on our residents, our businesses and our state.”
“This is no small task,” he said. “But it is the responsible thing to do to react to current realities and to plan for the future.”
While Sweeney has decided to pump the brakes on new tax proposals, New Jersey Policy Perspective, a liberal think tank based in Trenton, released a new batch of research last week that suggests households making more than $1 million in New Jersey will still come out ahead even if lawmakers follow through on Murphy’s millionaire’s tax proposal. Those households are in line to save nearly $30,000 on average from the federal tax-code overhaul, which also reduced federal income-tax rates in addition to capping the SALT deduction, according to the NJPP analysis.
The SALT problem
“Even with the limits on state and local tax (SALT) deductions, the top earners in the Garden State will reap more rewards from the GOP plan than middle-class or working families,” said NJPP senior policy analyst Sheila Reynertson.
Meanwhile, the impact of the federal tax changes, including major corporate tax cuts, was also raised by Sen. Declan O’Scanlon (R-Monmouth) in his reaction to the Murphy transition report. O’Scanlon pointed to a recent study of New Jersey’s unfunded-pension obligations issued by the conservative Manhattan Institute while suggesting that, unless the federal tax cuts trigger a groundswell of economic growth, the Murphy administration won’t be able to cover all of its obligations simply through the tax changes that are detailed in the transition report.
O’Scanlon, a member of the Senate Budget and Appropriations Committee, has been calling for public-employee health-benefit cuts to free up more money for the pension obligation, but the transition report only made a passing reference to spending reductions in its discussion of the pension issue.
“Quite frankly, they’re not talking about a lot of things that could save us money,” O’Scanlon said.