Major changes to the federal tax code recently enacted in Washington, D.C. may have significant and unexpected impact on the state economy, according to state lawmakers — particularly in a high-cost place like New Jersey. That’s why Senate President Steve Sweeney has ordered a broad review of the state’s entire tax and fiscal policy landscape, and he’s named well-known outside policy experts to participate.
Sweeney (D-Gloucester) yesterday named two dozen members of a special working group, made up of both lawmakers and these experts; they’ve been charged with coming up with ways to help New Jersey deal with any economic challenges the federal tax-code overhaul poses.
But that’s not all. Other areas will be subject to the group’s discussions, which will primarily only be held in private, according to Sweeney’s announcement. The group will look at everything from how New Jersey funds local schools and other government services, to what can be done to control high property taxes and stop residents from leaving the state for cheaper alternatives.
Sarlo and Oroho return
The effort will be led by state Sens. Paul Sarlo (D-Bergen) and Steve Oroho (R-Sussex), and Assemblyman Lou Greenwald (D-Camden). In addition to several other lawmakers from both parties, the working group also will include more than a dozen outside policy experts, including economist Mark Zandi of Moody’s Analytics and former state Treasurer Feather O’Connor Houstoun.
The formation of the working group comes just weeks before Gov. Phil Murphy is expected to put forward his first state budget message to a joint session of the Legislature. It also comes as Murphy and Sweeney have publicly disagreed about whether the new governor should go forward immediately with his plan to hike New Jersey’s top-end income tax rate on earnings over $1 million to bring in more revenue to fund core priorities like K-12 education and public-employee pensions.
In fact, such working groups are usually organized by governors, and noticeably absent from the panel assembled by Sweeney — who once considered running for governor himself — is a member of Murphy’s administration. It remains to be seen exactly how receptive the governor will be to any of the group’s findings once they are released; Murphy’s press secretary did not respond to requests for comment yesterday.
The major federal tax changes signed into law by President Donald Trump just before Christmas last year slightly lowered individual income-tax rates and, among other changes, significantly cut the federal tax burden for corporations and those with large estates. To help pay for those cuts, the tax-code overhaul made several changes to rules on federal tax exemptions and deductions, including to a longstanding write-off for state and local taxes that’s commonly referred to as SALT.
Concerns about real estate market
While several analyses of the tax changes indicate many New Jersey residents will see some modest tax relief as a result of the overhaul, many others who previously itemized their deductions — an estimated 40 percent of the state’s taxpayers — may see a tax increase thanks, in part, to the establishment of a new $10,000 cap on the SALT deduction. That’s because the average annual property tax bill in New Jersey costs more than $8,500, and the state’s per capita state income-tax burden totals nearly $1,500. The new SALT limit and changes to mortgage-interest deduction rules have helped to fuel concerns that New Jersey’s real-estate market could suffer a setback, and trigger a broader economic decline across the state.
Sweeney had previously tasked Sarlo and Oroho to begin an informal review of how the federal tax changes could impact New Jersey even before the legislation was finalized in Washington, D.C. In announcing the next step in the effort yesterday, Sweeney said one goal is to learn “how we can mitigate the negative impact of the federal tax plan. But another is to conduct a “long-overdue examination of the adequacy, fairness and competitiveness of our tax structure,” which suggests the scope has broadened significantly.
“We want to make sure that government spending is efficient and effective so that we maximize the impact and minimize the costs,” Sweeney went on to say.
The working group reunites the bipartisan team of Sarlo and Oroho; they also worked together in 2016 on a comprehensive tax-revision proposal that paired an increase of the state gas tax to renew the state Transportation Trust Fund with a series of targeted tax cuts. The cuts included a phase-out of the estate tax, and a lifting of state tax exemptions for pensions and other sources of retirement income. Their effort established the framework for a complicated deal that was eventually enacted by then-Gov. Chris Christie.
Oroho: ‘We are facing a crisis’
Sarlo stressed that this new effort is putting “everything on the table,” and Greenwald promised it would not be just an “academic exercise.” Oroho suggested the group’s eventual policy proposals would help the state deal with a potential crisis.
“We are facing a crisis — a crisis of competitiveness, a crisis in housing values, and a crisis that undermines our prospects for future economic growth,” Oroho said.
In addition to Zandi and Houstoun, the experts from outside the Legislature are Dr. Joel Naroff, Naroff Economic Advisers Inc.; Dr. Michael Lahr, Rutgers Economic Advisory Service; Dr. Ray Caprio and Marc Pfeiffer, Rutgers Local Government Research Center; Richard Keevey, Rutgers University Bloustein School of Planning & Public Policy, and Princeton University’s Woodrow Wilson School; Dr. Henry Coleman, Rutgers University Bloustein School of Planning & Public Policy; Dr. Donald Moliver and Peter Reinhart, Monmouth University’s Kislak Real Estate Institute; Dr. Spencer Levy, CBRE Group Inc.; Ralph Thomas, New Jersey Society of Certified Public Accountants; Frank Chin and Ray Kljajic, American Public Infrastructure Inc.; Kurt Stroemel, H&RHS Financial Services; and Jerry Maginnis, accounting executive in residence at Rowan University.
Joining Sarlo, Oroho and Greenwald on the working group are Sens. Dawn Marie Addiego (R-Burlington); Anthony Bucco (R-Morris); Troy Singleton (D-Burlington); Assembly Budget Committee Chair Eliana Pintor Marin (D-Essex); and former Sen. Ray Lesniak (D-Union).
Behind closed doors
It’s unclear when the working group will put forward its first policy recommendations, but some could be out by the time Murphy and lawmakers are getting ready to sign off on the state’s next fiscal-year budget, which must be approved under the New Jersey Constitution by July 1. Other proposals may be more ambitious and take longer to enact, according to legislative staff.
Most of the working group’s discussions are expected to occur behind closed doors. Sweeney explained the reason for that secrecy during a recent Senate committee meeting as lawmakers were discussing a “workaround” bill backed by Murphy that’s aimed at helping taxpayers recapture some of the lost SALT deduction, at least in the short-term.
“Blowing up the system, and putting it back together in a way that makes it work better, requires total discussion amongst people that can speak freely, and not be concerned that they’re going to be criticized until we get a product done,” Sweeney said.