The state is on course to run up a sizable budget deficit unless new tax increases are adopted this year, the top fiscal official in Gov. Phil Murphy’s administration told a group of skeptical lawmakers during a hearing in Trenton yesterday.
Making matters worse, it’s becoming harder for the state to generate enough cash to cover all its core obligations as bipartisan tax policies that have been enacted in recent years are jeopardizing the flexibility that lawmakers have to provide aid every year to hospitals, developmental centers and other vital programs.
Murphy’s proposed solution to the fiscal crunch involves hiking taxes on millionaires and restoring the sales tax rate to 7 percent, among other, more modest tax-policy changes, and he’s still working to convince lawmakers that those remedies are absolutely necessary.
Yesterday, his plan was outlined for the first time in detail for lawmakers in Trenton by acting state Treasurer Elizabeth Maher Muoio, who warned that New Jersey is facing a budget deficit of $161 million if the fiscal policies inherited from former Gov. Chris Christie’s administration were left in place without any tax hikes.
Are we on ‘life support’?
“It’s time to face facts,” Muoio said. “Our economic engine is on life support.”
Earlier in the day, the lawmakers heard about the latest revenue projections prepared by the nonpartisan Office of Legislative Services, which included a discussion of the closely watched outlook for this year’s April income-tax collections. Some lawmakers have been suggesting there may not be a need to adopt all of Murphy’s tax proposals if the current tax rates generate a robust “April surprise,” which is raising the stakes for the Murphy administration as those tax returns continue to be counted. Several Republicans also questioned whether enough consideration has been given to spending cuts, given the state’s many fiscal challenges.
“There’s an obvious gap here, can we expect major tax increases from this administration every year is the real question, and if not, then where are we proposing to get the money,” said Sen. Declan O’Scanlon (R-Monmouth).
A big share of the looming budget deficit of $161 million that Muoio outlined during a lengthy Senate Budget and Appropriations Committee meeting is rooted in a plan the state has been following over the last several years that calls for increasing contributions into the grossly underfunded public-employee pension system. In all, Murphy’s fiscal 2019 budget increases pension funding by $700 million to $3.2 billion. Muoio made it clear yesterday that the governor has no intention of shorting the retirement plan during his tenure.
“The governor is unequivocally committed to continuing to escalate those payments until we achieve full funding,” she said.
Wall Street not happy
The state also needs to make new investments in K-12 education and mass-transit, and build up a budget surplus that has been a frequent source of criticism in notices issued by Wall Street credit-rating agencies in recent years, she said. Those items, which attempt to make up for underfunding that occurred during Christie’s tenure, account for another more than $1 billion in new spending.
“Once we had the chance to really open the books, it became readily apparent that decisions made over the past eight years, and in some cases over the past two decades, have had a devastating impact on our state’s finances,” Muoio said.
To bring in new revenue, Murphy is proposing to establish a 10.75 percent top-end income-tax rate on earnings over $1 million. He also wants to reinstate the 7 percent sales-tax rate that was in place for a decade until Christie convinced lawmakers to lower it in 2016. New taxes on “sharing-economy” services like Uber and Airbnb would also be levied. Murphy’s budget proposal also proposes new corporate tax rules to raise additional revenue. In all, the tax hikes would yield close to $1.7 billion in new revenue.
Muoio said her staff is also being forced to confront structural budget problems that are starting to threaten many state spending priorities. Tax changes that have been enacted in recent years, including reducing the sales tax, phasing out the estate tax, and devoting Lottery revenues to public-worker retirement costs, have significantly reduced the part of the state’s revenue pie that isn’t constitutionally dedicated to specific purposes. That is cutting into lawmakers’ flexibility on annual appropriations, leaving less money to cover costs in core areas like hospitals, developmental centers, and prisons.
Some $788 million in energy-tax receipts are being shifted “on budget” to help address those concerns in the near term, Muoio said.
‘…our last resort’
The same issue was raised earlier in the day by Frank Haines, the legislative budget and finance officer for the OLS, as the Legislature’s nonpartisan analysts provided lawmakers with their own budget update. That discussion also included Haines and OLS fiscal analyst David Drescher fielding questions about what to expect as the state continues to count this year’s income-tax returns. New federal tax policies and those currently up for discussion in the State House have made it harder for the analysts to determine exactly what will happen over the next few weeks. The income tax is the state’s largest single source of revenue, so a lot is riding on this year’s “April surprise.”
“There may be a big swing, but then again, there may not be,” Drescher said.
Meanwhile, the OLS estimates for fiscal 2019 are slightly less optimistic than the Murphy administration’s, with OLS projecting that tax collections will come up $177 million short of Murphy’s estimates. But the two sides are in near perfect alignment when it comes to the remaining months of fiscal 2018, with an only $3 million difference in forecasts at this point.
“Inclusive of both years, the difference is approximately one quarter of 1 percent,” Drescher said.
After the hearing ended, Senate Budget and Appropriations Committee chairman Paul Sarlo (D-Bergen) said he’s still withholding judgment on Murphy’s tax proposals until it’s clear which way this year’s “April surprise” will go.
“In my opinion, the crisis is not there yet to justify tax (increases),” Sarlo said. “I’m not saying we won’t get there, but it’s got to be our last resort.”