State lawmakers defiantly moved their own spending bill out of legislative committees yesterday despite Gov. Phil Murphy’s promise that he will veto their budget over concerns about an increased corporate tax and other revenue measures that he considers unacceptable.
The early-evening, party-line votes in the Democratic-controlled Assembly and Senate budget panels set the stage for final passage of the Legislature’s fiscal year 2019 spending bill in both full houses tomorrow.
But it remains to be seen what will happen next as Murphy, a first-term Democrat, has already promised to reject the budget bill even as it’s still being advanced by lawmakers. If a deal can’t be reached by midnight on June 30, the state constitution requires a government shutdown.
The sticking points
The key sticking points remain Murphy’s insistence that any new spending be backed by his preferred tax hikes, namely a millionaires tax and the restoration of a 7 percent sales tax. Instead, lawmakers would rather raise the tax rate on high-earning corporations, while also trying to boost revenue by offering a tax-amnesty program and a series of audits and other spending reforms.
The Legislature’s willingness to move ahead with final approval of their competing spending plan could bring on more serious budget negotiations, and an eventual compromise, but Murphy doubled down on his veto threat yesterday during an event at the Trenton Train Station. Its purpose was to highlight an increased investment in mass transit that his own budget proposal would support. Still, he also signaled a willingness to meet with lawmakers to reach a compromise.
“I’ve said publicly and privately, we’re here, any moment, any hour, of any day,” Murphy said about his willingness to negotiate.
In all, the Legislature’s version of the 2019 budget totals $36.5 billion, nearly $2 billion more than the budget currently in place. It’s slightly smaller than Murphy’s own fiscal 2019 budget plan, which measures $37.4 billion, but most of the difference is due to an accounting maneuver, with the legislative budget calling for $800 million in energy tax receipts to be considered “off budget,” while Murphy’s spending plan characterizes that appropriation as “on budget.”
Running the numbers
Meanwhile, the legislative appropriations bill incorporates a number of the same spending increases that were included in the budget that Murphy put forward in March, including adding $700 million to the state’s annual public-employee pension-system contribution. The budget legislation also increases state aid for K-12 school districts by nearly $345 million, besting Murphy’s budget proposal by $61 million, and it includes roughly the same $170 million increase for New Jersey Transit. The legislative budget also adds $155 million to fully fund the Homestead property tax relief program, and allows a cap on the state income tax deduction for local property taxes to be increased from $10,000 to $15,000.
And while some lawmakers questioned Murphy’s proposal to boost aid for community college students as part of a broader, multiyear goal of providing a tuition-free education, the legislative budget does include $5 million to start that program.
On the revenue side
But it’s on the revenue side of the ledger that the legislative spending plan veers significantly from Murphy’s own budget proposal, which assumed some $1.7 billion in new revenue would be collected. Most of that new revenue would come from the establishment of a 10.75 percent income-tax rate on earnings over $1 million, and he would move the sales tax back to 7 percent from 6.625 percent, a reduction that just went into effect earlier this year. Murphy’s budget also relies on higher taxes on the nicotine used in e-cigarettes, and on “sharing-economy” services like Uber and Airbnb.
But Sweeney has strongly opposed Murphy’s millionaires tax, saying it could chase away high-income residents who stand to benefit more from the federal-tax overhaul that was enacted late last year by President Donald Trump. Assembly Speaker Craig Coughlin (D-Middlesex) has also led a resistance to the proposed sales-tax hike, which would undo a 2016 deal that Democratic lawmakers struck with former Republican Gov. Chris Christie in exchange for an increase in the gas tax needed to renew the state Transportation Trust Fund.
The legislative budget includes the taxes on liquid nicotine and the sharing-economy services, but it uses a number of other revenue measures to replace the millionaires tax and higher sales-tax rate sought by Murphy. They account for a saving of over $300 million from a series of audits and other planned changes that would be made to the state’s pharmacy benefits contract and management of Medicare, state health benefits programs, and Medicaid. The lawmakers also bank on another $150 million being generated by a tax-amnesty program that would be offered to those who are behind on their state taxes.
In addition, the legislative budget also has a slightly smaller unreserved budget surplus of $635 million, compared with the $741 million surplus that Murphy is planning to maintain in his budget.
Counting on corporate taxes
But the biggest new revenue source that the legislative budget relies on is raising the corporate tax on businesses with over $1 million in income. Under separate legislation that also advanced through budget committees yesterday, the corporate rate would go from 9 percent to 11.5 percent on businesses with earnings between $1 million and $25 million, and to 13 percent on those with earnings over $25 million.
State Senate President Steve Sweeney, the architect of that tax hike has argued those businesses are due to receive a windfall as a result of tax cuts that were included in the 2017 federal-tax overhaul. And unlike individual taxpayers, they can still write off their state taxes on their federal tax forms.
“A lot of the money is coming from out of state, the Walmarts, the Home Depots, they’re based on sales in New Jersey,” Sweeney (D-Gloucester) told reporters in the State House yesterday. “It’s a better tax.”
The higher corporate rates would be in effect for only two years, and would generate an estimated $805 million in revenue annually. The lawmakers are also banking on an additional $200 million in corporate-tax revenue as a result of the federal-tax changes than the Murphy administration is estimating.
The corporate-tax legislation was approved yesterday over the objections of representatives from the state’s business community, who raised concerns about New Jersey becoming an outlier on corporate taxes, as neighboring states like New York and Pennsylvania collect 6.5 percent and 10 percent, respectively.
“We’re concerned about the impacts on our competitiveness and affordability in New Jersey,” said Michele Siekerka, president and chief executive of the New Jersey Business & Industry Association.
Murphy, a former Goldman Sachs executive, has shared similar concerns, and has also questioned lawmakers for proposing a tax hike that would expire after two years even as the state’s expenses, including the contribution to the pension system, are scheduled to continue rising. The corporate tax is also one of the state’s most volatile revenue sources, and future collections are likely to be reduced significantly by lucrative state-tax incentives that were awarded during Christie’s tenure.
“This is the mindset that I’m trying to break here in Trenton,” Murphy said yesterday at the train station.