The cause of the division: The major beef between Gov. Phil Murphy, a first-term Democrat, and the Democrats who control both houses of the Legislature, is over how the state should raise more revenue to pay for spending on things like K-12 education, public-worker pensions, property tax relief, and mass transit.
Competing tax proposals: Murphy has proposed a series of tax increases that include establishing a millionaires tax and restoring the 7 percent sales tax. The two tax hikes combined would raise an estimated $1.3 billion. But Democratic legislative leaders want to bring in more cash by levying, for at least two years, a higher corporate rate on high-earning businesses. They’ve also proposed several other fiscal initiatives, including a six-month amnesty program for tax delinquents. Combined, the Legislature’s two main revenue measures would generate an estimated $955 million. They have also scored another $200 million in revenue collected from tax policies enacted late last year by President Donald Trump.
How it came to this: Murphy made no secret about his desire to raise taxes while running for office last year, and he explicitly promised to establish a millionaires tax. (The state’s current top-end rate of 8.97 percent is levied on annual income over $500,000. A new rate of 10.75 percent would be levied on earnings over $1 million.) But Murphy was less direct about the sales tax, taking some lawmakers by surprise when it became part of his fiscal year 2019 budget message that he unveiled in March.
Meanwhile, Senate President Steve Sweeney (D-Gloucester) drew a clear line in the sand against taxing New Jersey residents in the wake of the federal tax changes, which capped a longstanding deduction for state and local taxes known as SALT, which had previously been unlimited. That led Sweeney to propose the corporate-tax hike, which would raise the rate from 9 percent to 11.5 percent on businesses with an annual income between $1 million and $25 million, and to 13 percent for businesses with an annual income over $25 million. Assembly Speaker Craig Coughlin (D-Middlesex), who has been outspoken about the sales-tax hike, put forward the tax-amnesty proposal in April.
The risk factor: Another bone of contention is the amount of risk that Murphy sees in the legislative budget. Commentary included in fiscal estimates and notes prepared by nonpartisan analysts who work for the Office of Legislative Services seems to back up some of that concern.
For example, the OLS review of the corporate-tax bill suggested the state could be vulnerable to creative accounting, warning that “actual revenues may be lower than predicted due to impacts related to taxpayer behavior, such as delaying the realization of income, intended to avoid the imposition of a higher tax rate during the two tax years for which the surtax is in effect.” On the tax-amnesty bill, the OLS said it was “unable to estimate a precise amount of revenue” to support the lawmakers’ projection.
But there’s also some risk in the millionaires tax, as an OLS review of a prior legislative proposal for a 10.75 percent rate warned. It said revenues would be “highly volatile” since “high-income taxpayers are far more dependent on volatile income sources such as capital gains, bonuses, and certain types of business income than are other taxpayers.” The money kept in the budget’s surplus fund is used to hedge any risk during the fiscal year, and Murphy’s budget plan has a slightly larger surplus than the Legislature’s spending bill. But both projected surpluses are smaller than they should be if the state were adhering to best practices.
The room for compromise: While the rhetoric has become more charged in recent days, there is actually a good deal of room for compromise. On paper, the sales tax may be the easiest tax hike for lawmakers to accept, since only the state’s biggest spenders have noticed a slight decrease, from 7 percent to 6.625 percent, that was phased in over the past two years. But it would take a big concession from lawmakers who agreed to that reduction as part of a broader bipartisan deal to so quickly undo the cut.
Murphy also has some room to bend on his millionaires tax proposal, which could be levied at a less-aggressive rate than 10.75 percent to address lawmakers’ concern, while still generating a good deal of new revenue. Sweeney could also agree to extend the corporate tax hike beyond two years, and to moderate the increase to ensure New Jersey’s rates remain more competitive, as the proposed 13 percent top-end rate would become the nation’s highest. Such a scenario would largely reinstate policies that were in place a decade ago during the tenure of Democratic Gov. Jon Corzine, when there was a 7 percent sales tax, a millionaires tax, and a corporate surcharge on the books at the same time.
Some possible outcomes: Murphy has already promised to veto the spending bill that lawmakers sent him late last week, as he feels it’s far riskier than his own budget proposal. His action on the spending bill could come as early as today.
But under the state constitution, the governor has a number of different tools to use in addition to an outright veto. They include the line-item veto, which he can employ to remove the things he doesn’t like. Since he can’t insert anything using the line-item veto, Murphy could also conditionally veto the budget to recommended changes to lawmakers, which would represent a compromise route.
If there is an outright veto, the Legislature would be forced to decide if it wants to try to override the governor. The budget legislation did not pass in either house with a veto-proof majority last week, and an override would require cooperation from Republicans, who would be reluctant to see major tax hikes enacted in the process.