Decades of financial mismanagement and political dishonesty have taken their toll on New Jersey in the form of neglected assets, massive pension obligations, and near-empty reserves for the next economic downturn or superstorm. But now, after eight years of massive tax breaks that failed to generate economic growth, New Jersey is poised to start a new chapter on July 1st with its new budget. The question is which budget will realistically meet New Jersey’s needs.
Simply put, one guarantees financial certainty with sustainable sources of revenue and the other does not.
Gov. Phil Murphy’s proposed budget takes a sensible approach we haven’t seen in years, with targeted tax increases that total $1.7 billion in new, sustainable revenue based almost entirely on a tax increase on earnings over $1 million and a return to a 7 percent sales tax. This sort of investment is essential to not only support key government services like property-tax relief, education, and clean water but finally enables New Jersey to re-invest in economically critical assets like mass transit and public colleges and universities.
The legislative scheme
The Democratic Legislature has committed to another year of short-term tactics to raise just enough revenue to get through the 2019 election. The centerpiece of its hastily adopted revenue plan is a two-year surcharge on large corporations. By tacking on an additional 2.5 percent tax on businesses with earnings over $1 million and 4 percentage points on those with earnings over $25 million, the Legislature expects to generate $805 million in annual revenue. But the likelihood of actually collecting that amount is questionable for several reasons.
First, state corporate taxes have been a shrinking share of state revenues even as, on the whole, businesses have fared quite well. Revenue projections have, on average, come up short by $212 million over the past five years. Because the corporate tax code is riddled with loopholes, rebates, and subsidies, many larger corporations operating in New Jersey were already paying just a fraction of the statutory rate, and some were paying nothing at all. Such a large increase will likely incentivize corporations to avoid the surcharge by deferring income beyond the two years. Hitting a target of over $800 million simply won’t happen without enacting combined reporting to fix a menu of tax loopholes used by multistate corporations to avoid state taxation.
Second, the Legislature’s other big-ticket revenue raiser is $200 million in corporate business revenue from additional federal tax changes not included in the governor’s budget. New Jersey is right to capitalize on federal tax changes on the offshore profits of multinational corporations, because there is solid evidence that some of the earnings parked abroad were earned in the United States and should be taxed accordingly. However, this revenue may not show up in New Jersey’s coffers for many years since multinational corporations will almost certainly challenge any state effort to piggyback on the federal provisions. Until these legal issues are resolved, New Jersey can’t expect to collect this revenue anytime soon, certainly not in time to count in the 2019 budget.
Third, the Legislature’s budget also relies on a one-time tax-amnesty program with the optimistic projection of $150 million. Tax experts contend that tax amnesty works best if offered very infrequently and when tied to broader tax-collection reform. Instead, states like New Jersey are turning increasingly to tax amnesty as a quick-money grab to help balance their budgets without political consequences, but the more frequently imposed, the lower the return. New Jersey is on course for trying this gimmick for a fifth time in just over 20 years. That pattern sends the wrong message to taxpayers: Evade timely payment of your taxes and we’ll reward you with a discount. Some studies suggest that even the mere mention of an upcoming amnesty discourages timely filings.
Finally, a Hail Mary moment potentially dropped millions more into the revenue side of the ledger with the release of a U.S. Supreme Court decision while the Legislature was hammering out its final budget. SCOTUS reversed a 1992 decision holding that states could only require out-of-state retailers to charge sales taxes to their residents if the retailer had some kind of “physical presence” in the state. While it is welcome news that New Jersey can collect sales taxes from internet sales, collection will not begin until the second quarter of fiscal 2019 at the very earliest. Small- and mid-sized Internet sellers need a significant amount of time to set up the process of charging sales tax, and the Division of Taxation needs time to register and integrate thousands of new merchants into their sales-tax administration systems.
Short-term political fixes that leave lawmakers politically unscathed but the state in a precarious fiscal crisis for another year have become the norm for far too long. And when the revenue inevitably fails to meet spending needs, or the federal government makes drastic cuts to safety-net programs, it will fall on the administration to either diminish or cut vital public services to make ends meet. Those kinds of drastic cuts have consequences that New Jersey simply can’t afford to absorb for another year. New Jersey’s economic future is on the line and meaningful, sustainable tax reform is a crucial part of getting it back on track.