NJ’s Budget Battle: Tax Breaks Are at Stake, Not Just Tax Hikes

John Reitmeyer | June 27, 2018 | Budget
Governor offers to compromise with Democratic legislative leaders, but fate unclear of tax breaks that would help low-income and middle-class New Jerseyans

Sweeney, Murphy, Coughlin
Several tax hikes that could be enacted with the state’s next budget have gotten a lot of attention in recent weeks, but a number of proposed tax breaks are also at stake in the ongoing budget talks between Gov. Phil Murphy and legislative leaders. Those talks took a new turn yesterday as the governor formally offered a broad compromise to lawmakers.

The tax breaks would benefit thousands of low-wage workers, working parents and homeowners struggling to pay New Jersey’s highest-in-the-nation property-tax bills.

Unlike the proposed tax hikes — which remain the main source of disagreement in Trenton despite yesterday’s olive branch from Murphy — there is already bipartisan consensus among the governor and lawmakers that the tax breaks should be enacted. In fact, the tax breaks were part of the original fiscal year 2019 budget plan that Murphy put forward in March, and the legislation that would set them in motion received a final stamp of approval in recent days from both the Assembly and Senate.

Yet even with that widespread support, the fate of the tax breaks remains up in the air as Murphy, a first-term Democrat, continues to try to hash out an agreed state budget with top Democrats who control both houses of the Legislature.

His office released a letter yesterday detailing the proposed compromise, which blends major elements of each camp’s tax proposals. They include the establishment of a millionaires tax, a higher corporate-tax rate, and a phased-in restoration of a 7 percent sales-tax rate. High-level talks also continued in Trenton, but without any agreement being announced yesterday, and Assembly Speaker Craig Coughlin and Senate President Steve Sweeney (D-Gloucester) issued a statement afterward that said they would give Murphy’s offer “full consideration, along with other options we are evaluating.”

Big sticking point

Murphy’s $37.4 billion fiscal 2019 budget calls for a series of tax hikes to help pay for more spending in key areas like K-12 education, public-worker pensions and mass transit. They include the establishment of a millionaires tax and the restoration of a 7 percent sales tax.

Those tax proposals that have been the main sticking point in the ongoing budget dispute as the legislative leaders would rather hike taxes on high-earning corporations and implement a number of other fiscal maneuvers to help pay for the increased spending sought by the governor.

Murphy’s budget plan also asks lawmakers to approve several targeted tax breaks designed to make the state more affordable for thousands of individual residents, particularly in the wake of recent tax-policy changes at the federal level made by President Donald Trump and the Republican Congress.

Among the proposed state tax breaks is a three-year expansion of the Earned Income Tax Credit that is currently offered to low-wage workers in New Jersey. Right now that’s worth 35 percent of the federal version of the same credit, which is designed to encourage residents to work instead of collect welfare and other forms of public assistance. Under the legislation that was passed late last week by both the Assembly and Senate, the size of the credit would increase to 37 percent for the current tax year. It would continue to go up over the next two years, to 39 percent in tax year 2019, and 40 percent in tax year 2020.

What Democrats and Republicans agree on

The tax-break legislation, which is sponsored by both Democrats and Republicans, would also establish a new state income-tax credit for child and dependent-care expenses, mirroring the recent action taken by the federal government. The tax break would be worth 50 percent of the federal credit for those making up to $20,000 annually; 40 percent for those making between $20,000 and $30,000; 30 percent for those making between $30,000 and $40,000; 20 percent for those making between $40,000 and $50,000; and 10 percent for those making between $50,000 and $60,000. The maximum amount that could be deducted would be $500 for one child or dependent, and $1,000 for two or more, according to the bill.

The same legislation would also increase the ceiling for an existing state income-tax write-off for local property taxes from $10,000 to $15,000. That proposed policy change was prompted by the decision Trump and the Republican Congress made to cap a longstanding federal write-off for state and local taxes that’s known as SALT. The SALT deduction had been unlimited for over a century, but the new cap was set at $10,000, a figure that’s considered to be too low for many homeowners in high-cost New Jersey, where the average property tax bill is about $8,700, and the average state income-tax liability is nearly $1,500.

“By increasing our state income tax deduction for property taxes from $10,000 to $15,000, we’re providing real property tax relief to New Jersey residents,” said Sen. Joe Pennacchio (R-Morris).

“This was a bipartisan effort that I was glad to lead the charge on,” said Pennacchio, one of the primary sponsors of the tax-break legislation.

In addition to sending Murphy the tax-break bill last week, lawmakers also moved a $36.5 billion spending bill to the governor’s desk that would fully pay for the estimated $123 million cost of the proposed tax breaks.

Threat of veto still there

But Murphy has promised to veto their budget over concerns about the proposed corporate-tax hike and the reliability of the revenue assumptions that underpin the legislative spending plan. Given that the governor said earlier this week that he could end up using the line-item veto to strip the lawmakers’ budget down to bare bones to avoid a government shutdown, the fate of the tax breaks remains uncertain. His office declined comment on the tax-break legislation when reached yesterday.

To be sure, at $1.7 billion, the amount of money that would be raised by the tax hikes in Murphy’s budget plan dwarfs the estimated savings that New Jersey residents would see if all the proposed tax breaks are enacted. But bill sponsors said the thousands of residents who stand to benefit if the changes are eventually signed into law would welcome those savings.

“By boosting the Earned Income Tax Credit, the tax deduction for homestead property taxes, and tax credits for child and dependent care, we will alleviate some of the financial burdens shouldered by middle class and low-income residents of one of the costliest states in the nation,” said Assemblyman Raj Mukherji (D-Hudson).