Gov. Phil Murphy has some of the broadest powers of any governor in the country, but it was the New Jersey Legislature that flexed some muscle in the budget deal that was ultimately worked out over the weekend.
To be sure, Murphy, a first-term Democrat, came away with the funding for nearly all of his top spending priorities in the final version of the fiscal year 2019 budget, which was enacted late last night after a package of related bills was approved in both houses of the Legislature yesterday.
That means there will be new money for K-12 education, mass transit, and public-employee pensions, which Murphy identified during last year’s gubernatorial campaign and featured in his original budget proposal as the main areas where he would seek increased state investment.
But to get that funding boost, the governor had to give up his pitch for a true millionaires tax, deciding instead to accept the establishment of an awkward sounding pentamillionaires tax — a higher state income-tax rate that will be levied on earnings over $5 million. Also gone by the wayside is the restoration of a 7 percent sales-tax rate, which he had called for. In addition, he was forced to accept lawmakers’ call for a higher corporate-tax rate, and to allow for a tax-amnesty program that has the potential to create a $200 million hole in next year’s budget.
Meanwhile, Senate President Steve Sweeney (D-Gloucester) and Assembly Speaker Craig Coughlin (D-Middlesex) convinced the governor to rewrite his original school-funding scheme and boost funding for Homestead property tax relief, which were key priorities for Sweeney and Coughlin, respectively. A series of other legislative add-ons that were inserted into the budget are also being fully funded, according to details of the agreement that were disclosed to reporters.
After the budget deal was reached following hard negotiations on Saturday — just hours before the deadline for a government shutdown — Murphy, with Sweeney and Coughlin standing by his side, characterized the first spending plan of his tenure as a “strong first step” toward his oft-repeated campaign message of creating a “stronger and fairer” New Jersey.
“We have just started on this journey,” the governor said.
At $37.4 billion, the final version of the budget will spend the exact same amount of money that Murphy called for in March when he put forward his original budget plan. Also making it into the final version is $242 million in additional aid for New Jersey Transit that Murphy included in his original budget, and another combined $400 million in additional K-12 and pre-K education dollars. A total of $25 million in new aid for community college students also made the final cut, which was another top priority for the governor.
A series of targeted tax breaks sought by Murphy, including for low-wage workers and for those who take care of children and other dependents, were also funded. The state’s income-tax deduction for property taxes will also be increased, from $10,000 to $15,000, and the surplus fund that’s used to hedge against unexpected shortfalls will be increased to $765 million, as the governor sought.
But on the revenue side of the ledger, the legislative leaders flexed their constitutional muscle to force the governor to make a number of concessions, particularly on his call for a millionaires tax and a higher sales-tax rate. While the state constitution gives the governor broad powers — like appointing judges, prosecutors and other officials who serve in key positions across the state — only lawmakers can draft bills that raise taxes.
Murphy needed to deal
In fact, such legislation must originate in the Assembly, the house that Coughlin leads. That left Murphy needing to deal with Coughlin and Sweeney to raise the new revenue he wanted to have available to fund all his spending priorities, which ironically the legislative leaders also largely shared.
In the end, the governor was forced to back off his push to restore New Jersey’s sales tax from 6.625 percent to 7 percent. The proposal faced strong opposition in the Assembly even though Murphy continued to press for it until just days before Saturday’s deadline for a budget agreement.
Also not making it into the final deal was Murphy’s millionaires tax, which would have established a 10.75 percent top-end rate on the estimated 20,000 residents who earn over $1 million. Instead, the 10.75 percent rate will only be levied on the estimated 1,760 residents with earnings over $5 million, leaving the 8.97 percent rate on earnings over $500,000 in place for earnings up to $5 million.
Sweeney had been adamantly opposed to a millionaires tax, arguing that such a policy could push the state’s wealthiest residents to consider leaving New Jersey for places with less aggressive tax structures, especially after recent federal tax changes included a cap on a longstanding deduction for state and local taxes known as SALT.
Meanwhile, making it into the final deal was the framework of a corporate-tax proposal that Sweeney put forward in March as a counter to Murphy’s millionaires tax. But Murphy was able to bargain for the corporate surcharge to stay in place for four years instead of the two that Sweeney originally looked for, and for the average rate of the tax increase to be 2 percent, not the 3 percent sought the Senate leader wanted.
Big changes in school aid
Sweeney also convinced Murphy to sign off on a series of changes to the state’s school-aid law that the Senate President has been seeking for years, updating several provisions of the law after nearly a decade of underfunding by prior Republican Gov. Chris Christie.
“At the end of the day, we got a budget that’s going to fix our schools, and move our state forward,” Sweeney said during a news conference with Murphy and Coughlin on Saturday.
As part of the new revenue mix, the budget banks on more sales-tax revenue being collected without having to change the rate — thanks to a recent U.S. Supreme Court decision that will allow New Jersey and other states to more aggressively tax online sales. The corporate tax is also expected to now get a boost from the repatriation of some corporate profits that are expected to be brought back to the U.S. under the federal tax changes adopted late last year.
The state will also count on collecting $200 million from a tax-amnesty program that will be offered as a one-time opportunity to those who owe the state unpaid taxes going back to 2009. Originally proposed by Coughlin, the tax-amnesty had been criticized by Murphy, who said it could create a budget hole next year since it is just a one-time revenue source. Nevertheless, it made it into the final budget.
Loud and clear
During his remarks on Saturday, Coughlin called the new spending plan “balanced, fair and responsible.”
“Throughout this process, my goal was to ensure that the voice of my caucus was heard, loud and clear,” Coughlin said.
While any big deal in Trenton generates an almost immediate analysis of who came out on top, Murphy seemed to want to get ahead of any dissection of his first budget. He said the final fiscal 2019 spending plan doesn’t represent “a win for any of us individually.”
“This is a win for the middle class, working families, and for those who look up and dream to be in the middle class,” Murphy said.