Worries about an income tax shortfall that have dogged the Murphy administration for much of the year could come to nothing, now that the Department of Treasury has upgraded slightly the revenue forecast for state taxes in the fiscal year 2019 budget.
In fact, that change, along with others made by the administration to this year’s state budget are meant to ensure that spending stays in balance through the end of June.
And that’s good news for Gov. Phil Murphy, who’s got to sell his fiscal 2020 budget proposal to lawmakers, some of whom have already expressed some skepticism about his numbers.
Boosting CBT forecast
Treasury’s increase of the overall revenue projection for the 2019 fiscal year is in large part due to a surge in corporate business-tax collections. That comes after the state’s top-end CBT rate was increased last year through a policy change that was not part of Murphy’s original budget proposal, but instead was pushed by Senate President Steve Sweeney (D-Gloucester).
In fact, the CBT is now forecast to bring in nearly $700 million more than the original projection made in July. That more than makes up for the reduction in the income-tax projection, which totals $414 million. It’s also helping push the overall revenue forecast up by about $330 million compared with last year’s original estimates.
Despite the income-tax downgrade, Treasury officials say they remain confident that April returns will still generate a sizable haul for the state by the time fiscal 2019 closes on June 30.
“It’s our belief that we will see a correction in April,” Treasurer Elizabeth Maher Muoio told reporters earlier this week during a briefing on Murphy’s proposed budget for fiscal 2020.
Murphy concerned about pace of growth
While budget adjustments are made on a routine basis whenever a new state budget is proposed, it was Murphy himself who raised concerns about the pace of growth in state tax collections for fiscal 2019 back in January when he issued a controversial veto of a bill sponsored by Sweeney that sought to increase aid for a public-assistance program that is used to prevent homelessness. At the time, the state’s income tax and overall tax collections were underperforming the growth projections that were included as part of the original budget the governor signed into law in July for the 2019 fiscal year.
Concerns only grew after Treasury disclosed last month that income-tax collections continued to trail the year-end growth target through the end of January, and that overall tax collections were up about 3 percent. To stay in balance through the end of June, when the fiscal year closes, the original budget needed to hit a 7.5 percent growth rate.
Among the many budget adjustments released by the Murphy administration on Tuesday is the downgrading of the revenue forecast for the income tax. That comes even after Murphy, a first-term Democrat, worked with legislative leaders from his own party last year to hike the state’s top-end marginal income tax rate to 10.75 percent on earnings over $5 million. (Murphy’s budget proposal for fiscal 2020 is seeking to apply that rate to all earnings over $1 million).
In all, the income tax is now projected to bring in $15.56 billion in fiscal 2019, down slightly from the nearly $16 billion that was projected in July. But with April around the corner, Muoio and other Treasury officials say they don’t see signs that a much larger drop-off is coming because they think taxpayers this year will wait until the last minute to file their payments. That behavior would stand in contrast to last year, when many taxpayers — including high earners who provide an outsized portion of the income-tax receipts — pushed their payments into tax-year 2017 to avoid new federal tax-policy changes that took effect last year. They included a new, $10,000 limit on the federal deduction for state and local taxes known as SALT.
No boost for sales-tax revenue
Also seeing a slight reduction is Treasury’s fiscal 2019 forecast for the state sales tax, which was expected to get a boost in the 2019 fiscal year, thanks to a recent U.S. Supreme Court ruling that allowed the state to extend the sales tax to most online purchases. The sales-tax downgrade announced on Tuesday is roughly $80 million, bringing the overall projection for that tax down to $10.05 billion.
Going in the other direction is the forecast for a number of smaller revenue sources that are also tracked by Treasury. Those are being upgraded by nearly $160 million.
But by far the biggest budget adjustment is the change to the forecast for the corporate-business tax, from $3.05 billion up to $3.71 billion. That adjustment comes after the top-end corporate rate was hiked last year for businesses with more than $1 million in profits, from 9 percent to 11.5 percent, under a proposal that was originally floated by Sweeney.
The CBT receipts are also being boosted this year by funds coming back into the United States from overseas under corporate-tax changes enacted at the federal level for tax-year 2018, Treasury officials said.
In all, Treasury is now expecting to see total revenues increase by about $330 million compared to the original forecast from July, reaching $37.74 billion by the time fiscal 2019 closes on June 30. And the size of the state’s rainy-day budget surplus — which is used to hedge against any revenue shortfalls — has also been increased in the budget for the 2019 fiscal year, from $765 million to a little over $1 billion, according to budget documents.