Moody’s: State Revenue Shortfall Could Roil Murphy’s Budget

John Reitmeyer | March 22, 2019 | Budget
Rating agency says income-tax receipts need to rise by 17 percent to match projections; is ‘uncertain’ state will get there

Credit: Edwin J. Torres/Governor's Office
Phil Murphy budget
The revenue New Jersey collects from April income-tax returns is always crucial for the state budget, but a new report from a top Wall Street credit-rating agency suggests the stakes are even higher for Gov. Phil Murphy’s administration this year.

Issued yesterday by Moody’s Investors Service, the detailed summary of New Jersey’s current revenue outlook says significant ground has to be made up in some of the state’s largest sources of tax dollars by the end of June to avoid a running shortfall for the current fiscal year.

In particular, the report says income tax receipts need to rise by 17 percent, before adding that “it is uncertain whether New Jersey will achieve that growth.”

To be sure, the Moody’s analysts suggest the state would likely manage any revenue shortfall with routine adjustments, and the report notably does not call for a change in the state’s “A3” credit rating.

But the analysis also warns a shortfall in this fiscal year has the potential to upset Murphy’s budget plan for fiscal year 2020, in part because the administration is counting on new revenue growth next year beyond proposed tax increases that may not win legislative approval.

“A fiscal 2019 revenue shortfall would make it more difficult to meet the governor’s fiscal 2020 forecast,” the report said.

Budget hearings are underway

The release of the latest Moody’s report comes as state lawmakers have just begun holding a series of public hearings on Murphy’s budget proposal for FY2020. Department of Treasury officials responded yesterday by saying they, too, are monitoring the state’s revenue situation “very closely.”

The latest official revenue report from Treasury indicated tax collections through the end of February were up by roughly $685 million compared to the same point during the prior fiscal year. That amounted to a growth rate of about 3.7 percent. However, to meet the 12-month growth target that has been set for the FY2019 budget, revenues will have to hit a growth rate of 7.7 percent.

A big source of concern this year has been the income tax, which is the state’s largest source of tax revenue. It was expected to see a nice boost from a new top-end rate of 10.75 percent established by Murphy and lawmakers last year for earnings over $5 million.

But so far, income-tax revenues through the end of February have been running below last year’s levels, and Treasury announced earlier this month that it was reducing the overall income-tax forecast by a little more than $400 million. The forecast for the sales tax, the next largest source of state revenue, was also reduced slightly, but officials said they expected an overperforming corporate-business tax to more than make up for the reductions. The booming corporate-business tax would also help the state exceed the original projection for all revenues by nearly $330 million, according to Treasury’s latest estimates.

Shortfalls more of a problem for the future

Treasury’s optimism about the income tax is rooted in part in the notion that federal tax-law changes that enticed taxpayers to frontload payments to the state last year were having the opposite effect this year. Moody’s report agreed with that argument to an extent, indicating “some improvement in April is likely” for the income tax.

Yet Moody’s also ran two different conservative revenue-forecast models, and each one had the state ending the fiscal year with a shortfall.

Still, the report downplayed the consequences, suggesting the state has shown in prior years that it can manage such revenue shortfalls without much trouble.

“The state would likely balance the gap with spending cuts in the remaining two months of the fiscal year, as it has before,” the report said.

The bigger risk from an FY2019 shortfall appears to be in Murphy’s plan for the new fiscal year that begins on July 1. He is already assuming lawmakers will authorize a new tax on the proposed legalization of recreational marijuana, as well as an expansion of the 10.75 percent income-tax rate to earnings over $1 million.

Lots of pieces in motion for the coming year

Those two measures would generate a combined $507 million in new revenue, but their approval is anything but certain.

A key vote on the marijuana proposal is scheduled for Monday, and Murphy was still lobbying legislative holdouts during a public event yesterday. Meanwhile, top leaders in both the Assembly and Senate have also suggested they oppose expanding the so-called millionaire’s tax as part of the FY2020 budget.

Murphy is also counting on $1 billion in FY2020 from savings initiatives, and at least some will require buy-in from public worker unions that Moody’s labeled “uncertain.” The governor is also assuming revenues will grow by 3.5 percent, on top of the new dollars that would arise from the proposed state tax changes.

“If fiscal 2019 revenues are lower than expected, it is likely that the fiscal 2020 revenue forecast would be cut,” Moody’s said.

Asked for a response yesterday, Treasury spokeswoman Jennifer Sciortino pointed to the changes already made to the FY2019 revenue forecast and also repeated her agency’s belief that income-tax proceeds are due for a rebound as April returns begin to be counted.

“As we have said, we are taking a measured approach and monitoring state revenues very closely, Gross Income Tax returns in particular,” she said.