Worried by an uncertain revenue outlook and the threat of recession, the state’s top budget officials urged lawmakers to build up New Jersey’s modest fiscal reserves.
Messages about building up the budget surplus don’t always play well in the Legislature — understandably so. Every dollar allocated to the surplus can’t be used to fund new programs or those popular with voters, like direct property-tax relief.
But both Treasurer Elizabeth Maher Muoio and top legislative fiscal analysts — appearing before the Assembly Budget Committee yesterday — stressed the need to protect a projected budget surplus of more than $1 billion in fiscal year 2020.
“We cannot simply treat it as an ‘extra’ pot of money available to be raided,” Muoio said.
Gas tax climbing?
The committee also heard the latest news on state revenues, including how the budget for fiscal year 2019 has been adjusted to deal with income-tax collections that, so far, are trailing projected year-end targets. And neither Muoio nor the legislative analysts could rule out the possibility of another gas-tax increase in the fall based on their read of the latest fuel-consumption figures.
“We are cautiously optimistic that total (gas-tax) revenues will remain stable,” Muoio said.
This month is always an important one for the state budget as the income tax is the largest source of revenue. What’s more, most income-tax collections occur in the days leading up to the April 15 filing deadline, creating what’s generally referred to as the “April surprise.” But this year, Treasury officials have said a combination of factors, including the federal government’s new $10,000 cap on state and local tax deductions, is likely to cause taxpayers to hold back their payments until right before the deadline, which is upping the stakes.
In fact, heading into April there’s been a gap between projected growth and actual income-tax collected. But Treasury is still expecting a big bump by the end of the month.
“This year, we are urging caution when it comes to jumping to conclusions and projecting dire shortfalls before we have a clear picture of April revenue collections,” Muoio said yesterday.
Still, Treasury has lowered its income-tax forecast by about $415 million, although some of that represents a routine accounting shift. And the forecast for all tax sources in FY2019 has been increased by about $330 million, thanks in part to booming corporate-tax collections.
Analysts from the nonpartisan Office of Legislative Services are not as optimistic about FY2019. They presented their own revenue forecast to committee members yesterday. They see tax collections coming in about $109 million lower than Treasury through the end of June. The OLS revenue projection for FY2020 is also lower than Gov. Phil Murphy’s, by about $183 million.
The surplus account is used as the primary hedge against revenue shortfalls, and this year the state has an estimated $1 billion in surplus headed into the final months of the 2019 fiscal year. Under Murphy’s budget plan for FY2020, the surplus is due to grow to $1.2 billion. Even though that represents a major improvement from some years during former Gov. Chris Christie’s tenure — the surplus ran as low as $300 million at one point — it still represents about 3 percent of the total budget, which is projected to increase to $38.6 billion in FY2020. Muoio said credit-rating firms pay close attention to budget reserves, with the national average among all states running about 10 percent.
“We have a long way to go to get to that level,” she said.
During his own testimony, Frank Haines, budget and finance officer for the OLS, also focused on the issue of the surplus. Citing research by Pew Charitable Trusts, he said the median number of days that a state can operate on its reserves is about 40 days. By contrast, New Jersey would last just eight days on its reserves, he said.
“We don’t rank very well on that scale, fourth from the bottom,” Haines said.
Market correction in the offing?
New Jersey hasn’t experienced a true recession in about a decade, but some economists are predicting a national market correction may be right around the corner.
“I’m no economist, so on the subject of recession you’ll get no prediction from me about whether, when, or how deep,” Haines said. “Certainly, our revenue forecast does not envision a recession. But should one arrive, how well-prepared are we?”
Some Republicans on the committee raised concerns yesterday that if the OLS projections prove to be more accurate for FY2019, it would mean heading into the new fiscal year with a smaller surplus unless other adjustments are made by the Murphy administration.
“There’s a lot hinging on April’s performance, as predicted,” said Assemblyman John DiMaio (R-Morris).
Meanwhile, uncertainty about the future of the state’s gas tax is likely to last well into the summer based on a review of current fuel consumption rates outlined by both Muoio and the OLS analysts.
Under a 2016 rewrite of the state’s gas-tax law, the tax levy charged at the pump can be adjusted each year to make sure that a specific revenue target is hit to keep the state’s eight-year, $16 billion Transportation Trust Fund spending plan from running at deficit. Every year an analysis is done in August, and if the tax collections look as if they’ll fall short, the law requires an increase in October. Last year, a 4.3-cent hike was triggered by flagging consumption, pushing the total rate to 41.4 cents.
“This will be revisited in August as required by law, but no rate change is assumed in the current projection,” Muoio said yesterday.