Lawmakers from both sides of the aisle took aim yesterday at Gov. Phil Murphy’s proposal to establish a true millionaire’s tax, suggesting it could make New Jersey even more susceptible to big revenue losses in the event of a recession.
The concerns about revenue volatility were raised during a second day of budget hearings in Trenton as lawmakers questioned state Treasurer Elizabeth Maher Muoio about specific elements of Murphy’s overall $38.6 billion spending plan for fiscal year 2020.
They also came as the Murphy administration and lawmakers are still waiting to find out whether income-tax collections for the current fiscal year will come in strong enough this month to avoid last-minute spending cuts. Revenue growth had failed to meet expectations through the first half of FY2019, but Treasury is predicting a big rebound this month.
The governor’s FY2020 budget plan relies on nearly $450 million in additional income-tax revenue from a proposed hike of the state’s marginal rate on earnings over $1 million. But that policy change can only be enacted with support from lawmakers. So far, only a few have signaled they are on board.
Some lawmakers said yesterday that the revenue stream is already too reliant on income-tax collections, which are subject to big swings depending on the health of the economy. Others said they want to see more emphasis placed on savings initiatives instead of tax hikes. But no lawmaker came forward yesterday with a complete and detailed plan to generate the same tax dollars that Murphy is counting on getting from the millionaire’s tax, meaning a deeper discussion about how best to balance the budget was pushed off to another time.
Counting on New Jersey’s millionaires
In all, Murphy’s budget plan for FY2020 is counting on $558 million in new revenue being generated from a host of proposed tax-policy changes, including the millionaire’s tax. It also counts on another $1.1 billion in planned spending cuts, including from proposed changes to public-employee healthcare coverage and requested departmental cutbacks. While some of those savings are coming from a new contract with the Communications Workers of America union, others are based on projections, adding some risk to the bottom line.
The Murphy administration is also counting on state income-tax collections picking up in the final months of FY2019, including this month as taxpayers submit their tax returns by the April 15 filing deadline. A carry-over of those expected income-tax gains into the next fiscal year is also expected.
Given the uncertainty over the final FY2019 revenue figures, lawmakers yesterday suggested that income tax may be the wrong place for the Murphy administration to look for new revenue in FY2020, particularly from top earners. That’s because their income is typically linked to the health of the overall economy, including Wall Street gains and corporate bonuses.
“The gross-income tax is sometimes very volatile at the high end because of Wall Street, and if we go into some type of a recession, is the millionaire’s tax really a sustainable revenue?” asked Senate Budget and Appropriations Committee chair Paul Sarlo (D-Bergen) during yesterday’s hearing.
“There is a degree of volatility in the GIT,” Muoio said in response, referring to gross income tax. But she also noted the size of the budget surplus that’s used to hedge against revenue shortfalls is set to rise in FY2020. And she also circled back to Murphy’s plan to generate more than $1 billion in proposed spending cuts.
Looking for balance
“We need, as I say, a balance of sustainable revenues and savings. That is what this budget is proposing, and it proposes an increased surplus so we can get through times when we experience volatility,” Muoio said.
Later, Sen. Declan O’Scanlon (R-Monmouth) and other Republicans questioned whether Murphy has put too much of an emphasis on tax hikes. Last year, the governor and lawmakers agreed to raise the top-end rate on earnings over $5 million from 8.97 percent to 10.75 percent. Under Murphy’s latest proposal, the 10.75 percent rate would start on earnings over $1 million.
“What this means is that the vast majority of millionaires will pay roughly two cents more on every dollar over $1 million,” Muoio said. “As the governor has repeatedly said, this is about tax fairness (and) asking a little more from those among us who have realized the greatest financial rewards from all that our state has to offer.”
But O’Scanlon countered that the “fair share” argument has been used for decades whenever the state has raised taxes on high earners. He suggested this latest hike could be the one that forces many of them to transfer their official residency to a place like Florida that levies no income tax at all.
“My question is, when do we reach that point?” O’Scanlon asked. “They can go from whatever our number is to zero in Florida.”
‘We are a state that creates wealth’
In response, Muoio suggested New Jersey will still have a lot to offer high earners even if they are asked to contribute some more of their sizable income in taxes. She also said the state added to its millionaire population following a 2004 income-tax hike and cited a recent study that placed New Jersey first in the country for millionaires per capita.
“We are a state that creates wealth,” she said. “We have an extraordinary location here in the Northeast corridor. We have a very well-educated workforce.”
As an alternative to tax hikes, some lawmakers have suggested they will be able to come up with savings of their own using proposals floated last summer by a group of fiscal policy experts impaneled by Senate President Steve Sweeney (D-Gloucester). They could include changes to public-worker health and pension benefits. So far, no legislation has been crafted that clearly defines what those savings may be.
Muoio said yesterday that “savings alone” are not going to cover the increasing costs of the public-employee pension system and K-12 education. But she added that the administration remains open to finding new savings under the right conditions.
After the hearing ended, Sarlo credited Muoio for keeping an open mind even if she didn’t back off her stance on the millionaire’s tax. He also repeated his own position that new taxes should be a “last resort.”
“We need to ensure that we look at other alternatives (and) cost-saving measures,” he said.