Lawmakers are poised today to follow through on their promise to send Gov. Phil Murphy a budget bill that doesn’t include his coveted millionaires tax. But their victory will likely come at a cost, as the governor appears ready to use his veto pen to delete some of their spending requests.
Murphy foreshadowed what he’s planning to do with the Legislature’s fiscal year 2020 spending plan yesterday in a letter sent to lawmakers ahead of today’s scheduled final votes in the Assembly and Senate.
Murphy, a Democrat, said outright that he will have “difficulty certifying” some sources of revenue that are baked into the Legislature’s spending bill, since they outpace projections made by his administration.
He also questioned a series of spending items that are in the budget bill backed by the Democrats and declared he would be “forced to take corrective action” if they aren’t removed. That’s likely a reference to the line-item veto that governors are granted by the state constitution. Under that scenario, Murphy would enact the state budget before the constitution’s June 30 deadline by vetoing specific items.
In all, the Murphy administration has flagged some $700 million in spending added by lawmakers, counting this year’s and last year’s budgets.
“I’m willing to continue to work with each of you on your budget priorities,” Murphy said in the letter. “But I cannot certify revenue that may not materialize in the coming 12 months.”
Lawmakers stand pat
For their part, legislative leaders didn’t budge an inch in response to the governor’s letter and showed no signs of canceling today’s votes. In fact, Assembly Speaker Craig Coughlin (D-Middlesex) defended the legislative spending bill in a statement, calling it “fair” and “responsible.” And Senate President Steve Sweeney (D-Gloucester) went a step further, saying lawmakers would be ready to “evaluate your line-item vetoes, in case we need to override them.”
What remains to be seen is whether in the days ahead the governor and the legislative leaders will reach a last-minute compromise, as they did last year, to smooth out their disagreements on taxes and spending.
Much of the $38.7 billion budget bill that went through legislative committees earlier this week resembles the spending plan that the governor proposed to lawmakers several months ago, retaining proposed increases for K-12 education, public-worker pensions, and mass transit, among other items.
Where lawmakers, governor diverge
But there are also major differences, including the Legislature’s rejection of several tax hikes proposed by Murphy, most notably his call to establish a true millionaires tax. That proposal would raise nearly $540 million in new revenue by increasing the top-end rate on earnings over $1 million from 8.97 percent to 10.75 percent. Right now, that rate is levied on earnings over $5 million.
Murphy has repeatedly referred to his proposal as a “tax fairness” measure that would help the state afford the increased spending on things like K-12 and pensions, while also putting the long-strained budget on more stable financial ground going forward. But legislative leaders have resisted the call for a millionaires tax and other tax increases, saying the state’s overall revenue outlook is strong enough to obviate the need for any tax hikes. Also likely playing a role are the Assembly elections that will be held in the fall as all 80 seats will be on the ballot.
Still, despite their resistance to higher taxes, lawmakers boosted spending in their own budget bill in several areas beyond what Murphy had requested. For example, they added $50 million for extraordinary special education and another $50 million in new funding for New Jersey Transit. They also tacked on another $100 million in new spending on pet projects, such as $1 million for stream restoration in Franklin Township, $4 million for road improvements in Ewing, and $1 million for restoring East Orange train stations.
To help offset the new spending, the legislative budget uses some revenue projections that were not included in Murphy’s own budget request, such as predicting $100 million in “repatriated” funds coming from overseas to boost the haul from the corporate-business tax. Another $317 million would be diverted from the state’s rainy-day fund, which is supposed be replenished from time to time to help the state prepare for the next recession. Instead, New Jersey is one of the few states in the country that continue to maintain a broke rainy-day fund.
Real numbers or best guesses?
While the legislative spending plan would maintain a $1.4 billion unrestricted budget reserve, it would be based in part on the revenue items that Murphy has flagged as sketchy.
“This is the type of budgeting that led to 11 (credit-rating) downgrades in the previous administration, and continuing it would put us at risk of more,” the governor said in his letter to lawmakers.
State Treasurer Elizabeth Maher Muoio also stressed the need for the state to be well-prepared for the next economic downturn during a meeting with NJ Spotlight and NJTV staffers yesterday as the proposed rainy-day fund diversion was discussed. She pointed to prior recessions where the state lost billions of dollars of revenue within a matter of months.
“We kept hearing during the (budget) hearings from several members that it’s ‘raining now’ in New Jersey and Treasury’s response to that … is, ‘If you think this is rain, you know, you haven’t seen anything,’” Muoio said.
Despite their disagreements and the threats of vetoes and overrides that were exchanged yesterday, there still seems to be a good chance that the budget issues can be worked out within the final days before a new spending plan must be enacted.
Last year, lawmakers also sent the governor a spending bill that left out a millionaires tax and several other top budget priorities. But last-minute negotiations generated a compromise that resulted in the establishment of the higher tax rate for earnings over $5 million. And this year, the governor has already signaled that he would continue to press for a millionaires tax for months, if not years, even if it doesn’t make it into the final budget.
“We can and must find common ground,” Murphy said in yesterday’s letter.