Nearly two years after New Jersey’s sales-tax was dropped to 6.625%, the tax cut remains a subject of debate between Gov. Phil Murphy and legislative leaders from his own party.
Murphy has long been a critic of the cut, which has cost the state budget more than $500 million a year at a time when bills for things like public-worker pensions have been rising.
The revenue loss has also made it harder for Murphy, a first-term Democrat, to boost funding for mass transit, community college tuition aid and other things that he campaigned on in 2017.
But many lawmakers, including Senate President Steve Sweeney (D-Gloucester), have steadfastly defended the sales-tax deal they cut with former Republican Gov. Chris Christie, which dropped the rate in two stages from 7%. They also resisted Murphy’s attempt to reinstate the old rate in last year’s state budget proposal, citing voter concerns about New Jersey’s generally high tax burden.
The battle was rejoined just last week when Murphy called the tax cut a “gimmick,” in response to the latest education-funding proposal put forward by Sweeney. That drew a sharp response from the Senate president, who accused Murphy of seeking a “$1 billion tax hike” — a figure that incorporates the revenue boost stemming both from repealing the sales tax cut and implementing the true millionaires tax the governor has championed as a way to bolster funding for K-12 schools.
Not the highest in the nation
At 6.625%, New Jersey’s sales-tax rate falls below the highest in the nation, a distinction that goes to California, at 7.25%. The two-step reduction that occurred between Jan. 1, 2017 and Jan. 1, 2018 also pushed New Jersey below several other states that have a 7% rate, including Mississippi, Rhode Island and Tennessee.
Other factors mitigate the impact of the sales tax on households. New Jersey exempts many products, such as clothing and groceries. And, for the most part, local governments in the state are not permitted to levy their own tax on retail sales.
In all, New Jersey’s sales-tax policies ranked 30th out of 50 in the latest State Business Tax Climate Index released in October by the Washington, D.C.-based Tax Foundation. That ranking is much better than where the state lands in the right-leaning organization’s analysis when excise taxes are added to the equation. New Jersey sits at 42nd out of 50 in that expanded category, due largely to a significant increase of the state gas tax that was part of the same bipartisan deal that triggered the minor sales-tax reduction.
Yet Murphy has regularly criticized the tax swap approved by Christie in 2016, arguing that most residents haven’t noticed any difference at the cash register.
Dispute flares anew
Last week, Murphy again raised the issue, suggesting that restoring the 7% sales tax was preferable to Sweeney’s proposal to allow some communities to offset reductions in state education aid by exceeding the current 2% limit on annual property-tax increases.
At that time, he also suggested again that raising the income-tax rate on earnings between $1 million and $5 million could yield even more money for public education and obviate the need for property-tax hikes.
Sweeney and other lawmakers have steadfastly resisted the governor’s push for a true millionaires tax, a key to Murphy’s tax-policy that he’s estimated would raise more than $500 million each year.
“Before middle-class property taxpayers have to again take it on the chin, we should be asking our wealthiest residents to pay their fair share through a millionaire’s tax and undoing Governor Christie’s tax gimmicks, including the sales tax reduction,” Murphy said.
In response, Sweeney accused Murphy of once again seeking a major tax hike.
“His proposed $1 billion tax hike wouldn’t put a penny into overfunded districts under the school funding bill,” Sweeney said, referencing the way state tax revenue is divvied up among district in the state.
More trouble on the way
While the dispute over tax policy is likely to continue on in 2020, the state could soon be facing another revenue crunch thanks to a deal on taxes that Murphy, Sweeney and Assembly Speaker Craig Coughlin (D-Middlesex) struck in 2018. The state’s top-end corporate-tax rate was increased temporarily to forestall the possibility of more broad-based tax hikes or deep spending cuts. But the temporary surcharge will begin phasing out on Jan. 1, with the rate dropping from 11.5% to 10.5%.
At the same time, the state’s projected pension contribution is expected to increase by roughly $750 million, to around $4.5 billion, in fiscal year 2021, which begins July 1. And right now, there’s no agreed-upon plan in place to fund the higher pension contribution, other than hoping for continued growth in overall revenues.
Some groups, including the left-leaning New Jersey Policy Perspective, have also called for a reinstatement of the 7% sales tax.
In fact, a report issued by the think tank last year also called for an expansion of the types of services that are subject to the sales tax as the economy continues to shift from the production of goods to services. Under NJPP’s plan, services like real-estate management, loan brokerage, data-processing, limousines, chartered flights, accounting and bookkeeping would lose their current sales-tax exemption.
Christie’s sales-tax cut still “barely registers” with low- and middle-income families in New Jersey because items like clothing and groceries remain exempt from the sales tax, said Sheila Reynertson, the NJPP senior policy analyst who authored the report.
“Instead, it primarily benefits the wealthiest residents in the state who have the most disposable income to spend, and robs the state of over $600 million in revenue that could be invested in areas proven to grow the economy like strong public schools, transit infrastructure, job training, and much more,” she said Tuesday.