2020 Brings New Year, New Budget Planning — and Familiar Fiscal-Policy Issues

John Reitmeyer | January 2, 2020 | Review/Preview, Budget
Instead of clean slate, unresolved questions about millionaires tax, sales tax, corporate tax breaks and public-worker pensions ensure last year’s concerns carry over into 2020
Credit: Edwin J. Torres/ Governor's Office
Gov. Phil Murphy

When it comes to the state budget, the new year is starting off with some unresolved fiscal-policy questions that have dogged Gov. Phil Murphy and fellow Democrats who control the Legislature since his tenure began two years ago.

For starters, Murphy remains at odds with legislative leaders from his own party on major tax policy, with the governor still backing proposed tax increases, including the establishment of a true millionaires tax and the restoration of a 7% sales tax.

Murphy and lawmakers are still locked in a stalemate over the future of major economic-development tax-break programs that expired over the summer, leaving New Jersey without any significant incentives to offer companies in exchange for new hiring and investment.

It’s also unclear how the governor and lawmakers plan to finance the next big increase in public-worker pension funding, which is scheduled to occur in the new fiscal year that will begin on July 1.

Further clouding budget matters is a decrease in the top-end corporate-tax rate that began on January 1 that is expected to reduce state revenues even as the governor and lawmakers have made a commitment to increase worker-pension funding. Also looming in the background are lingering concerns about a recession, something many New Jersey business owners fear is coming in the next 12 to 24 months.

Taxes

Murphy’s proposed millionaires tax, if enacted, would push the income-tax rate on earnings between $1 million and $5 million from 8.97% to 10.75%. But it has long been a sticking point with lawmakers, and their disagreements continued to rage in 2019 without resolution. The dispute also shaped the adoption of the current state budget late last June as Murphy continued to insist on the adoption of the wealth surcharge even after lawmakers passed a spending bill that rejected the proposal.

In the end, Murphy used the line-item veto to remove several appropriations from the legislative spending bill; he also impounded dozens of additional appropriations, with many remaining in reserve heading into the 2020 calendar year.

Murphy renewed support for a millionaires tax and for the 7% sales-tax rate in the final weeks of 2019 in response to an education-funding proposal floated by Senate President Steve Sweeney, who has been a key opponent of Murphy’s tax initiatives. Sweeney (D-Gloucester) later accused Murphy of seeking a “$1 billion tax hike” — Murphy has projected both the millionaires tax and the restoration of a 7% sales-tax rate would each bring in more than $500 million in new revenue — showing the disharmony that remains ongoing two years into the governor’s tenure. 

Business incentives

Also unresolved at the start of a new calendar year is the future of the state’s economic-development tax-incentive programs.

Murphy has been a longstanding critic of programs that were put in place to encourage new hiring and business investment during the tenure of Republican Gov. Chris Christie. Oversight of those incentives was questioned last year in an audit conducted by the Office of the State Comptroller. They are also the subject of an ongoing investigation by a special task force impaneled by Murphy that has already made at least one criminal referral.

Amid those probes, Murphy has proposed a series of tax-incentive reforms, calling for programs to be more targeted and capped to limit their impact on the state budget. (An estimated $9 billion in tax breaks have been promised to companies going back over a decade, according to the Department of Treasury’s latest estimates.)

But lawmakers instead sought to convince Murphy to renew the programs that were in place under Christie and to negotiate any policy changes after their renewal to ensure the state remained competitive with other states that continue to offer corporate tax breaks. However, the New Jersey tax-incentive programs were allowed to expire over the summer, and the stalemate has now dragged into 2020.

Murphy, Sweeney and Assembly Speaker Craig Coughlin (D-Middlesex) have all suggested a deal may be close, but whether caps on tax breaks should be established remains a key sticking point that has yet to be resolved at the negotiating table.

Pension funding

Despite some progress in recent years amid an ongoing ramp-up in pension funding, New Jersey’s public-worker retirement system remains ranked as the worst-funded in the nation according to top Wall Street credit-rating agencies. And even as the current state budget calls for a record pension payment totaling $3.8 billion, that remains just 70% of the amount that actuaries have called for to return the pension funds to good health.

The next state budget, due to be introduced by Murphy as early as next month, would include another step up in pension funding to roughly $4.5 billion under the ramp-up plan that Murphy has been following. Yet it’s unclear how the governor and lawmakers would fund the increase, other than hoping for substantial growth in baseline state revenues.

But that hoped-for growth would have to be strong enough to offset a reduction of the top-end corporate tax rate, from 11.5% to 10.5%, that occurred on Jan. 1, 2020. The higher rate was enacted temporarily in 2018 to settle tax-policy disagreements between Murphy and lawmakers that nearly shut down the government.

The latest tax-collection figures from the Department of Treasury provided some reason for optimism as total revenues for fiscal year 2020 were up by 10% through the end of November compared with the same period last fiscal year.

Recession readiness

However, New Jersey also remains one of the states that is most vulnerable to a recession, as budget reserves, despite being boosted in recent years, remain just a small percentage of overall spending. And there are growing concerns that another recession could be coming soon.

According to the latest member survey conducted by the Trenton-based New Jersey Business & Industry Association, more than half said they believe the next economic downturn is looming in either 2020 or 2021.

While some progress was made in fiscal 2020, including the state’s first rainy-day fund deposit in over a decade, a recession would likely test reserves that remain just 3% of total spending. In fact, the latest review of state budget reserves by The Pew Charitable Trusts showed New Jersey had enough revenue to sustain about eight days of operations. By contrast, U.S. states overall had enough revenue in reserves to cover an estimated 40 days of operations, according to the Pew study.