New forecasts for all of New Jersey’s major sources of tax revenue released this week by the Department of Treasury suggest the current fiscal year is on course to finish on a high note in a few months.
In fact, the projections for all three of the state’s top sources of revenue have been moved up compared with what was originally forecast when the fiscal year 2020 spending plan was signed into law by Gov. Phil Murphy last summer.
The result of the rosier projections is the expectation that there will be about $1 billion in additional revenue compared to what was originally forecast.
The Murphy administration is planning to use a big chunk of the new revenue — nearly $300 million — to beef up the state’s contribution to the grossly underfunded public-worker pension system, according to budget documents released by Treasury this week along with Murphy’s spending proposal for fiscal 2021.
Downturn in the offing?
In addition, the forecasts for the new fiscal year, which will begin in July, also show Treasury is expecting to see more revenue growth in fiscal 2021. That modest growth is forecast despite concerns among many economists that an economic downturn may be looming. But some of the projected revenue growth stems from proposed tax increases the governor is hoping to convince lawmakers to approve between now and the end of June, and it remains to be seen whether they will go along with all of Murphy’s requests.
While the end-of-February unveiling of a new fiscal-year spending plan typically gets most of the attention, Treasury also makes official revisions to the budget plan for the current fiscal year at the same time. Those changes, typically made on both the spending and the revenue sides of the ledger, are also important as the current fiscal year progresses toward its June 30 closing.
This year, the midyear revisions by Treasury show slightly larger forecasts for the income, sales and corporate-business taxes compared with what was originally projected when Murphy, a Democrat, enacted a $38.7 billion spending bill for fiscal 2020 in late June 2019.
The projected increase for the income tax, the state’s largest source of revenue, pushes the total projection up by $308 million, to $16.8 billion. For the sales tax, the projection has increased by $164 million, to $10.4 billion.
Seeing the biggest forecast upgrade is the corporate-business tax, or CBT, which is now projected to generate $555 million more than was originally forecast, pushing the total up to $3.89 billion. That upgrade comes even as the top-end CBT rate on companies earning more than $1 million dropped by one percentage point on January 1 as part of a planned multiyear phaseout of a special surcharge that was enacted by Murphy and lawmakers in 2018.
Tax revenue could top $1 billion
The total forecast upgrade for all major tax sources for fiscal year 2020 equals nearly $1 billion, according to the budget documents. And another nearly $300 million in budget resources are also being freed up by what Treasury calls “lapses,” which are generally spending items where the actual need is less than what was originally called for in the annual appropriations bill.
Meanwhile, on the other side of the ledger, Treasury is adding about $1.2 billion in “supplemental” spending to the fiscal 2020 budget, led by the nearly $300 million add-on to the state’s annual pension contribution for fiscal year 2020. That will push the total contribution up to a record $4.1 billion, which Treasury is scoring as a “prepayment” of a portion of the liability for fiscal 2021.
Making a larger pension contribution also conforms with best fiscal-policy practices, which generally call for excess revenues to be used to do things like pay down unfunded obligations or boost budget reserves. In fact, Murphy’s fiscal 2021 budget calls for reserves to increase from $1.3 billion to $1.6 billion.
Among other fiscal year 2020 supplementals is new spending tied to the additional CBT revenues that are constitutionally dedicated to specific purposes, such as Green Acres open-space preservation, Treasury officials said in a briefing with reporters held earlier this week.
Among the lapses for fiscal 2020, Treasury officials said, is money that was freed up by refinancing state bond issues under today’s more favorable market conditions versus when the bonds were originally sold.
Healthy outlook for fiscal 2021
In fiscal year 2021, overall revenues are projected to grow again, at a roughly 4% clip compared with the adjusted forecast for the prior fiscal year. But amid that growth projection is a call by Murphy to raise new revenues from a series of proposed tax hikes, including a higher tax on packs of cigarettes and on all personal income over $1 million. Murphy is also seeking to establish a “corporate-responsibility fee” on private businesses with more than 50 of their employees enrolled in Medicaid.
The tax hikes would bring in a projected nearly $1 billion in new revenue, according to the budget documents, with normal growth in tax collections accounting for roughly an additional $700 million in revenue. If Murphy cannot convince lawmakers to approve the tax hikes that help support his overall $40.85 billion spending plan, the final spending total will have to be reduced because, unlike the federal government, the New Jersey Constitution does not allow the state budget to operate with a deficit.