It’s an attention-grabbing number: $10 billion. That’s how much Gov. Phil Murphy says the state is short due to the economic fallout following the lockdown ordered to stop the spread of the coronavirus.
“The revenue losses we can already project stemming from our current emergency are drastic — $10 billion, over the next, slightly more than, calendar year,” Murphy said during a media briefing on May 22.
That $10 billion figure has been oft-repeated since. It’s coming up again as lawmakers are being asked by the governor to approve an emergency-borrowing proposal that allows for at least $5 billion in long-term debt to be issued to help the state manage the projected shortfall.
Murphy himself has caused some confusion on the shortfall issue by initially telling President Donald Trump in a late-April meeting in the White House that New Jersey was in need of up to $30 billion in federal assistance. His administration has since clarified that statement, saying it incorporated a rough estimate of a worst-case scenario for state-revenue losses, as well as a best guess at the cost of potential spending as part of the response to the health crisis.
But how real is that $10 billion figure? Where did Murphy get it?
Several weeks ago, the New Jersey Department of Treasury put forward new revenue projections that account for the different ways the coronavirus pandemic is expected to impact state tax collections this year, and through the middle of 2021.
Those projections covered parts of two fiscal years; combined, they forecast a nearly $10 billion gap between ambitious spending goals that Murphy’s administration announced before the pandemic hit and those that are being reset to keep the budget in balance in the wake of the health crisis.
Here’s a more detailed breakdown of how Treasury calculated the two-year budget gap.
Fiscal year 2020
Analyzing the revenue shortfall starts with a close look at the $38.7 billion budget for fiscal 2020 that Murphy, a first-term Democrat, worked with the Democratic-controlled Legislature to enact around this time last year. That budget increased year-over-year spending without enacting any major tax hikes by forecasting modest revenue growth would occur throughout the state’s July 1 to June 30 fiscal year.
Earlier this year, the optimistic outlook for fiscal year 2020 revenues continued as the original budget forecast was revised, with Treasury officials estimating at the time that current tax rates would bring in even more revenue than first thought. That pushed the original forecast for total revenues to $39.5 billion, up from $38.5 billion, as of late February.
Assuming lawmakers would have signed off on about $1 billion in supplemental spending sought by the administration in February, the total projected spending for the 2020 fiscal year was bumped up to nearly $40 billion by Treasury. But those revisions were made before the full force of the pandemic was felt in New Jersey. And in March, Murphy ordered a series of strict social-distancing measures that significantly affected the economy and, in turn, the state’s revenue stream.
The onset of the pandemic also prompted Treasury to release new revenue projections for fiscal 2020 in May that forecast revenues would drop to $36.7 billion by the end of June. At the same time, Treasury announced there was a $2.73 billion gap between the administration’s revenue forecast from February — when it upgraded the projection for total revenues by about $1 billion — and what it was now predicting would be collected via state taxes through the end of this month.
Projections from the nonpartisan Office of Legislative Services that were released in May after Treasury’s were not as dire for fiscal 2020. The OLS forecast a revenue gap closer to $2.3 billion through the end of this month.
If the February revisions and proposed supplemental spending are put to the side, the difference between the original revenue forecast for fiscal 2020 and the new one released by Treasury in May is a little less than $2 billion.
Also, some lawmakers are predicting the budget gap for the 2020 fiscal year, however it is calculated, could shrink even more because the administration assumed the economy would be locked down through the end of June when it updated the projections in May. But that was before recent executive orders issued by Murphy started easing the tight economic restrictions, suggesting a more positive outlook for June revenue collections is in order.
Fiscal year 2021
At the same time the fiscal 2020 forecast was upgraded in late February, Murphy issued a budget plan for fiscal 2021 that predicted additional revenue would be collected to support a series of new spending increases that were being proposed by the administration.
But instead of relying solely on existing tax rates, this time Murphy was also proposing a number of tax hikes could be enacted in the 2021 fiscal year to support his administration’s spending goals. Those proposed hikes included a higher tax rate on cigarettes and a higher income-tax rate on earnings over $1 million and up to $5 million. Murphy was also asking lawmakers to enact higher fees for gun permits and related items, and to establish in New Jersey a “corporate-responsibility fee” on private businesses with more than 50 employees enrolled in Medicaid.
Revenue from all those tax measures — which have yet to win support from lawmakers — was baked into the administration’s original revenue forecast for fiscal 2021. Thus, under Treasury’s assumptions from February, there would be more than $41 billion available to spend in the 2021 fiscal year.
Fast forward to May, and the revised projections released by Treasury now forecast only about $34 billion in total revenues through the end of June 2021. The new projections reflect the impact of the pandemic, but they also account for the governor’s recent decision to drop, at least for now, his quest to seek any tax hikes in fiscal 2021.
When compared with Treasury’s original revenue projections for fiscal year 2021, the administration is forecasting a $7.21 billion gap between what Murphy had hoped to spend back in February — when he also wanted to hike taxes — and the roughly $34 billion that is now forecast to be collected through the end of June 2021, without any tax hikes.
The fiscal 2021 gap is a more modest, $2.7 billion — if the $36.7 billion in revenue that Treasury is now estimating will be available through the end of June 30, 2020 is used as the baseline for the start of fiscal 2021. To get up to the administration’s $10 billion combined budget shortfall estimate for the 2020 and 2021 fiscal years, the starting point for the comparison would be Treasury’s most optimistic revenue projections from February. It also assumes lawmakers would have approved the proposed supplemental spending in fiscal 2020, and the tax hikes and an additional year-over-year spending increase for fiscal year 2021.
But if the original revenue forecast for fiscal 2020 is used as the baseline for the comparison, a gap of nearly $2 billion has to be closed before the end of June 2020, and then another gap of nearly $3 billion has to be closed before the end of June 2021.