Gov. Phil Murphy has formally enacted a new state budget that is balanced with borrowed money and a millionaires tax that will help cover state spending over the next nine months.
The $32.7 billion budget signed into law by Murphy on Tuesday in Trenton hikes year-over-year spending even as general revenues are projected to decline due to the ongoing coronavirus pandemic.
Murphy, a first-term Democrat who faces reelection next year, portrayed the new spending and borrowing as necessary to ensure the state can maintain key programs and services amid the health crisis. During Tuesday’s event, he highlighted funding in the budget for things like public education and tax-relief programs.
“Our budget safeguards key programs that our families and residents are relying upon to see themselves through the pandemic, especially our most vulnerable residents, and doesn’t pull the rug out from under them,” Murphy said.
The budget goes into effect on Oct. 1, following a three-month, stopgap spending bill that was enacted by Murphy and lawmakers in late June.
This budget’s hallmarks
Here’s a closer look at how the new budget will affect several key fiscal issues over the next nine months.
Tax increases: In all, Murphy enacted about $700 million in tax increases on Tuesday along with the nine-month budget that lawmakers sent to him late last week. The increases include a higher income-tax rate on earnings over $1 million and up to $5 million, a so-called millionaires tax that has been a perennial policy goal for the governor. A surcharge on top-earning businesses that was supposed to begin phasing out this year will remain in place, and a tax on what Health Management Organizations charge consumers for health insurance policies was also increased. Unrelated to the budget, but hitting taxpayers at the same time, are highway toll hikes that went into effect earlier this month, and a gas-tax increase that takes effect across the state later this week.
Tax relief: To get lawmakers to agree to the millionaires tax, Murphy backed their plan for a new tax-relief program amid the pandemic. The program calls for rebates to be sent next summer to some families making up to $150,000, although there is no funding in this new budget to pay for any new rebates. Spending on popular state-funded property-tax relief programs like the Homestead Benefit and Senior Freeze was also restored after being put on hold over the summer, and the Earned Income Tax Credit for low-wage workers was expanded in the new budget. But the governor and lawmakers also continued a long-standing practice of using budget language to block benefit increases that — under the original law that established the Homestead program — should be going out to thousands of seniors, disabled and low- and middle-income residents this year.
Borrowing: The new budget needs $4.5 billion — raised by issuing debt without voter approval — to keep revenue aligned with spending. The New Jersey Constitution generally prohibits deficit spending, but it allows for exceptions such as helping the state respond to a war or major emergency. Earlier this summer, lawmakers gave preliminary authorization for up to $7.2 billion in borrowing without voter approval over the next nine months, and a four-member panel met on Monday to give Murphy’s administration a final signoff for the $4.5 billion. If administration officials stick to their current plan, it will take $400 million to $500 million in annual payments over the next decade to cover the principal and interest on the new debt.
Reform: Although they approved the tax and spending increases in the new budget, a key issue many lawmakers raised is the need to cut costs through long-discussed spending reforms. Without reducing spending, it remains to be seen how the next budget will fund things like the proposed tax-rebate program. The next budget will also have to compensate for the $4.5 billion in borrowing that covers spending now while at the same time paying for a significant increase in funding for public-employee pensions. Several reform proposals have stalled in the Democratic-controlled Legislature in recent years related to state spending on public-worker benefits. When changes to teacher health plans were enacted earlier this year, a key spending reform enacted during former Gov. Chris Christie’s tenure was repealed at the same time to win support from labor.
Credit rating: New Jersey went into the recession triggered by the health crisis with one of the worst credit ratings among U.S. states, and as of earlier this year, major Wall Street rating agencies had also labeled the state’s credit outlook as “negative.” The new spending plan relies heavily on one-time sources of revenue like the borrowed money, widening a structural budget deficit that credit analysts had already flagged as a concern. And even with a record contribution to the public-worker pension system, the new budget continues a trend of shorting what would be considered by actuaries to be a full payment. If there is another credit-rating downgrade looming, it would add to the costs taxpayers must cover whenever the state needs to borrow money to cover capital investments that cannot be funded in a single fiscal year.