Gov. Phil Murphy wants to hike taxes and borrow money to help offset forecasted budget shortfalls, but the Legislature’s nonpartisan fiscal experts now say those losses won’t be as bad as the governor has been projecting.
The Murphy administration is overestimating the projected revenue losses by nearly $1.4 billion through the middle of next year, according to a new, long-range forecast released Tuesday by the Office of Legislative Services.
That discrepancy is the biggest ever gap between revenue estimates from OLS and those from an administration at this point in the budget approval process, the fiscal experts noted during an appearance before members of the Senate Budget and Appropriations Committee Tuesday.
The big difference between the new forecast from the nonpartisan OLS and that put forward by the governor’s administration late last month is likely to be an important friction point between Murphy and lawmakers who have only a few weeks to settle differences on taxes, borrowing and spending for a new fiscal year that begins on Oct. 1.
Treasurer Maher Muoio: ‘May take years to fully recover’
During her own appearance before lawmakers on Tuesday, state Treasurer Elizabeth Maher Muoio stood by her agency’s less optimistic forecast, saying she has “complete faith” in the staff. She also pointed to the ongoing coronavirus pandemic and the potential for increased revenue volatility as she discussed the state’s budget outlook in more detail.
“Our fiscal condition may take years to fully recover,” Muoio said.
Murphy, a first-term Democrat who’s up for reelection next year, has put forward a $32.4 billion budget plan to cover state spending between Oct. 1 and June 30. That would follow a nearly $8 billion stopgap spending bill that was approved amid the pandemic to cover state operations during July, August and September.
The governor’s nine-month budget plan proposes about $1 billion in tax hikes and $4 billion in borrowing to help offset projected revenue losses stemming from the pandemic. At one point, Murphy’s administration was forecasting losses would be as large as $10 billion, but subsequent forecast revisions have cut that figure nearly in half.
Under Murphy’s latest long-range forecast, there would be nearly $36.4 billion in revenue available for spending over the 12 months ending on June 30. That’s if lawmakers go along with the proposed tax hikes, which include setting higher rates on top-earning businesses and individuals earning over $1 million and up to $5 million annually.
The OLS forecast projects total revenues through the end of June 30 at nearly $37.8 billion.
“To the best of my knowledge, this is the largest difference our two agencies have ever had,” OLS senior fiscal analyst David Drescher told members of the Senate committee.
OLS forecast brighter on all major tax revenue
Moreover, the OLS forecast is more optimistic about all three of the state’s largest sources of tax revenue, which are the income, sales and corporate-business taxes, he explained. And even if the tax hikes are not approved, the forecasted gap remains about the same.
“We are assuming that the pretty positive signs we’ve seen over the past few months are going to continue,” Drescher said.
Still, Drescher urged lawmakers to consider the entire tax-collection environment remains in flux due to the pandemic and could be influenced by a second wave of COVID-19 infections. That’s something Murphy’s administration has also been warning about.
And tax collections would still be lower year-over-year even though the OLS forecast is not as dire as Murphy’s, according to the latest forecasts.
During her testimony, Muoio highlighted the income tax specifically, which OLS forecasts to be nearly $900 million higher than Treasury.
Muoio said her agency’s forecasters are accounting for the reduced quarterly estimated payments that have been submitted by many taxpayers, suggesting these foreshadow reductions that will carry through the rest of the year and impact the budget’s bottom line.
“Taxpayers are signaling how they view their income prospects in tax year 2020, and the warning light is blinking red,” Muoio said.
She and other officials also noted significant federal dollars were pumped into the state economy to help mitigate the pandemic’s economic damage, which may have distorted revenue collections. The OLS forecast also used more updated sales-tax figures as it came in nearly $230 million higher for that category than Treasury. And Murphy’s budget proposal forecasts a more than $2 billion surplus to hedge against revenue volatility or a flare-up of the pandemic.
Looking for OK to borrow $4 billion
On the topic of borrowing, Muoio said the Murphy administration is hoping to win legislative approval by the end of the month for the $4 billion it proposes to borrow. That’s the same deadline lawmakers are facing for adopting the new spending bill, making it a key task since it’s Murphy, and not lawmakers, who has the power to certify revenues under language in the state Constitution.
The Constitution generally prohibits deficit spending, but it allows for exceptions such as helping the state respond to a war or major emergency. Lawmakers gave their preliminary authorization for emergency borrowing in a new law enacted earlier this summer, and the Murphy administration has already issued a request for proposals from firms to help arrange a $4 billion debt issue as early as this fall.
“This whole process must be completed by Sept. 30 in order for the governor to be able to certify revenues for the (fiscal year 2021) budget due to be enacted by Oct. 1,” Muoio said.
The big gap between the Murphy administration’s forecasts and the OLS projections harkens back to 2012, when then-Gov. Chris Christie and the OLS were off by more than $1 billion. The forecast difference then brought on a personal attack on the OLS by Christie, a Republican who at the time was trying to convince lawmakers to cut taxes. The final audit of that year’s budget proved closer to the OLS projections than Christie’s.
Earlier this year, the OLS was also more optimistic about the pace of revenue collections over the initial months of the pandemic, and thus far those forecasts look to have been more accurate than the Murphy administration’s.