Budget juggling, big borrowing, higher taxes: NJ 2020, the year of COVID-19

The economic fallout is expected to affect tax collections and the broader state economy well into 2021
Credit: (Edwin J. Torres/Governor’s Office)
File photo: Aug. 25, 2020, Gov. Phil Murphy delivered address on his revised budget at SHI Stadium, Rutgers University. Seated, Assembly Speaker Craig Coughlin (left) and Senate President Steve Sweeney.

There was significant borrowing without voter approval. A long-discussed millionaires tax was finally approved. And lawmakers still found money to spend on legislative pet projects, even during a devastating pandemic.

These are just some of the things that made 2020 a memorable year for New Jersey fiscal policy — even if the health crisis made it harder than usual for residents to keep track of everything that was going on inside the State House over the budget.

Of course, 2020 also brought news of yet another year-over-year increase in the average property-tax bill in New Jersey. Adding to the pain for many homeowners was the decision by Gov. Phil Murphy’s administration to temporarily freeze funding for a key state property-tax relief program to help ease pandemic-fueled budget woes.

Where New Jersey’s budget goes from here remains to be seen, but the fallout from the coronavirus pandemic is expected to continue to impact tax collections and the broader state economy well into next year, even as vaccines are expected to become widely available during the first half of 2021.

The first signs of what would become a devastating pandemic cropped up in New Jersey just weeks after Murphy, a first-term Democrat, proposed a budget plan in late February to cover a typical, 12-month state fiscal year. Murphy eventually pulled back that original spending proposal as the health crisis unfolded and stay-at-home orders severely restricted economic activity throughout the state.

Unprecedented change in budgetary process

In the early months of the pandemic, Murphy also worked with fellow Democrats who control the Legislature to take the virtually unprecedented step of extending the fiscal year by three months. That gave residents more time to pay their state income tax bills as many faced economic challenges related to the health crisis.

As state revenue losses began to pile up and long-term forecasts worsened, Murphy convinced lawmakers to approve an emergency borrowing measure that allowed for up to $9.9 billion in new debt without voter approval.

The emergency borrowing plan relied on a rarely used clause in the state Constitution that loosens restrictions on deficit spending during times of war or major emergency. The emergency borrowing legislation was largely upheld by the state Supreme Court after Republicans sued to block it.

A stopgap spending bill was enacted in late June for the months of July, August and September, and then another budget for a nine-month fiscal “year” 2021 was adopted in late September. That budget relied on more than $4 billion in emergency borrowing to sustain a year-over-year increase in spending.

Cut in credit rating

The emergency borrowing also helped push one-time revenue sources to more than 10% of spending, a level not seen since the worst days of the 2007-2009 Great Recession. And by November, S&P Global Ratings, a major Wall Street rating agency, announced it was cutting New Jersey’s credit rating by one notch to BBB+. That marked the first time the state’s credit rating had ever been in BBB+ territory with the ratings firm.

“If the structural deficit does not decrease in future years, because of such factors as little or no revenue growth, pension underperformance, or political unwillingness to make necessary adjustments, we could revise the outlook downward or lower the rating,” S&P analysts noted in their full analysis.

Another major fiscal-policy change secured by Murphy amid the pandemic was the establishment of a true millionaires tax. Majority Democrats had pressed former Republican Gov. Chris Christie to enact a millionaires tax on multiple occasions, but they reversed their position after Murphy took office early in 2018. It took the revenue losses triggered by the pandemic to foster a deal between the governor and legislative leaders.

“In this unprecedented time, when so many middle-class families and others have sacrificed so much, now is the time to ensure that the wealthiest among us are also called to sacrifice,” Murphy said as the deal was announced during a late September news conference.

But to get the higher rate on earnings over $1 million and up to $5 million, Murphy had to agree to establish a new tax-relief program that is planned to provide some residents with state-funded relief checks sometime next year. How that promised program gets funded as pandemic-related revenue losses are expected to continue at least through the spring remains an open question.

Higher taxes, not just for millionaires

It wasn’t just millionaires who were socked with higher taxes in 2020. A surcharge on top-earning businesses that was originally billed as temporary was kept in place, and the governor and lawmakers also increased a tax on what Health Management Organizations charge consumers for health insurance policies.

New Jersey motorists were hit with a gas-tax hike in October to help offset sagging revenues that are needed to sustain the state’s Transportation Trust Fund. The Murphy administration also signed off on toll hikes for the Atlantic City Expressway, Garden State Parkway and New Jersey Turnpike.

Meanwhile, 2020 also brought news that the average property-tax bill went up year-over-year by nearly $200, to a record-high of $8,953. That came as funding for the state’s popular Homestead property-tax relief program was temporarily frozen by Murphy’s administration to help ease the budget woes.

But there was good news for some taxpayers in 2020. The governor and lawmakers enacted another expansion of the Earned Income Tax Credit, a tax break for low-wage workers that has wide support from both Democrats and Republicans.

Despite the ongoing pandemic and its effect on the state’s finances, lawmakers didn’t put on hold their practice of inserting last-minute spending items into the annual budget just days before final adoption in the State House.

Funding for lawmakers’ pet projects

This year, some of their additions — commonly referred to in Trenton as “Christmas tree items” — funded pet projects like a museum in Edison and reservoir dredging in Clark. Although funding such legislative add-ons is not unusual, the practice was viewed differently by many this year due to the ongoing health crisis.

“This is shameful,” said Sen. Bob Singer (R-Ocean) as a spending bill that included the add-ons drafted by majority Democrats was debated in late September.

Legislative rules generally call for such spending additions to be disclosed well before the budget bill wins final approval in both houses of the Legislature. But individual “budget resolutions” that are supposed to detail each spending addition and indicate whether sponsors have any conflicts of interest have still not been made public months after they were first due to be submitted to budget committee leaders.

Democratic legislative leaders also decided not to hold a standard series of public hearings to scrutinize Murphy’s nine-month budget proposal after it was put forward in late August. Instead, only written comments on the governor’s more than $30 billion spending proposal were accepted.

Concerns about lack of transparency

Legislative leaders said the pandemic and the need to meet an unusual Oct. 1 deadline for the adoption of a new spending plan were to blame. But the decision to shelve public hearings was panned by Republicans and a number of groups that normally align with majority Democrats.

As a response, those groups held a “virtual” budget hearing to highlight concerns about taxes, worker-pension funding and state support for mass transit, among other issues.

Many also raised other issues related to the budget and the need for transparency in the budgetary process as heightened concerns about racial equality and social justice emerged alongside the pandemic this year. Among them was Brandon McKoy, the president of New Jersey Policy Perspective, an influential left-leaning think tank based in Trenton.

“The basic point is that New Jersey’s state budget — the most important thing it does every year — is developed by a process that marginalizes the public at large and locks out leaders of color at crucial moments,” wrote McKoy in an opinion piece published by NJ Spotlight News in September.

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