Amid a new wave of COVID-19 infections in a state where the economy was nearly crippled by pandemic restrictions, New Jersey tax collections surged in December. But Department of Treasury officials are warning that much of the fiscal boost may be temporary.
Major revenues collected through the halfway mark of the state fiscal year were up by nearly $800 million year-over-year, thanks to an increase of more than 40% recorded during December, according to figures released by Treasury on Wednesday.
But Treasury officials said the December collections were largely buoyed by a recent change in the way that many owners of businesses known as “pass throughs” — which include many small businesses — are paying their state taxes.
Much of the December revenue increase will likely be offset before the current fiscal year ends, the officials said.
“Ultimately, the (pass-through tax) collections are largely a timing shift rather than a new State revenue stream,” the officials said.
Still, even after accounting for the temporary boost in revenue, the latest tax-collection figures may be a sign that New Jersey’s budget is not taking as big a hit from the ongoing pandemic as once feared by Gov. Phil Murphy’s administration.
Sales-tax collections: Looking good
Among the bright spots were sales-tax collections, which remained ahead of the previous year’s totals for the fifth straight month, according to Treasury’s figures. Revenues from the state Lottery dedicated to funding public-worker pensions were also ahead of last year’s pace for both December and the first six months of the fiscal year.
New Jersey has already been hit hard by the pandemic, and the latest public health statistics suggest the state is now contending with a second wave of infections. The health crisis has brought on a series of executive orders and other restrictions that have diminished economic activity across the state and depressed tax collections that support New Jersey’s budget.
Murphy, a first-term Democrat, used the state’s weakened tax outlook as the basis for borrowing roughly $4 billion without voter approval to help sustain a spending increase for the 2021 fiscal year, which closes at the end of June.
Tax collections through the first six months of the fiscal year totaled $14.67 billion, up $783 million compared to the first six months in the prior year, according to Treasury’s figures.
But Treasury collected nearly $1 billion in December 2020 under the state’s newly instituted Business Alternative Income Tax. That new tax category was established under a complicated policy change that Murphy and state lawmakers enacted last year in response to a new federal limit on state and local tax deductions known as SALT implemented by former President Donald Trump in late 2017.
Assisting ‘pass-through’ businesses
The new state tax policy restored the full federal deduction for state and local taxes for the owners of pass-through businesses located in New Jersey. But under the policy change, the owners of such businesses will now be provided with an offsetting credit before the end of the current fiscal year to ensure they aren’t double-taxed.
“In the long run, the (pass-through) tax is expected to be revenue neutral because any taxes paid by the pass-through entity will result in equivalent tax credits for its members,” Treasury officials said.
In addition to the policy for pass-through businesses, the year-over-year increase in state tax collections in December also reflects recent tax hikes that Murphy and lawmakers enacted in response to the pandemic, including a higher marginal income-tax rate levied on earnings over $1 million and up to $5 million.
Treasury officials cautioned that the month of December included an additional employer withholding payment compared to the same month the prior year. That “timing issue” will be offset in this month’s collections, they said.
Take from income tax lagged
Moreover, proceeds from income tax — the largest single source of revenue for the state budget — remained 3% behind last year’s totals through the first half of the fiscal year.
However, for the sales tax — the budget’s second-largest source of revenue — collections through the end of December were up by nearly 4% year-over-year. Since the state reports sales-tax revenues with a one-month lag, the December figures represent economic activity in November. Murphy’s administration has projected an overall 2% increase in sales-tax collections through the end of June.
Among other tax sources that were beating the administration’s projections through the first half of the fiscal year were alcoholic beverage, realty transfer and transfer-inheritance taxes, according to Treasury’s figures. Lottery revenues were also ahead of last year’s pace, by nearly 9% in December, and 7.6% through the first six months of the fiscal year.
This isn’t the first time that a recent tax-policy change has generated what appeared to be a major swing in monthly tax collections in New Jersey.
Last year, April revenue collections fell way off the previous year’s pace after Murphy and lawmakers agreed to delay the deadline for state income-tax payments and extend the term of the traditional, 12-month fiscal year in response to the pandemic. But there was a corresponding upswing in July — typically a slow month for tax collections — due to the three-month payment extension.
Murphy and lawmakers attempted to establish a SALT workaround for other New Jersey taxpayers in response to the Republican Trump administration’s policy change, but it was largely blocked by new Internal Revenue Service rules. It remains to be seen whether newly sworn-in President Joe Biden will try to reverse those policies or work with fellow Democrats who now control both houses of the Congress to repeal the cap on the SALT deduction, which was set at $10,000.