Gov. Chris Christie plans to talk about his commitment to rebuilding New Jersey after Sandy in his budget address tomorrow. But no matter what Christie focuses on, Wall Street analysts and Democratic leaders will head straight for the numbers to scrutinize the revenue projections that underpin Christie’s Fiscal Year 2014 budget.
Christie faces a $3 billion structural deficit heading into next year’s budget that will be difficult to bridge without projecting revenue growth of at least 8 percent for the fiscal year that starts July 1 -- and that number will have to be higher if state revenues don’t soar over the next five months to make up a combined shortfall of $473 million in Christie’s FY12/FY13 revenue projections.
To put Christie’s challenge in perspective, state revenues grew just 3.9 percent in the first seven months of the current fiscal year -- even with a 9 percent surge in income tax revenues fueled by a booming stock market and a federal fiscal cliff that led wealthy taxpayers to push as much income as they could into 2012 to avoid increases in the top income tax rate and capital gains tax rates.
For the past year, Christie has been battling with Democratic legislative leaders and with the nonpartisan Office of Legislative Services over his insistence that “our fiscal house is in order,” and that his New Jersey Comeback would create a $2.2 billion (8.3 percent) increase in revenues that would enable the state to afford the first $183 million down payment on a four-year income $1.4 billion income tax cut.
It was one of the most ambitious revenue growth projections in the nation, and it was for a state that had ranked 47th in economic growth the previous two years and had one of the highest unemployment rates in the nation.
Christie’s New Jersey Comeback never materialized. Three months after Christie’s budget address, his treasurer, Andrew Sidamon-Eristoff, was forced to concede last May that revenues were already coming in $676 million behind projections -- a significant setback for a popular governor who was angling for the Republican vice presidential nomination.
Christie’s single-minded focus on passing a tax cut at any cost prevented him from enacting spending cuts or lowering his revenue estimates, which would have been the usual response. Instead, he plugged in more than $450 million of additional one-shot revenues to fill the gap and vowed to badger Democratic legislative leaders to cave in on the tax cut with an “Endless Summer Tax Relief Tour.”
Nevertheless, balky Democrats packed Christie off to the Republican National Convention without a tax cut, even when he agreed to abandon his own income tax cut that would have benefited the rich in favor of a Democratic property tax deduction aimed at the middle class.
Christie was lucky that Senate President Stephen Sweeney (D-Gloucester) and Assembly Speaker Sheila Oliver (D-Essex) stubbornly stuck to their insistence on waiting for Christie’s ambitious revenue projections to materialize before enacting a tax cut.
If the Democratic leaders had bowed to Christie’s pressure, the governor's built-in structural deficit heading into the FY14 budget would be about $730 million larger. The the state would have spent the $183 million in FY13 surplus set aside for the first stage of the tax cut, and there would have been an expectation that the state would come up with the $550 million scheduled cost of the second year of the tax cut phase-in in FY14.
As it is, Christie will have to lay out in his budget address tomorrow how he plans to fill a $3 billion structural deficit, and whether he is sticking to his original FY13 revenue projections and/or plans to cut current-year spending to make up all or part of that gap.
Christie’s built-in budget challenge falls into four major categories: + One-Shot Revenues: Christie’s current budget includes $1.115 billion in nonrecurring revenues, a problem that Standard & Poor flagged in lowering the state’s budget outlook from stable to negative in September. That does not include an additional one-shot of $250 million or so caused when wealthy taxpayers shifted income into 2012 to avoid future federal income tax and capital gains tax increases.
Built-In Cost Increases: New Jersey’s pension contribution is scheduled to increase by $690 million as the third year of a scheduled seven-year phase-in of full pension funding included in the controversial pension and health benefits overhaul that Christie signed into law in 2011. Christie also has to cover the $194 million scheduled increased cost of his 2010 business tax cuts and a $114 million hike in pay-as-you-go transportation capital funding he promised in the 2011 Transportation Trust Fund extension.
Current Budget Issues: Medicaid and Social Security savings were coming in $200 million below expectations as of early January, the first $58 million of its affordable housing fund diversion has evaporated, and the other $142 million shift of affordable housing funds is under review by the Supreme Court.
Current Year Revenue Shortfall: Treasury acknowledged in January that FY12 end-of-year revenues had come in $274.6 million below projections and that only $151 million had been covered by spending cuts and funding lapses, leaving a $123 million FY12 gap. Meanwhile, FY13 revenues have come in $350 million below Christie’s projections for the first seven months of the fiscal year.
The Christie administration failed to meet revenue targets nine months in a row from March-November 2012, and it would have been inconceivable for Christie to stick to his original revenue projections if that trend had continued. But Christie and his fiscal team have been buoyed by two consecutive months that have exceeded original revenue estimates, by $23 million in December and by $75.5 million in the January figures released last Thursday. What those two months of revenue collections means is already a subject of significant debate.
“The recovery in our sales tax collections combined with the trend we have seen throughout this fiscal year of strong outperformance in our income tax collections are both signs that the fundamentals of the state economy are firming up in a way that bodes well for the rest of the fiscal year,” Sidamon-Eristoff said in announcing the January revenue figures.
Dr. Charles Steindel, Treasury’s chief economist cited the “resurgence of sales tax revenue, which appears to be a combination of a catch-up of spending deferred by Sandy, additional spending coming in line to make up for losses to Sandy, and the strengthening of the underlying trend in spending late last year.” He attributed the unexpected growth in Motor Vehicle fees to the replacement of thousands of cars and trucks damaged by Hurricane Sandy.
However, the non-partisan Office of Legislative Services is not convinced that the two-month trend will wipe out the current-year budget deficit. The biggest point of contention is over the meaning and sustainability of the surge in income tax revenues, which are currently running $201,664, or 3.4 percent, ahead of Christie’s and Sidamon-Eristoff’s certified revenue projections last June.
“For the second consecutive month GIT (Gross Income Tax) growth surged by nearly 20 percent,” the January OLS Revenue Snapshot noted. “The exceptional growth in January is driven primarily by strong stock market performance in Tax Year 2012 and taxpayer reaction to the federal tax law changes. In addition, the shifting of one week’s withholding collection from February last year into January this year boosted receipts by between $120 million - $150 million.” OLS said it expects income tax receipts to grow, but more modestly, in February and March, with the real question being how large of a windfall to expect in April, which is the biggest month for state income tax collections.
Clearly, the January 1st increase in the top income tax bracket from 35 percent to 39.6 percent on individuals making more than $400,000 and families more than $450,000, and the hike in the capital gains tax rate from 15 percent to 20 percent will have a larger positive impact in New Jersey than almost other state.
Wealthy taxpayers nationwide took additional income in 2012 to avoid those 2013 federal fiscal cliff tax hikes. New Jersey stands to benefit heavily because it has a higher percentage of taxpayers earning over $500,000 than any state other than Connecticut, and because the top 1 percent of New Jersey taxpayers pay almost 40 percent of the state’s highly graduated income tax.
The unexpected state income tax surge is vital to Christie administration hopes to meet or come close to its original revenue projections. Currently, the income tax is the only major tax exceeding projections, but sales taxes remain 3.6 percent below estimates. Ominously for the state of the overall economy, corporation business taxes, inheritance taxes, realty transfer taxes, and casino revenues are all running between 15 percent and 27 percent behind projections.
“Overall growth continues to lag the certified year-end growth target of 8.3 percent, so the remaining months of FY 2013 will need the major revenues to increase by about 12.7 percent in order to achieve the year-end target,” OLS noted, a goal that remains unlikely.
Christie will have no new revenue numbers to unveil in tomorrow’s speech, which means that legislative leaders will be making their initial assessment of the governor’s FY14 tax collection projections with FY 12/FY 13 revenues still running $473 million below expectations.
Of the “Big Three” taxes, sales tax collections are currently up just 1.5 percent over the previous year, and corporate business tax receipts, which are notoriously hard to predict, are actually running 4.3 percent lower than in FY12.
That makes it very likely that Christie will have to rely heavily on a major increase in income tax collections to balance his FY14 budget. Democrats are likely to question aggressive income tax claims, however, because this year’s surge is so heavily reliant on a one-time response by wealthy taxpayers to the federal fiscal cliff and on a stock market boom that may not continue.
Democrats can criticize Christie’s revenue projections tomorrow, but the governor gets the last word.
One of the least-understood of the powers that make New Jersey’s governor constitutionally the most powerful in the nation is that it is the governor alone who gets to certify the revenues the state will have to spend in the upcoming budget.
It makes sense for Christie – especially the kinder and gentler post-Sandy Christie -- to propose a budget with as little political pain as possible. There is nothing to prevent Christie from projecting that a bigger and better New Jersey Comeback will once again provide a revenue surge greater than any other state in the nation -- and push off dealing with the state’s fiscal problems until after the November election.