Tax relief could sink NJ into a $1 billion hole as revenue loss grows year after year
According to an analysis by the Bergen Record earlier this week, New Jersey will be on a course to lose at least $1 billion annually in the coming years if lawmakers choose to institute either the Governor’s or Legislature’s plan for tax relief.
The competing tax-relief plans that the Republican Christie and Democrats who control the Legislature are pushing now come with a seemingly modest, $183 million price tag on a $32 billion spending plan.
But both the direct income tax cut Christie wants and the new income tax credit for middle-class homeowners that Democrats have countered with call for multiple-year phase-ins, meaning after a few years actual costs will range from more than $1 billion annually to more than $2 billion based on the current proposals.
The loss of that revenue would hit the state budget at the same time tax collections are missing original estimates by as much as $1.4 billion thanks to New Jersey’s slow crawl out of recession.
And over the next several years, the cost of the proposed tax relief would compete with other big-ticket spending commitments already made by lawmakers and the governor to create an even tighter fiscal crunch, a Record analysis found.
That means any new tax relief approved this year could crowd out other priorities – like school funding - in future budgets if revenues don’t meet lofty projections, because New Jersey’s constitution requires a balanced spending plan.
Tax collections over the last several months have already trailed Christie’s budget projections, and his plan for a 10 percent income tax cut is forcing hard decisions that are affecting other areas.
The governor and Democratic legislative leaders are in the midst of debating three different tax plans as they near a July 1 deadline for a new state budget set forth in the state constitution.
“We have money there to do it,” Christie said on Tuesday during a town-hall event in Haddonfield. “We’re ready to do it.”
But it’s in future years when the cost of Christie’s plan or the ones put forward by Democrats would really add up. And the governor may not be here to see that occur. He has yet to say whether he is running for reelection in New Jersey next year.
If approved, any new tax-relief expenditure would be included in a state budget that’s already being stressed by the cost of other priorities, including economic development, education, public employee pensions and transportation.
Business tax breaks designed to stimulate much-needed job growth will cost an estimated $350 million in the new budget and rise to more than $600 million annually in a few years.
Direct school aid in the new budget is set to increase by $121 million, an expenditure that could increase over time with the state still mired in court fights over education aid.
A state Supreme Court ruling last year added nearly $500 million in spending for school aid at the last minute.
The new budget also includes a $1 billion payment into the grossly underfunded pension system, and that payment is now scheduled for regular increases mandated by state law to help repair the fund that pays public employee retirements.
And New Jersey’s commitment to so-called pay-go transportation spending — something intended to ease the state’s addiction to borrowing — is also scheduled to rise over the next few years, to $600 million annually.
To meet all of those commitments moving forward while also offering new tax breaks, New Jersey tax collections will have to grow more rapidly than the modest growth that has been seen the last 12 months.
Last week, the federal government ranked New Jersey’s economy 47th among the 50 states for 2011. And the state’s unemployment rate remains well above the national average, with new figures expected as early as this week.
The non-partisan legislative budget analyst David Rosen forecasts a gap of as much as $1.4 billion between Christie’s original revenue estimates and what is now projected to be collected in taxes from now until the end of June 2013. The Christie administration disputes that forecast, but recently lowered its own revenue projections by roughly $700 million for the same term.
And during a speech last week before an influential conservative group in Chicago, Christie held back the New Jersey Comeback phrase that he’s used repeatedly since the beginning of the year to help sell the proposed income tax cut both in-state and to a national audience.
To help keep his tax-relief proposal viable amid the slow revenue growth, Christie is raiding funds set aside for affordable housing and clean energy programs, while also taking money that had been allocated for transportation spending. The latter move will lead to $260 million in new borrowing even though the state constitution prohibits going into debt to balance the budget. But New Jersey was already falling short of prior spending commitments before those one-shot fixes were announced last month.
Under Christie, who took office in 2010, the state has either skipped or made only partial payments into the pension system, which had a $42 billion deficit as of the last accounting.
The governor’s new spending plan would also fall short of the benchmarks set forth in the state’s school funding law for the third straight year.
And raiding transportation funds to offset missed revenue projections reverses course on the governor’s own plan to ease New Jersey’s heavy debt burden, which was one of the factors Wall Street ratings agencies identified when they lowered the state’s credit rating in 2011.
As the state moves into the final weeks of deliberation on the FY13 budget NJPSA will keep you posted on revenue projections and budget negotiations. Stay tuned.
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