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6-16-15 State Budget Issues in the News

NJ Spotlight - State’s Tax Revenue Still Lags Behind Pre-Recession Levels by 10 Percent…New data from Pew Charitable Trust helps plot NJ’s slow recovery, fuels arguments about raising some taxes or slicing business taxes further

John Reitmeyer | June 15, 2015

The debate over taxes -- who should be taxed, how much, and what kind of tax should be levied -- is a knotty problem in New Jersey. With the recent state Supreme Court ruling in a major public-employee pension-fund case, this debate has become more pronounced. Democrats who control the state Legislature say they want to increase taxes on the state’s wealthiest residents to bring in more revenue for workers’ retirements. Republicans in the Assembly, meanwhile, say they want to cut taxes as they seek to become the party of power in the lower house this fall.

Amid this ongoing argument comes new data from the Pew Charitable Trusts’ Fiscal 50 survey that indicates that states as a whole took in 3.5 percent more money during the last quarter of 2014 than they did just before the recession hit in 2008.

Yet in New Jersey -- where business taxes have been reduced during Gov. Chris Christie’s tenure -- tax collections did not follow the national trend tracked by Pew over the same period. New Jersey tax collections, adjusted for inflation, were at the end of 2014 still roughly 10 percent behind the pre-recession peak from 2008, according to Pew.

Though monthly and even quarterly revenue data often gets little attention in Trenton, how much money the state is taking in from taxpayers more than five years after the recession ended is at the heart of a huge debate inside the State House as the Republican governor and Democrats who control the Legislature clash over how much to put into the state’s chronically underfunded public-employee pension system.

Democrats want to increase taxes on high-earners to bring in more money for the pension system, which covers the retirements of an estimated 773,000 current and retired workers. Christie and other Republicans, meanwhile, say more benefit cuts are necessary because tax hikes would hurt the state’s economy. They’re also supporting the recommendations released earlier this year by a nonpartisan benefits-study commission, including moving employees into a hybrid retirement system with some features of a 401(k) and changing to less-costly health plans.

And with all 80 seats in the Assembly up for grabs this November, Assembly Republicans say they would ultimately like to reduce taxes.

Yet New Jersey, even after Christie enacted several rounds of business-tax cuts, is one of 27 states still collecting less than they did before the recession hit, and one of only eight where those collections are still 10 percent or more below after being adjusted for inflation, according to Pew.

And though states as a group are 3.5 percent above their pre-recession peak for revenue collections after adjusting for inflation, the Pew analysis found much variation among the individual states.

“Total 50-state tax revenue has hovered above its 2008 high mark -- even though most states had below-peak receipts -- largely because of the recovery of collections in four states with large tax bases: California, Illinois, New York, and Texas,” the Pew analysis said. “If those states were excluded, overall tax revenue would fall short of its 2008 level.”

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The analysis also highlights the role tax hikes have played in bringing in more revenue, helping states like Illinois and Minnesota take in 15 percent more revenue during the last quarter of 2014 than they did before the recession. And Pew tracked the reverse effect in many states that enacted tax cuts.

“Collections remain below their previous peak in states such as Florida, Kansas, North Carolina, and Wisconsin, which cut taxes or fees since the recession,” according to the analysis.

Amid the ongoing pension-funding debate, Democrats in New Jersey have been calling for tax hikes on personal income over $1 million to help boost the pension system, which has an unfunded liability of at least $40 billion according to the latest actuarial reports. Their goal for the next fiscal year, which begins July 1, is to make a $3.1 billion payment that was called for in a 2011 pension-reform law that Christie and lawmakers once touted as a landmark measure.

But Christie has since gone back on the payment commitments made in the 2011 law, even as employees have been contributing more toward their pensions under another component of the reform law. Instead, Christie has proposed a state budget that would make a $1.3 billion pension contribution before June 30, 2016, while his administration is also seeking to lower costs by enacting the new benefits cuts.

In the wake of recent credit-rating downgrades and last week’s state Supreme Court ruling that determined the state payments spelled out in the reform law were unconstitutional, Democrats say it’s important for the state to still make the larger contributions.

But Republicans are warning the Democrats, who are working on their own budget proposal in the weeks left before a July 1 deadline for a new state-spending plan, that tax hikes would cripple a state business community that already faces a high tax burden.

This year, the Assembly Republicans are also talking about lowering taxes in advance of the November election. They need to pick up nine seats to take control of the Legislature’s 80-member lower house.

It was this past year, amid a similar pension-funding dilemma, when Democrats proposed higher taxes on corporations and earnings over $1 million, only to see Christie veto their efforts. And this year the latest state revenue data suggests tax collections will meet growth projections of about 6 percent.

“When you look at the history (in New Jersey), year after year, their answer to solving the budget crisis is to raise taxes,” said Assemblyman Anthony Bucco (R-Morris). “All of that sends a horrible message.”

But Assembly Speaker Vince Prieto (D-Hudson) said the question is really whether to raise taxes today or push the costs off onto future generations who would face certain tax hikes to cover bills that today’s lawmakers are accruing but not paying for.

“We’re committed to fully funding the pension system as we did last year,” Prieto said. “We’re looking under every rock (for revenue). We’re looking under every cushion.”

Garden State Coalition of Schools
160 W. State Street, Trenton New Jersey 08608