The latest budget figures from the Murphy administration show soaring corporate business tax revenue and strong income tax collections for the current fiscal year, prompting lawmakers to question whether the state actually needs the governor’s controversial millionaire’s tax.
Administration officials cautioned against any sort of celebration, arguing that most of the CBT increase will come from one-time revenue sources that will dry up in July. Gov. Phil Murphy has proposed a millionaire’s tax rate of 10.75 percent for every dollar earned above $1 million, which would generate roughly $448 million.
But the strong revenue numbers may have weakened Murphy’s case. Senate Budget Committee Chairman Paul Sarlo, D-36th District, noted that the uptick in collections renders the millionaire’s tax superfluous.
“The pressure of balancing the budget, that pressure is off. We don’t need that any longer to balance the budget,” he said after the committee meeting.
Business groups agreed that the millionaire’s tax would be at best redundant, given how much revenue the state is seeing — and it would more likely constitute an impediment to the state’s competitiveness and economic success.
“The budget does not need a millionaire’s tax. The reason a millionaire’s tax was in the original budget has been mitigated by the strong revenues,” said Tom Bracken, president of the New Jersey Chamber of Commerce. “We couldn’t do it before for many reasons, now we don’t need to do it, because there’s enough to cover everything the governor wanted to cover.”
Michele Siekerka, president and chief executive officer of the New Jersey Business and Industry Association, echoed those sentiments.
“The state tax collections announced today are … not necessarily surprising considering the strength of the national economy, coupled with a Corporate Business Tax rate increase last year,” Siekerka said in a statement. “What is surprising, in light of this windfall, is the continued call for even more taxation as part of the FY 2020 budget proposal.”
“Clearly, this additional revenue is more justification to not increase the Gross Income Tax rate on those making over $1 million, as proposed, as it will further hurt our competitiveness in the region,” she added.
But Sheila Reynertson, a policy analyst at the progressive think tank New Jersey Policy Perspective, argued that the treasurer made the case that the state needs “sustainable” revenue such as the millionaire’s tax.
“This year’s budget relies on over $1 billion in one-shot revenue sources that are set to disappear,” Reynertson said in a statement. “Lawmakers must pursue reliable and sustainable sources of revenue, like the proposed millionaires tax, to make up for these lost funds and continue investing in assets proven to grow the economy.”
State Treasurer Elizabeth Maher Muoio, in May 14 testimony before Sarlo’s committee, said the extra revenue could go toward pensions and benefits, public education and New Jersey Transit. But while the increased revenue is welcome in Trenton, it’s still not enough to cover every faction’s priorities. And the continuing disagreement over the millionaire’s tax is evidence that budget negotiations will remain strained, even with some extra cash in the state’s coffers.
Tallying the tax numbers
The state will see $3.8 billion from the CBT, out of the total $38.115 billion of total revenues for 2019, according to figures Muoio presented on May 14.
“Through the end of April, the CBT is up 91.2 percent. As a result, we have increased the CBT forecast by another $99.4 million to a total of $3.808 billion for FY19,” Muoio said.
Revenue for the 2019 fiscal year, which ends June 30, will include $15.91 billion from the gross income tax and $9.954 billion from the sales tax, according to budget documents she presented on May 14. The state collected $3.6 billion of income taxes in April, bearing out the Treasury Department’s predictions that lagging revenue was the result of taxpaying changes wrought by the $10,000 federal cap on state and local property tax deductions.
Many of those taxpayers delayed their payments until April, whereas before the SALT cap, they would have filed by January, according to Muoio.
“While we correctly anticipated the taxpayer behavior that played out, we not only met our robust April tax collection targets, but we encountered somewhat of a surprise when Gross Income Tax collections set a new April record,” Muoio said.
Income tax collections were still much higher than the Treasury prediction, $377 million specifically.
“As a result, we expect to close out FY19 with a surplus balance of $1.139 billion, up from the $1.098 billion we projected at the time of the Governor’s budget message,” Muoio said.
Murphy’s budget calls for a $317 million payment into the state’s rainy day fund, the first deposit into the fund in over a decade after the fund ran dry following the Great Recession.
“Our surplus and rainy day fund are crucial to sustaining us in the event of an economic downtown, which most economists view as inevitable, sooner than later,” Muoio said.
“While our proposed surplus is roughly double the average of the previous administration, it represents only three percent of our total budget,” she countered. “So we still have a long way to go to get to the recommended average of 10 percent of our total budget.”
The state treasury describes the rainy day fund as a “lockbox,” which can only be used under limited circumstances, such as the recession a decade ago during which the state burned through $734.7 million to soften the blow of revenue decreases stemming from the nationwide financial crisis.
“We have to prepare for forces both inside and outside of our control,” Muoio said.
‘A last resort’
But some lawmakers, including Sarlo and Sen. Declan O’Scanlon, R-13th District, questioned why the Murphy administration wanted to inject money into the rainy day fund while calling for a millionaire’s tax to fund several spending priorities.
“Your average family ends up with a surplus at the end of the year. Do they put it into savings or do they pay their bills that they have not yet paid?” O’Scanlon asked. “If they have a deficit in the bills they’re paying, I would argue it’s irresponsible to take any money and put it into savings.”
“I’ve always believed a surplus is important … but taxes should be a last resort,” Sarlo told Muoio.
The overall budget initially called for just over $3 billion from the CBT increase, but that was increased by nearly $800 million based on the numbers that the state treasury reported.
“Clearly the pressure to do a millionaire’s tax is gone, the pressure is now off, whether you want to use it for other spending priorities, that’s a policy decision,” Sarlo told reporters after the budget hearing.
If lawmakers go along with the plan, revenue in fiscal 2020 would amount to $38.9 billion; income taxes for the year would total $17.1 billion, according to budget documents.
In attempting to win support for the millionaire’s tax, the governor proposed adding $250 million more of property tax relief, which would be piled on to the already budgeted $283 million for the Homestead property tax credit program and $202 million for the Senior Freeze program.
But the proposal was shot down by Senate President Stephen Sweeney, D-3rd District, and Assembly Speaker Craig Coughlin, D-19th District.
“For this governor, a millionaire’s tax is just a talking point,” Sweeney said in a May 7 statement. “We need a real budget with long-term, sustainable property tax savings, not gimmicks.”
Murphy argued that the strong revenue performance would “sweeten the pot” for lawmakers and build a stronger case for the millionaire’s tax.
Sweeney shot back that the higher revenue total came from increased CBT, which he noted Murphy opposed during budget talks last year.
“The unexpected surge in revenues the Governor is now claiming is the surge the Legislature expected when we imposed a 2.5 percent surcharge on the millionaire and billionaire corporations that benefited directly from the Republican Congress’ tax cut,” Sweeney added.
“The treasurer and administration did not back down today, and I don’t think the senate president and the speaker either are backing away from their positions,” Sarlo said.
It would be up to the Sweeney, Coughlin and Murphy camps to reach a compromise on a spending plan before the end of the fiscal year on June 30, including how they want to move forward with the millionaire’s tax.
The governor signed a budget last July with an increased corporate business tax rate by 2.5 percent for two years and then 1.5 percent for another two years, before dropping it back to the original 9 percent level.
Muoio said that because over half of the CBT increased revenue – $721 million – will not be available next year, the state needs the millionaire’s tax. She testified on May 14 that those one-time sources included $200 million from “deemed repatriated dividends,” $82 million from the tax amnesty program, $100 million from an “unexpected, one-time single taxpayer payment,” $35 million from “one-time tax planning behavior,” and $304 million from the “surtax enacted last July being applied retroactively to the beginning of last year.”
“This is an important point to underscore because these catch-up payments mean FY19 will essentially include 18 months of CBT surtax payments in a 12-month period,” Muoio testified.
“Overall, about half the FY19 CBT growth is due to statutory state and federal tax law changes, while the other half is from temporary, one-year enhancements,” she added.
During budget talks last year, the Murphy administration lambasted the CBT increase as a “gimmick” and “short-term trick,” arguing that an increased millionaire’s tax would better serve the state. “FY2019 benefitted from substantial non-recurring revenues, but the loss of these funds curtails growth in FY2020 and increases structural budget pressures,” Muoio told lawmakers. “As the CBT surtax expires over the next couple of years, recurring revenue growth will continue to be restricted.”
Muoio argued that the millionaire’s tax would be essential to boosting the state’s credit rating and reversing the trend of New Jersey’s 11-time credit downgrades under former Gov. Chris Christie.
“The governor’s continued push for reliable, recurring revenues, such as the true millionaire’s tax, are crucial to boosting our credit rating and providing the critical resources to fund the policies that will help grow our middle class,” she said.
Murphy has said that the millionaire’s tax would help reverse the state’s credit downgrades.
Sweeney expressed repeated skepticism toward that notion, insisting that the only way to boost the state’s credit rating would be to reduce the massive unfunded pension liability — roughly $100 billion by some estimates. The three main credit rating agencies — Moody’s Investors Service, S&P and Fitch Ratings, often cited the state’s pension obligation when issuing the downgrades.
The Governor’s 2020 budget calls for a record-high $3.2 billion payment toward the state’s pension obligation, an amount still only 70 percent of the recommended annual payment.
Under the proposed budget, the state expects to make close to $4 billion in pension payments next year, with the goal of making full contributions by the 2023 fiscal year, which will start July 1, 2022.
Those kinds of tactics would help in the short-term, Sweeney said, but the state needs long-term reform. Last August, the Economic and Fiscal Policy Working Group he put together unveiled a proposal to scale back the pension obligation for state workers with less than five years of experience.
Sweeney has argued that the pension contributions could swallow up most of the budget and leave little room for any of Murphy’s proposals, such as improvements to New Jersey Transit, and expanded access to community college and Pre-K.
The Senate President also proposed shifting the public worker health care plans from the equivalent of a platinum level of coverage under the Affordable Care Act to a gold level of coverage.
Now Sweeney and Murphy must hash out which of these proposals – if any – the state might adopt as part of the 2020 package.