Gov. Phil Murphy delivers his 2020 budget address in Trenton on March 5.
Gov. Phil Murphy’s first budget last year nearly caused a government shutdown and left many in Trenton bruised and bloodied. In contrast, the launch of Murphy’s second budget, which the governor unveiled on March 5, was relatively smooth.
The Democratic governor called for $38.6 billion in spending during fiscal year 2020, which starts in July, along with myriad savings that he insisted will limit the need for new revenues. The budget that lawmakers and Murphy adopted last year included $1.5 billion in increased revenue.
“This budget is how we make real the promise of a stronger and fairer state that works for every family. And, it builds on the progress we have already made,” Murphy said during his budget address.
While the response from Democrats who control the legislature was generally positive, Murphy’s renewed call for a tax on high-income earners drew criticism from the statehouse and from business advocates. Progressive groups praised the blueprint as a move toward equality and representatives of the cannabis industry expressed optimism about the prospects of adult use legalization, given that the budget includes revenue from taxes on recreational marijuana. The budget now faces months of debate – with public employee benefit reform likely to remain a contentious point – before the fiscal year ends on June 30. This year, though, lawmakers seem confident that the threat of a shutdown has receded.
A better start
Senate President Stephen Sweeney, D-3rd District, one of the most powerful elected officials in the state, credited Murphy for “starting off this budget year a lot differently than last year.”
“It was a rough start on both sides, but this is a positive step forward,” Sweeney said at a news conference immediately after the Tuesday afternoon budget presentation.
He was flanked by many of the lawmakers who will determine whether Murphy can enact the priorities outlined in the budget. The group included Assembly Speaker Craig Coughlin, D-19th District; Assembly Budget Chair Eliana Pintor Marin, D-29th District; and Senate Budget Chair Paul Sarlo, D-36th District.
Democratic lawmakers, whose support Murphy needs, reacted favorably to the governor’s proposed $1.1 billion in savings. Murphy’s proposed spending level is three percent higher than the 2019 budget he signed last July.
“It was optimistic and upbeat, which I think is a change about the future of our state,” Senate Majority Leader Loretta Weinberg, D-37th District, told reporters. “It was a hand to the Legislature, from the governor, ‘I am willing to work with you.’”
On the other hand, Murphy’s proposed millionaire’s tax — a rate increase from 8.97 percent to 10.75 percent for those earning more than $1 million — was pronounced a non-starter, with lawmakers including Sweeney and Coughlin saying they would not support the measure.
“I believe the governor’s proposal is an encouraging first step,” Coughlin said. “However, I remain convinced that we can achieve added substantial savings through reforms and that our fiscal solutions should not include any broad-based tax increase, including sales and income tax.”
Running a surplus
Gov. Phil Murphy greets attendees in Trenton on March 5.
The total savings number includes $800 million in reduced health care costs, attributable in part to $200 million in savings from a new contract with several state employee unions, including the Communication Workers of America. Other proposed health care savings include member-eligibility audits to make sure everyone enrolled in the state health plan is actually eligible to participate, as well as engaging a third-party administrator who would independently scrutinize medical claims in real time.
Murphy’s budget also counts on the state rebidding its health care contracts to third-party administrators, likely Horizon Blue Cross and Blue Shield of New Jersey, Aetna and Optum.
These plans were among the recommendations laid out by the Plan Design Committees, which oversee the state and school employee health plans.
“In total, our budget contains roughly $800 million in real and lasting savings in the delivery of public employee health care in the coming fiscal year — a 16 percent year-over-year decrease from the current budget,” Murphy said.
The budget projects $16.7 billion in revenue from the gross income tax, $10.5 billion from the sales tax and $3.2 billion from the corporate business tax. All told, the spending blueprint would produce a yearend surplus of $1.16 billion.
New Jersey is expected to end the current fiscal year with a $1 billion surplus, even though the government missed its revenue targets. The state lowered its estimates for income tax collections by $415 million to $15.6 billion and sales tax revenue by $79 million to $10 billion.
“This budget will grow our surplus even more in Fiscal 2020, to nearly $1.2 billion,” Murphy said. “One-shot revenues are down to only 1.7 percent, a decrease of one-third over the current budget, and half the average yearly amount across the prior administration.”
The state’s real GDP grew 3.3 percent in the third quarter of 2018, and the economy expanded by two percent, year-over-year in the first three quarters of 2018, according to budget data.
“We are building a stronger fiscal house for New Jersey,” Murphy said. “We are replacing gimmicks with stability.”
The state treasury reported in February that revenue growth was at three percent, rather than the 7.5 percent lawmakers and Murphy agreed on last year.
State Treasurer Elizabeth Maher Muoio attributed the slow growth to the timeline during which people filed their taxes in response to the 2017 federal tax cuts. The number will “correct” itself in April, Muoio said.
Critics see trouble ahead
But Regina Egea, president of the right-leaning think tank Garden State Initiative, said the loss of income tax revenue could be a sign that New Jersey has forced out many residents because of its high cost of living and tax rates.
“Taxpayers are mobile. Shouldering an ever-larger tax burden, our neighbors have been fleeing our state and taking tax revenue with them,” Egea said in a March 5 statement.
Michele Siekerka, president and CEO of the New Jersey Business and Industry Association said the state’s spending increases year-over-year could undo any economic progress.
Gov. Phil Murphy in Trenton on March 5 to deliver his 2020 budget address.
“With a reform agenda that comprehensively addresses underfunded pensions and right-sizing health benefit costs, and allows for no new taxes, New Jersey can begin to escape from the obstacles holding our great state back,” Siekerka said in a statement.
“It is only through fiscal discipline that we can give New Jersey what it needs most at this crucial hour — a strategy that makes our obligations more affordable and an increase in opportunities to grow our economy through sound investment,” she added.
Sen. Steve Oroho, R-24th District, a member of the Senate Budget and Appropriations Committee and one of the chairs of Sweeney’s Economic and Fiscal Policy Workgroup, said the plan still lacks adequate “structural reform” to the state’s spending.
“The announced health care savings are a positive step,” Oroho said at a Tuesday press conference after the governor’s budget address.
“I’m concerned that the governor still hasn’t addressed the critical need to enact reforms that have been proposed on a bipartisan basis to sustainably rein in the costs of providing pension and health care benefits over time,” he added.
The Fiscal Policy Workgroup was tasked with finding ways to reduce property taxes and the state’s public worker pension and health care obligations. The panel has called for merging school districts and municipal services.
Two of the groups’ proposals would scale back pension obligations for state workers with less than five years of experience. In one iteration, such workers would continue in a defined benefit plan for the first $40,000 of their yearly income and establish a 401k-style retirement plan for higher amounts. The second would move those employees completely into a 401k-style plan.
The group also recommended 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.
“While I will give the governor credit for exercising some caution by not bloating the budget further with excessive new spending, I think he missed the mark by not fully embracing true structural reforms to government,” Oroho said.
Murphy said he is confident the state could end a string of 11 credit downgrades because of the savings his budget will generate.
Sweeney, though, argued doing so will require addressing the roughly $100 billion unfunded liability to the state’s public worker pension system.
Murphy’s 2020 budget calls for a record-high $3.8 billion payment into the state pension system, which would still be only 70 percent of what is recommended for the state. Under the budget, the state will begin making 100 percent of the recommended payments by fiscal year 2023 fiscal year.
On the bright side
The budget drew the praise of the policy think tank New Jersey Policy Perspective, which in a statement said that the spending plan “sets a foundation for shared prosperity and fiscal health.”
NJPP Senior Policy Analyst Sheila Reynertson added: “It pairs significant cost savings with continued investments in critical programs and services, while also committing to a healthy surplus that will safeguard the state from future economic downturns or natural disasters. This is a fiscally sound vision that invests in New Jersey’s greatest assets, while lifting up the most vulnerable families in the state.”
Indeed, Murphy in his budget address decried what he said was a habit of past governors raiding the budget surplus.
“With our surplus, we must remain vigilant to safeguard these funds, and not to view them as just extra cash laying around to be raided for any number of programs or projects, no matter how well-intentioned,” Murphy said.
Targeting millionaires again
Murphy’s most controversial proposal remains the “millionaire’s tax,” which is projected to pump $447 million into the state’s coffers.
Gov. Phil Murphy delivering his budget address.
The scheme calls for higher taxes on 18,066 New Jersey residents and another 19,057 non-residents; that is, people who work here but live outside the state.
“While our middle class is trying to figure out where their tax relief went, those at the very top are shouldering less and less of their fair share of the tax burden. That’s the opposite of tax fairness,” Murphy said. “Let’s work together to apply the millionaire’s tax to every millionaire.”
The governor tried unsuccessfully to implement the tax on earnings over $1 million last year after facing pushback from Sweeney. Ultimately, Murphy managed to enact a “multi-millionaire’s tax” on earnings above $5 million. Fewer taxpayers are included in that group — roughly 1,581 residents and 5,085 non-residents.
Sweeney and Coughlin both oppose the tax on the grounds that the half-billion dollars of revenue is small enough that the Murphy administration could find that amount through additional savings and spending cuts.
“What the governor and the Communication Workers of America have demonstrated to us is that there are a lot of savings, a lot more savings to be had,” Sweeney said after the budget address.
Sweeney voted for the millionaire’s tax several times under former-Gov. Chris Christie, but said that many workers who would pay the new rates likely would also be hit by the $10,000 federal cap on the deduction for state and local taxes, given that many residents pay at least twice that amount in yearly property taxes.
“That was the game-changer, when you can’t write off your taxes anymore. It changed the game,” Sweeney said.
Many business advocates also oppose the millionaire’s tax, including New Jersey Chamber of Commerce President Tom Bracken.
“The millionaire’s tax is going to enhance our problem of affordability, non-competitiveness, out-migration and it’s going to prevent some of the programs that the governor’s proposing from ever happening, because jobs are going to leave, wealth is going to leave and revenue is going to leave,” Bracken said.
“We can’t continue to ask New Jersey residents and job-creators to pay more money. We’re already the highest-taxed state in the nation,” NJBIA’s Siekerka said. Many of those residents will simply leave New Jersey for lower-tax states, she suggested.
But many progressive organizations, such as New Jersey Working Families and NJPP, said they see the millionaire’s tax as a positive step toward leveling the playing field for the state’s lower-and-middle-income families.
“Tax cuts for wealthy heirs and heiresses, yacht owners, and big corporations have dinged New Jersey’s credit ratings, made a mess of its finances, and kept us from making smart investments to move this state forward,” NJ Working Families Interim Director Rob Duffy said in a statement. “Voters know that our tax system is rigged against them and for the rich, which is why they overwhelmingly support raising taxes on the wealthy and well-connected.”
“Given the state’s growing income inequality, racial disparities, and lopsided tax code, asking New Jersey’s wealthiest individuals to pay a little bit more is the definition of fairness,” Reynertson said. “This overdo change in the tax code will impact less than one percent of tax filers, many of whom just received a generous tax break from changes to the federal tax code.”
Despite the disagreements, Sweeney downplayed the prospect of another government shutdown. Lawmakers have to pass a budget to keep the government open past July 1, otherwise Murphy would have to declare a state of emergency and close all state departments until a deal is reached.
“There’s no desire to go through a shutdown,” Sweeney said. “The governor’s budget is a better start this year than it was last year.”
Corporate tax changes
In a move pushed through by Sweeney, the state will increase the corporate business tax rate by 2.5 percent for two years and then 1.5 percent for another two years. The increase makes New Jersey’s CBT rate the second-highest in the country.
Under the administration’s projections for the remainder of the current fiscal year, the state will generate $3.7 billion from the CBT — up $662 million from the $3.05 billion lawmakers agreed upon when Murphy signed the budget last July.
“It was the right tax to go after,” Sweeney said, given that the increased CBT performed better than expected this past year.
However, the 2020 budget projects a $491 million decline in revenue to $3.2 billion.
Muoio said the falloff is a product of past increases from “one-shot” revenue sources. Those included $200 million from a repatriation fee, the one-time tax on funds companies brought back into New Jersey after the 2017 federal tax cuts.
Other one-time sources for CBT revenue included $81.8 million from the tax amnesty program, which allowed taxpayers who did not pay taxes owed between 2009 and 2017 a two-month window to pay them back with reduced interest and no penalties.
The amnesty brought in a total of $282 million, including $104.4 million from the sales and use tax, $67.7 million from the gross income tax, $15.5 million from the estate tax and $9.9 million from the petroleum products gross receipts tax along with the revenue from the CBT.
Can NJ do cannabis?
Although lawmakers still have not reached a final agreement on legalizing adult-use marijuana, the proposed budget calls for $60 million in tax revenue on legal weed for half the year.
If legalized adult use cannabis and the necessary bureaucracy is in place on Jan. 1, 2020, the budget projects $39 million in net revenue over the course of six months.
Initial administrative costs would total $21 million but fall over time to roughly $12 million a year.
New Jersey CannaBusiness Association President Scott Rudder said that $60 million in projected revenue for six months of 2020 was a “positive sign” and a “good baseline.”
“We have an agreement in place in principle with regard to how the legislation should look, [and] they’re putting money in the budget with an expectation [for] a start in the new year,” Rudder said. “These two things provides assurance that we’re finally going to end cannabis prohibition in New Jersey and expand our medical program.”
Murphy campaigned on legalizing marijuana within his first 100 days of office, but his efforts stalled in the state Legislature.
A proposed deal struck in February calls for cannabis to be taxed at $42 an ounce and for a five-person Cannabis Regulatory Commission to oversee the fledgling market. Murphy would be able to pick three members subject to Senate confirmation.
The $60 million gross revenue estimate is based on the per-ounce-tax.
“Most importantly, this is the right step for eliminating decades-old and persistent racial and social inequities,” Murphy said. “But it is also our chance to create an entirely new state-based industry with the potential to create thousands of good-paying jobs, expand opportunities for minority business owners, and jumpstart billions of dollars in new economic activity.”
But Rudder notes that uncertainties remain, such as the amount of money licensing fees would bring in and the actual timeline of Trenton negotiations over a cannabis-legalization bill.
“Anything could change a little bit, but I do think when we have a fully realized new market, we’ll have tens of thousands of new jobs and billions of dollars in sales,” Rudder said. “Hopefully the revenue collected would be even greater because that means that the industry is getting up and running at a quick pace. This is something that’ll help drive the economic engine in New Jersey.”
New tax breaks
The governor’s budget calls for setting aside $400 million toward a series of five new economic incentive programs aimed at replacing the Christie-era Grow New Jersey tax breaks and the Economic Redevelopment and Growth gap financing program, both of which end in July.
Murphy’s proposal comes on the heels of an oft-cited January audit by the state comptroller detailing how the Economic Development Authority — which administers the credits — exercised little oversight of $11 billion of tax breaks it awarded between 2005 and 2017, making it hard for state officials to determine if tax credit recipients actually delivered on promised economic activity.
“We can provide strategic incentives without hurting our ability to reinvest in the things that bolster our economy and help our businesses,” Murphy said. “Tax incentives, transparent and accountable, smartly devised and strategically deployed, have a vital role to play in a focused economic growth plan.”
NJ Forward, which would replace Grow NJ, would be capped at $200 million per year. NJ Aspire, which would replace ERG, would be capped at $100 million.
An expanded Brownfields Redevelopment program – aimed at financing the recovery of contaminated urban sites – and a historic preservation tax credit program would each be capped at $20 million a year.
Finally, the governor unveiled a $500 million “Innovation Evergreen Fund,” capped at $60 million a year, under which the state would split investments 50/50 with venture capitalists to fund life sciences, financial technology, digital media and cybersecurity startups.
New Jersey will have to begin spending $1 billion annually starting this July to finance the tax breaks, according to budget data.
“The potential impact of past corporate tax breaks on corporate business tax collection, in the coming fiscal year, surpasses $1 billion. And, it will remain over $1 billion annually for at least the next three fiscal years,” Murphy said.
“The simple fact is that we are currently obligated — I repeat, obligated — to corporate tax breaks totaling $11 billion through at least Fiscal Year 2031,” he added.
Sweeney has been critical of the audit, noting that three of the programs named are not accepting applications and essentially no longer exist. He also said the $11 billion figure Murphy cites as money the state lost is misleading, because only about $1 billion of the tax credits have actually been distributed.
The tax breaks run for 10 to 20 years and are awarded in yearly increments only if the companies meet agreed-upon goals for job creation or retention, or economic activity generation.
Penalizing businesses that do not offer health plans
The state is projecting $30 million from a proposed “corporate responsibility fee” imposed on businesses with more than 50 workers that do not offer medical benefits. Employers of that size would have to pay $150 for each worker enrolled in Medicaid.
Roughly one million New Jersey residents receive Medicaid benefits. The law would target 956 employers.
Proponents argue the measure will entice businesses to offer health care coverage to their workers.
“We will do more to alleviate the costs pushed onto our Medicaid system by large employers who leave workers to rely on Medicaid, instead of offering a health care plan,” Murphy said. “They should share in the burden of paying for their employees’ care, rather than leaving it to the rest of us,” Murphy said.
Business groups said they were uncertain about the impact of the proposed fee and would need to study it in greater detail, but were generally opposed to any new mandates, taxes or fees for businesses.
“A fee is a fee, a tax is a tax, it’s money out of someone’s pocket,” Bracken said.
Boosted investments
NJ Transit would get an additional $25 million under the proposed budget, bringing its total allocation to $407 million this year.
State officials said that the statewide transit agency would not have to raise any fares next year if the Legislature approves Murphy’s proposed budget.
“If it kills me, we’ll rebuild NJ Transit,” Murphy said. “There is no higher priority than fixing NJ Transit.”
Peter Kasabach, executive director of the policy development nonprofit New Jersey Future, said Murphy’s proposed infrastructure investment still falls short of what New Jersey would need.
“Reliable public transportation is vital to the success of our cities and to meet the increasing demand for housing near transit, but this is not the only type of infrastructure in need of investment,” Kasabach said in a statement. “Our water infrastructure is in desperate need of repair and we hope to see funding for this in the next budget.”
The budget also calls for boosting the state’s tuition aid grants, part of the governor’s signature tuition-free community college program. Enrollment will expand from 13 to 19 county colleges and from 13,000 students to 18,000.
“We commend Murphy for centering his speech on the state’s role in providing opportunities to help New Jersey families thrive in a variety of ways, including increased funding for affordable homes, expanding free community college, covering birth support for black mothers, and increasing the Earned Income Tax Credit,” Reynertson said.
