Treasurer reports $1B drop in state tax collections during key NJ budget hearing

New Jersey State Treasurer Elizabeth Maher Muoio told the Assembly Budget Committee during a May 17 hearing in Trenton that the all-important April tax collections dropped significantly from the unprecedented surge seen over the last few budget cycles, leading to a lowering of revenue projections.

“When I last came here before you six weeks ago, I remarked about how welcome a return to some revenue stability would be. After three years of turmoil, when we experienced precipitous drops in revenue followed by extraordinary growth, it appeared that revenues were beginning to settle back into more stable pre-pandemic growth levels,” the treasurer said during the opening of her testimony. “As always, the all-important April revenues inevitably lead to adjustments to these forecasts when we appear before you in May.

“In 2021 and 2022 those adjustments resulted in increases in our revenue forecasts,” she continued. “Unfortunately, while we expected a decline in April revenues this year when compared to 2022, the returns of April 2023 are necessitating the need to adjust our revenue forecasts downward.”

The Treasury Department is lowering its Fiscal Year 2023 revenue forecast to $52.8 billion, which is $1.2 billion lower than February’s initial projection. It is also lowering the FY 2024 revenue forecast to $52.8 billion, a $1 billion drop from the February number.

“The majority of the decline experienced was seen in the Gross Income Tax, GIT. While we had anticipated a 12% drop in April GIT collections following last year’s record receipts, certain taxpayers realized income losses far exceeding expectations,” Muoio explained. “April GIT collections declined by 27%. The main source of this drop lies with the annual 1040 return payments for Tax Year 2022, which were down 36%, or about $900 million below expectations.”

Earlier this week, April revenue figures reported by the Treasury Department revealed that total major taxes declined by $1.17 billion, or 14.3% from last April, while fiscal year-to-date collections were reported at $37.1 billion—$423.7 million, or 1.1% lower, than the same period last year.

Those figures included the significant fall in GIT, which is down $1.4 billion, or 27.4%, from last April. Muoio noted that that dip was driven by the turbulence in the stock market.

“Preliminary 2022 tax return data suggests that net gains are the primary culprit for the GIT’s underperformance and may have fallen by at least 55%,” the treasurer explained. “Stock markets were down in 2022, with the S&P 500 index declining by nearly 20% and the Nasdaq Composite falling close to 35%. Historically, stock declines have foreshadowed a down year for net gains, and this contributed to the year-over-year declines in April final payments forecast in the GBM [Governor’s Budget Message].”

The treasurer added that New Jersey was not alone in these April declines, citing neighboring states and even the federal government reporting drops.

Other key points of the revised forecast from Treasury include:

• GIT forecasts reduced by $1.1 billion in FY 2023 and by $1.2 billion in FY 2024
• Sales Tax forecasts are increased by $94 million in FY 2023 and by $148 million in FY 2024
• CBT forecasts are decreased by $237 million in FY 2023 and by $74 million in FY 2024
• Sales Tax forecasts on energy-related revenues are increased by $110 million in FY 2023 and by $137 million in FY 2024

‘Today we face no crisis’

“Thanks to judicious fiscal planning, the state is in unprecedented shape to handle April’s momentary revenue weakness,” said Muoio. “In the past, billion-dollar revenue surprises precipitated emergency budgetary actions – sudden spending cuts, tax increases, and gimmicky fiscal maneuvers. But today we face no crisis. Even with the lower forecasts we are presenting today, we remain at record high revenue levels, and the state’s surplus of $7.9 billion equals 15% of appropriations.”

Her testimony followed an appearance earlier in the day by members of the Office of Legislative Services (OLS), which also slashed its original forecasts.

“The last few years, I have been fond of describing the state’s revenue and budgetary picture as ‘unprecedented’ and ‘extraordinary,’” said Thomas Koenig, OLS budget and finance officer. “I applied these terms to revenue and fund balance projections that seemingly increased by billions every time we came before you. I’m still using the terms ‘unprecedented’ and ‘extraordinary’ today. But this time not in reference to billions in unanticipated revenue. Instead, I’m using them in reference to a revised forecast that’s about $2 billion less over the two-year period than when we last appeared before you.”

OLS says it is preliminarily lowering its FY 2023 revenue forecast by $1.27 billion and its FY 2024 forecast by $705 million, for a combined reduction of $1.97 billion.

“And yet, this is not the cataclysmic event it would have been 10 or 20 years ago,” said Koenig. “The projected two-year, $1.97 billion decline of our March estimates does not have to prompt corrective budget actions in either Fiscal ’23 or Fiscal ’24. The first reason is that our $1.3 billion downward revision for Fiscal ’23 is only relative to our forecast from March, when we estimated revenues exceeding the amount certified in the FY 23 Appropriations Act by $3.3 billion.”

For the second reason that no corrective budget actions are needed, Koenig echoed the treasurer by pointing to the state’s massive surplus.

“And that now serves its purpose as a cushion against revenue volatility,” said Koenig.

Of course, all of these developments come amid the backdrop of more economic uncertainty, banking turbulence, continued effects coming out of the pandemic, a debt ceiling showdown, and more.

There is also the continuing conversation on the sunset of the corporate business tax (CBT) surcharge, on which NJBIZ has extensively reported.

The governor and lawmakers have expressed their agreement and support in letting the 2.5% surcharge sunset at the end of 2023, to the delight of the state business community, and to the chagrin of advocacy groups who say the lost revenue will result in the slashing of vital programs and services. Jersey City Mayor and 2025 gubernatorial candidate Steven Fulop waded into the fight this week, saying it would be a mistake for his fellow Democrats in Trenton to let the CBT sunset, and suggesting using it as a funding source NJ Transit.

Critics of letting the CBT surcharge sunset will likely point to these final revenue forecasts as more ammunition for their argument.

The revised revenue projections set the stage for the home stretch of the budget process, with Treasury and OLS set testify next week before the Senate Budget Committee as well, as hearings wrap up and negotiations between lawmakers and the administration intensify before the June 30 deadline to agree to a spending plan for FY 2024.

“It is important to note, however, that because of the work that has been done to improve New Jersey’s financial condition and prepare the state budget for fiscal challenges, the downward revenue adjustments are manageable and represent approximately two percent of our total revenues for two fiscal years,” the treasurer stressed. “We are well-prepared to handle this April surprise.”