Budget busting: Report outlines fiscal cliff ahead for state — and how to avoid it

You might not expect it from a report from Garden State Initiative, but some of the conclusions its paper reached regarding the state budget are somewhat favorable toward Gov. Phil Murphy’s administration.

The report, “New Jersey’s Fiscal Cliff Explained,” credits the Murphy administration for holding the line on taxes since the pandemic (even lowering some tax rates) and making the required pension contributions. It also notes that the administration did not explicitly use the temporary federal pandemic relief funds to finance ongoing and permanent programs — and mentioned how doing that facilitated the state’s ability to make its pension payments, thereby freeing up state funds.

All of this led to an $8.3 billion surplus in the Fiscal Year 2024 budget that was signed last summer.

But, as the governor readies for his budget address next week, the GSI report said the state must pivot in a new direction. Gone are the years of remarkable increases (the budget has jumped from $35 billion in Gov. Chris Christie’s final year to $54.5 billion now).

And the federal subsidies that have helped the state so much are no longer there. Recent revenue totals are below expectations, too. It appears a fiscal cliff awaits, the report said.

“Put plainly, New Jersey was able to increase its own recurring spending in the last several years because it was generously subsidized by the federal government,” the report said. “But, with federal funds expiring, the state has much to do to right its fiscal boat.”

The question is how.

There is talk of reinstating the Corporate Business Tax surcharge or raising the state sales tax — or a combination of taxes. All of which figure to be too much to bear.

The report notes that the corporation income tax has increased 92% in real terms in the past several years. In Fiscal Year 2018, the CBT raised $2.4 billion.

It’s not much better for individuals, as families making $250,000 or more now pay two-thirds of the income tax revenue.

“New Jersey now must decide to either significantly reduce spending, or significantly increase tax rates to replace the surplus federal funds presently being consumed,” the report said.

The report, prepared by Thad Calabrese, a professor of public and nonprofit financial management at the Robert F. Wagner Graduate School of Public Service at New York University, offers six general steps the state must take moving forward.

1. Address tax burden: New Jersey is already a highly taxed state that is dependent upon a few taxpayers for its revenues. In 2011, those making over $250,000 paid over 50% of the Gross Income Tax liability; in 2020, this group paid nearly 2/3 of the tax. This trend increases the risk to New Jersey that a small number of taxpayers moving out of state has an outsized effect on future budgets.
2. Lower corporate taxes: New Jersey should pursue lowering tax rates that make the state more competitive with states that are attracting businesses and residents. The state has experienced losses in construction and information while it gained jobs in education, health, leisure and hospitality. The industries reporting losses tend to pay well and those that have gained tend to have significant numbers of low-wage jobs. While the nation has experienced sustained job and wage growth, New Jersey’s labor market appears less robust by comparison. In the last decade, New Jersey has gone from an anemic less-than-1% growth in population annually to negative growth in 2022, all while state spending has increased nearly one-third during the same time period.
3. Reform pension system: New Jersey needs to reform its pension systems and retiree health insurance system. The consumption of nearly 20% of total state revenues generated for this one purpose of public employee benefits is not sustainable. The state’s pension and retiree health care obligations are significantly higher than other comparable states.
4. Address affordability issue: New Jersey needs to reduce the cost of energy, infrastructure and construction to address underlying drivers of our “unaffordability” for residents. Since 2012, New Jersey’s state population has grown less than 3.7% in total, which is only a 0.3% average growth rate per year. By way of contrast, during this same period, the overall U.S. population grew by nearly 6.2%, for about a 0.6% average annual growth rate, or double New Jersey’s growth rate.
5. Focus on vital services: New Jersey should focus state spending on vital public services and reallocate any remaining funds that measurably increase the state’s attractiveness. For example, on education, on an inflation-adjusted basis, per pupil spending has increased nearly 17% during a decade of declining enrollment.
6. Reduce reliance on one-shot revenues: New Jersey needs to continue to reduce its budgetary reliance on one-shot revenues and rolling surpluses, and work towards real structural budget stability — where annual spending is covered completely by annual revenues. These actions will better align New Jersey with other states that are experiencing strong growth, reduce the state’s high debt burden and make New Jersey’s public services fiscally sustainable. Such actions should decelerate the outmigration of businesses and individuals and improve the economic conditions of the state.

GSI President Regina Egea, who has long preached financial restraint, said the state must follow the lead of others.

“While states like Pennsylvania and North Carolina — both with Democratic governors and Republican legislatures — continue to make their states more hospitable to families, seniors and business owners, New Jersey is going in the opposite direction,” she said. “New Jersey’s Corporation Business Tax, as well as major taxes on their employees, have grown exponentially, making it more expensive to operate and undoubtedly discourages the creation of new jobs.”

Egea wants to spare families, too.

“For residents, our state’s gross overreliance on families making $250,000 or more — which can be a police officer married to a public-school teacher in this state — has become untenable,” she said. “In 2011, these middle-class and above households contributed half of the state’s total Gross Income Tax revenue; today, these same families make up two-thirds of that revenue. In short, that accelerating reliance on these same families is not sustainable.”

Egea said it’s time to face a new fiscal reality.

“Federal money essentially propped up this excessive state spending for the past several years, and now we’re on the brink of a cliff,” she said. “Policy choices about reining in spending, versus going over the cliff by raising taxes, are squarely in front of us.”