New Jersey's recently announced plan to fund transportation infrastructure projects through a rise in the gasoline tax exacerbates long-term challenges to the state's operations by swapping cuts to growing tax revenue sources with an increase in motor fuel taxes -- a revenue source with limited growth prospects, Fitch Ratings says.
New Jersey's gas tax will be hiked by 23 cents per gallon on Nov. 1 to replenish the state's Transportation Trust Fund (TTF), which funds road and rail projects.
After the gas tax hike, Fitch estimates that the annual revenue available to TTF to be spent on transportation projects will rise to $1.7 billion, after factoring in sales tax and other revenues that revert to the operating funds under this deal. Over the eight-year term of the funding, the reauthorization provides $14 billion in revenue to the TTF.
This funding level will be sufficient to address currently identified projects, such as road maintenance and critical investments in safety infrastructure in the rail network. However, delays (such as identifying a revenue source for New Jersey's share of the renovation costs for the rail line between Newark, NJ and New York City) due to political discord will likely continue to inject uncertainty and risk into New Jersey's infrastructure projects.
The funding plan includes a reduction in the sales tax to 6.625% by 2018, a phase-out of the state's estate tax and an increase in the earned income tax credit. The gas tax increase nets $940.3 million per year of additional revenue to the TTF over the eight-year reauthorization while the other tax revenue changes cause annual operating funds revenue loss. Operating fund revenue loss begins in fiscal 2018 at approximately $385 million and balloons to approximately $1.15 billion in fiscal 2022. Over the eight years, Fitch estimates $8.4 billion in total operating fund revenue loss.
The transportation funding plan also pulls down the state's overall net revenues beginning in fiscal 2020 as the tax-swap cuts sales and estate tax revenues, which grow over time with the economy, and increases the earned income tax credit, in exchange for a per-gallon gas tax that is expected to be a flat to declining revenue source. On a total combined basis, the state's revenues will fall by approximately $63 million in fiscal 2020, and by $214.4 million in fiscal 2022, with revenue losses growing over the eight-year authorization.
Combined with unaddressed liabilities from New Jersey's poorly funded pensions and other capital pressures, this deal will put additional pressure on the state's operations beginning in fiscal 2020. New Jersey has yet to address its sizable and increasing pension and other post-employment benefits expenditures that are likely escalate absent future revenue growth. The state's liability burden is 16.5% of personal income -- almost 3x the state median. Fitch rates New Jersey 'A' with a Stable Rating Outlook.
