New Jersey’s recent tax deal will cause a net loss for the state general fund for fiscal 2018 and beyond, said S&P Global Ratings analyst David Hitchcock.

New Jersey's 23-cent gas tax hike, and its offsetting tax cuts in other areas, will help the state's current 2017 operating budget at the expense of raising budgetary pressure for 2018 and beyond, according to S&P Global Ratings.

In addition to raising the state's gas tax to 37 cents a gallon to raise roughly $1.2 billion a year for the state's Transportation Trust Fund, the legislation also cuts the state sales tax to 6.625% from 7% and phases out the estate tax over the next 15 months. State officials estimate a net gain of $120 million to the general fund in 2017, or 0.3% of budgeted operating funds' expenditures, and a net loss in 2018 of $400 million, according to an Oct. 17 S&P report. However, the state forecasts the annual net general fund loss will rise to $1.4 billion by 2024.

"Overall, we believe the tax agreement will have a minor immediate effect on the state budget, at least through fiscal 2019, when offsetting general fund net losses could potentially rise to slightly less than 1% of state operating funds expenditures," said S&P analyst David G Hitchcock in the report. "As offsetting cuts in the state sales tax rate, estate tax, veteran's exclusion, pension earnings exemptions, and earned income tax credits phase in under the new legislation, the state general fund will have a net loss that will need to be addressed in fiscal 2018 budget negotiations and beyond."

Hitchcock noted that S&P's New Jersey general obligation rating of A with a negative outlook "reflects the state's pattern of favoring near-term budget relief at the expense of increased costs later on" and this new legislation underscores that philosophy. He said the state's underfunded annual pension contributions pose more of a long-term fiscal threat, but that the loss of annual general fund revenue from the bill will "grow over time" and add to its financial pressure.

For the current fiscal year that runs until June 30, 2017, New Jersey's general fund will gain from the legislation because of increased fuel rates that allow the state to reduce its transfer to the transportation trust fund by $350 million, according to Hitchcock. However, as the offsetting tax cuts take effect, the general fund will incur a net loss that needs to be addressed in fiscal 2018 budget discussions and beyond, he said.

The Garden State also faces budget challenges from potential slow revenue growth with state collections up 0.9% through September 2016 compared to the year-ago period. The state made full-year growth assumptions of 3.6% and indicated it is in line with budget projections due to an extra payroll period last year.

"Although we believe full-year revenue cannot be reliably predicated this early in the fiscal year, particularly with the important April income tax collection period yet to come, the state will need to meet its economic growth targets to avoid a deficit," said Hitchcock. "New Jersey is currently budgeting for a slim, but positive general fund balance in fiscal 2017, but the prospect for substantial fixed-cost growth in future years remains a significant driver of our current state bond rating."

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