Murphy budget proposal sets up New Jersey fight on taxes and spending

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New Jersey Gov. Phil Murphy’s second proposed budget sets up another showdown with lawmakers over taxes and spending.

Murphy pitched a $38.6 billion fiscal year 2020 spending plan in his budget address Tuesday that relies on tax increases to produce revenue to fund his program initiatives. The Democratic governor’s budget proposal hinges largely on resurrecting a campaign promise to enact a millionaire’s tax that is opposed by Senate President Steve Sweeney, D-Gloucester.

“Let’s work together to apply the millionaire’s tax to every millionaire,” said Murphy in his budget address that focused largely on improving the lives of middle-class workers. “This is not a tax that will be paid by anyone in the middle class…but, it is revenue that is necessary to strengthen and expand the middle class.”

The Murphy administration estimates that the millionaire’s tax would generate around $500 million of new revenue for the cash-strapped state, which has been plagued in recent years by structurally unbalanced budgets and severely underfunded pensions. The governor and Senate leader clashed last year over the millionaire’s tax before crafting a compromise right before the July 1 budget deadline that instead hiked taxes on those earning more than $5 million of income, which projects to raise $280 million annually.

“Both Governor Murphy and Senate President Sweeney have staked out positions that are going to cause a battle,” said Seton Hall University political science professor Matt Hale. “Neither one has an incentive to give up their positions because both believe they are right.”

Murphy’s millionaire’s tax faces other political hurdles beyond Sweeney, including in the state Assembly, where all members face re-election this November. Hale noted that many lawmakers are reluctant to raise taxes on high-income earners already negatively affected by federal tax changes that cap deductions for state and local taxes at $10,000.

The governor also proposed more than $1.1 billion in spending cuts achieved through collaboration with state departments and public workers. He said the “real and sustainable savings” include nearly $800 million in reduced spending on health care for public workers and slashing state operating costs by more than $200 million.

“We are building a stronger fiscal house for New Jersey,” said Murphy, who noted that the surplus is for 2019 is projected to grow by one-third over what was estimated to above $1 billion. “We are replacing gimmicks with stability.”

The $37.4 billion budget enacted last June raised over $1 million of new state revenues driven mainly through the over $5 million gross income tax increase and a 2.5% surcharge for corporations with incomes above $1 million. Murphy relied on 7.5% revenue growth to support the fiscal plan, but the state is at risk of running a shortfall as tax collections lag heading into the home stretch of the fiscal year. The Garden State’s yearly tax growth was at 3% as of Feb. 1, putting the state at $740 million behind with five months left, according to a Feb. 25 report by S&P Global Ratings.

“Slow revenue growth in fiscal 2019 indicates there might not be much new revenue to appropriate in fiscal 2020, and budgeting could become even more difficult if an end-of-year shortfall developed in fiscal 2019,” wrote S&P credit analyst David Hitchcock in his report. “While state monthly revenue reports typically show large month-to-month volatility, continued revenue growth below current fiscal 2019 budget targets could point to longer economic and revenue pressure.”

New Jersey’s slowing tax growth poses a potential challenge to Murphy’s plan to contribute $3.8 billion toward pensions, which would mark a 10% increase and put the state at 70% of the actuarially determined contribution (ADC) in fiscal 2020 from a budgeted 60% in fiscal 2019. The state remains on pace to be at a full ADC funding level in 2023, but the pension system faces a deep burden with only a 36% funded ratio, according to S&P.

“We cannot look for quick outs or easy fixes, because they simply don’t exist,” said Murphy. “It took us years to get to this point, and it will take years of good-faith efforts — efforts that must include our public employees, our educators, and our first responders — to successfully get past it.”

Growing pension liabilities drove 11 bond rating downgrades for New Jersey between 2011 and 2017. The Garden State’s general obligation bonds are rated A-minus by S&P, A3 by Moody’s Investors Service and A by Fitch Ratings and Kroll Bond Rating Agency. Murphy said Tuesday that “stabilizing New Jersey’s creditworthiness through responsible fiscal stewardship” was among the goals he is seeking from the budget proposal.

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State budgets Income taxes Phil Murphy State of New Jersey New Jersey