A New Jersey budget agreement forged just in time to avert a government shutdown sets the state up for future financial challenges, according to credit analysts.
Gov. Phil Murphy was unsuccessful with his bid to increase the sales tax back to its previous 7% level and impose a new millionaire’s tax he campaigned on last year. The compromise $37.4 billion spending plan that Gov. Phil Murphy signed late Sunday increases taxes on income over $5 million and imposes a four-year surcharge for corporations.
“It is no secret that New Jersey faces real challenges,” said Murphy during a press conference announcing the budget deal Saturday night. “They weren’t created overnight and they won’t be solved overnight, but this is a strong first step.”
The state is increasing the income tax for those at levels of $5 million or above to 10.75% from 8.97%, a move Murphy said will raise roughly $280 million in new annual revenues. Corporations will pay a 2.5% tax surcharge for the current 2019 fiscal year, providing about $425 million. The surcharge will stay at 2.5% in year two and then go to 1.5% for the third and fourth year, before expiring in 2023.
Municipal Markets Analytics analyst Lisa Washburn said the budget plan should reduce the risk of any short-term negative credit rating action from Wall Street. She stressed however that the budget contains too many one-shot revenue sources and that state will have a harder time achieving tax increases next year when assembly members face re-election.
“Every increased revenue source is helpful, but they didn’t do anything to address the escalating expenditures,” said Washburn. “It’s likely to lead to a continued cycle of increased taxes and unbalanced budgets.”
Washburn said the state missed an opportunity to bring the sales tax back to its previous 7% level after it was cut to 6.625% by former Gov. Chris Christie in 2016 as part of a compromise to raise the gas tax by 23 cents a gallon for a replenished Transportation Trust Fund. She said that efforts also could have been made to expand uses of the sales tax to such items as clothing to bring additional needed monies into the Garden State.
“They could ill afford to cut the sales tax,” said Washburn. “I thought that would have been a no-brainer, but I don’t think anyone wants to go into an election cycle having raised taxes.”
The budget includes a $3.2 billion pension payment, which will raise annual contributions to 60% of New Jersey's actuarially determined contribution from 50%. A heavy unfunded pension burden triggered 11 credit rating downgrades under Christie to the lowest mark of U.S. states with the exception of Illinois. The state has debt ratings of A-minus from S&P Global Ratings, A3 from Moody’s Investors Service and A from Fitch Ratings and Kroll Bond Rating Agency.
Marc Pfeiffer, assistant director of Rutgers University’s Bloustein Local Government Research Center, said the budget buys New Jersey time to combat some of its looming challenges such as rising pension liabilities, employee benefits and creating more revenue sources for New Jersey Transit. He said the expensive cost of government and many competing interests throughout the state will make major challenges very difficult politically.
“We got through this budget cycle, but we can’t take our eye off the fiscal challenges ahead,” said Pfeiffer. “These issues aren’t going away.”