New Jersey revenue lag pinned to Trump tax reform
New Jersey is on pace for a revenue shortfall driven largely by the effects of federal tax law changes, according to Gov. Phil Murphy’s administration.
The Garden State’s tax collection growth from major revenue sources is at 3% seven months into the 2019 fiscal year, a Department of Treasury report said last week. The Murphy administration had forecast a 7.5% increase in 2019.
New Jersey's largest revenue source, the gross income tax, has played a major factor in the state's lagging numbers. The state’s income tax collections are down around $500 million, or 6%, compared to a 5.4% increase that was forecasted.
The Treasury Department attributed a two-month dip in income tax collections primarily to “a shift in tax planning behavior” caused by the federal Tax Cut and Jobs Act, passed by Republicans and signed by President Trump in December 2017. High-income taxpayers historically had incentive to accelerate yearly tax payments in December in order to take advantage of an unlimited federal state and local tax deduction. The motivation to accelerate early tax payments has “evaporated” with the SALT deduction now capped at $10,000 and many taxpayers may now be waiting until closer to the April filing deadline, according to the report.
“Gross Income Tax collections fell short of targets for the past two months, after tracking expectations for the first five months of the fiscal year,” said Department of Treasury spokeswoman Jennifer Sciortino. “We are taking a measured approach and intend to wait until after the April income tax filing deadline before we make any definitive conclusions about the year’s total revenues.”
Dips in income tax collections have been reported in multiple states, including neighboring New York where Gov. Andrew Cuomo warned of a $2.3 billion revenue shortfall because of wealthy taxpayers relocating due to the SALT cap. Cuomo’s Feb. 4 announcement of a sharp drop in income tax collections which he called "as serious as a heart attack,” did not mention expectations for later filings that can make up some of the revenue difference.
“New York State’s projections may be influenced by their April 1 budget year deadline, which is different from New Jersey’s June 30 deadline,” said Sciortino.
The Feb. 15 report noted that New Jersey’s revenue picture would be bleaker if not for a tax amnesty program that collected $282 million in delinquent payments, exceeding its $200 million target goal. Excluding the amnesty program, which concluded on Jan. 15, the state’s year-to-date major tax revenues grew by $211.8 million, or 1.3%.
New Jersey’s sales tax revenue rose 10.8% in January and is up 3% year-to-date. The state projected 6.2% sales tax growth for the 2019 fiscal year that ends June 30.
Murphy is slated to unveil his proposed 2020 fiscal year budget in late February.
Past structural imbalanced budgets along with a growing pension burden triggered 11 bond rating downgrades between 2011 and 2017 under former Gov. Chris Christie to the lowest mark among U.S. states with the exception of Illinois. The Garden State’s debt is rated A3 by Moody’s Investors Service, A-minus by S&P Global Ratings and A by Fitch Ratings and Kroll Bond Rating Agency.