New Jersey revenue outlook could shift based on coronavirus
New Jersey revenues received a lift from newly enacted tax increases, but a sustained fiscal rebound during the upcoming winter months will hinge on the trajectory of the COVID-19 pandemic, according to analysts.
The Garden State saw a 6% revenue uptick for November compared to the year-ago period, fueled by a new millionaires' tax and a gas tax hike, according to the latest New Jersey Department of Treasury figures. Monthly income-tax collections rose 8.7% year-over-year and receipts for the state’s petroleum products gross receipts jumped 14% compared to November 2019, according to the report.
“The state’s goal was to identify a recurring revenue source to help it through a very difficult budgetary period and it appears to be having the desired effect,” said Fitch Ratings analyst Douglas Offerman. “A number of factors could affect performance going forward, including what the course of the pandemic is and vaccination efforts.”
The revenue rise occurred on the heels of New Jersey hiking income taxes to 10.75% from 8.97% on those making more than $1 million as part of the 2021 fiscal year budget that took effect Oct. 1. The November report also reflected a nearly 10-cent increase in the state’s gas tax as of Oct. 1, to coverage shortages in collections, as spelled out in 2016 legislation requiring a steady stream of revenue to support New Jersey’s Transportation Trust Fund.
Despite November’s positive tax receipt numbers, 2021 fiscal year-to-date total collections of $10.4 billion are down $548.3 million, from the same five months in 2019, according to treasury officials.
The revenue report was released at a time when New Jersey has seen a surge in COVID-19 cases, with the state’s Department of Health reporting a 12.97% daily positivity rate on Dec. 23. Gov. Phil Murphy ordered restaurants and bars to close at 10 p.m. beginning last month while limiting capacity to 25% in an effort to combat the virus’ spread.
New Jersey, like most other states and municipalities, was battered last spring at the onset of the COVID-19 pandemic when state shutdown orders resulted in lost economic activity. State Treasurer Elizabeth Maher Muoio forecast last month that 2021 fiscal year revenues would be $5 billion less than February's projections issued in Murphy's initial budget proposal before virus cases began to mount.
Murphy signed a shortened nine-month $32.7 billion budget in late September that relies on $4.5 billion of proceeds from new borrowing to offset revenue losses. The state sold $3.7 billion of tax-exempt COVID-19 emergency bonds on Nov. 17.
Offerman said the revenue projections through June 30 included in the budget were realistic in factoring in the unpredictable nature of how the COVID-19 pandemic may play out in early 2021. Key factors that will determine whether the state meets or exceeds revenue expectations, he added, depend on whether a rise in virus cases prompts more non-essential business closures or if a successful vaccine rollout results in the state quickly thereafter easing restrictions.
“The state has been fairly cautious in its forecasting, which given the number of uncertainties facing the economy with vaccination efforts and public health measures and the pandemic in general, there is certainly a strong case for caution,” Offerman said. “Early indications are good, but a cautious approach seems reasonable.”
S&P Global Ratings downgraded New Jersey general obligation bonds one notch on Nov. 6, ahead of the emergency bond sale, to BBB-plus from A-minus, citing expected revenue losses for the next couple budget cycles due to the pandemic that could produce structural deficit challenges. It revised the state’s credit outlook to stable from negative at the lower rating.
Moody’s Investors Service and Fitch Ratings both affirmed New Jersey GOs at A3 and A-minus, respectively, last month with negative outlooks. Kroll Bond Rating Agency affirmed New Jersey at A with a stable outlook.
“They seemed to be aiming for realistic revenue forecasts at the time of the budget, but things can change over time and it really depends on the course of the pandemic,” said S&P credit analyst David Hitchcock. “At the time they made the projections for 2021, it seemed reasonable and I would expect probably at the end of the year they might be close to projections, but it is really hard say to say since there is so much uncertainty.”
Hitchcock noted New Jersey should benefit revenue-wise in the next few months from momentum in the stock market, which could elevate the state’s capital gains taxes for the April filing period. Demand for home purchases throughout the state, as many city residents seek relocation to suburban settings during the pandemic, also bodes well for the state’s sales tax numbers, he said.
November’s Department of Treasury figures show sale tax collections are 5.5% ahead of the year-ago period, the fourth consecutive month of growth for this revenue source. Year-to-date sales tax receipts are up 4.2%.
Treasury officials cautioned though the spike in income taxes driven by the millionaire’s tax was largely attributed to the policy change becoming retroactive to January 2020, which means the withholding rate for high-income earners was set at 21.3%. This factored into boosting November’s income tax collections by between $70 million and $100 million with a similar trend forecast for December, but it may result in refunds next year, they said.
“While November saw a pause in the recent decline of state revenue due to tax changes, Treasury still expects overall [fiscal year] 2021 collections to remain weak into the winter months followed by a return to sustainable collections growth next spring and summer,” Treasury officials said in the November report.
Regina Egea, president of the conservative-leaning Garden State Initiative, said the Murphy administration is underestimating the revenue outlook for the remainder of fiscal 2021, since sales tax collections have held steady the past few months even with businesses operating at limited capacity. She noted that a 2018 law requiring most remote sellers and online marketplace facilitators to collect sales taxes that are remitted to state coffers has contributed to the boost, since many consumers have opted for online shopping during the pandemic.
“We have nine months of experience now during the pandemic and I just don’t see what tax line is going to fall apart,” she said, noting the sales tax trends coupled with higher rates for income and gas taxes. ”The results are just not that soft and they are continuing to stiffen as the months go on.”