New Jersey's new governor is squabbling with lawmakers in a dispute that threatens the state's ability to enact an on-time budget.
The $37.4 billion budget proposed by Gov. Phil Murphy, a Democrat who took office in January, relies on $1.56 billion of new tax revenues to combat the state’s persistent structural imbalance.
But the higher taxes face stiff resistance from members of Murphy’s own party who control the state legislature, putting the state in danger of a government shutdown for a second straight year if a 2019 budget plan can’t hashed out before the July 1 deadline.
Seton Hall University political science professor Matt Hale said that while New Jersey leans left, many Democratic lawmakers tend to be more moderate on fiscal matters and are reluctant to raise taxes.
“Fiscal responsibility matters to many Democrats here, especially in the southern part of the state,” said Hale. “Governor Murphy has not made the case yet to centrist Democrats.”
State Treasurer Elizabeth Maher Muoio has said increased taxes are necessary to combat structural imbalance from general fund revenues falling short of expectations, resulting in a potential $2.4 billion shortfall for the start of the 2019 fiscal year.
Some of revenue measures proposed by Murphy to fill the gap include establishing a 10.75% income tax bracket for those earning more than $1 million, raising the sales tax to its previous 7% level from 6.625%, legalizing recreational marijuana and hiking the state’s corporate tax rate from 9% to 12% for businesses with income above $1 million.
Montclair State University political science professor Brigid Harrison said there has been “acrimony” between Murphy and Senate President Steve Sweeney, D-Gloucester, since then-candidate Murphy’s embrace of the New Jersey Education Association, which opposed Sweeney’s re-election bid last November.
Harrison said Sweeney and other legislative Democrats are leery of raising taxes, especially after the new federal tax law capped deductions for state taxes.
She said Murphy has not grasped the political challenge of increasing taxes during his first half-year in office. She said Assembly Democrats might especially be reluctant to get behind tax increases since they face re-election in 2019 while the Senate terms aren’t up until 2021.
“When a politician proposes raising taxes in New Jersey there is hell to pay,” said Harrison. “Legislators would prefer to come to a bipartisan agreement since then it can’t be used against them politically.”
Murphy has also pushed to legalize recreational marijuana to generate an estimated $300 million of revenue, but lawmakers have asked for more time to study the issue.
Hale said much of the reluctance to fast-track marijuana legalization comes from African-American lawmakers who want the legislation to also include measures that would expunge past weed convictions.
“I think it will ultimately happen, but it won’t be the slam dunk it was thought to be when he was elected,” said Hale. “They want to make sure it isn’t just a money grab.”
Another avenue the Murphy administration is exploring to mitigate structural imbalances is a plan that would direct $788.5 million of energy tax receipts previously given to municipalities toward the general fund. The state would then provide that same $788.5 million amount to local governments from the better-performing Property Tax Relief Fund, but this switch would still require legislative approval.
The uncertain fate of the energy tax receipts proposal and of Murphy’s proposed tax measures led Muoio on June 1 to begin preparations for a potential government shutdown. The treasurer directed all state cabinet and agency heads to immediately freeze all hiring, promotions and discretionary spending until further notice so that general fund resources would be “adequate” to support essential state operations.
“I have repeatedly made it clear that we face extraordinary fiscal challenges due primarily to the structural imbalance in our General Fund,” Muoio said in a statement. “Given the uncertainty about bringing Energy Tax Receipts on budget before the close of the fiscal year, we have to reserve all available resources in order to ensure we close out the General Fund in a positive position.”
Murphy needs new tax revenue to support spending priorities, which include raising annual pension contributions by 10% to 60% of New Jersey's actuarially determined contribution.
Rising pension liabilities triggered 11 rating downgrades under Murphy's predecessor, Republican Chris Christie. New Jersey ratings are now the second lowest among states at A-minus from S&P Global Ratings, A3 from Moody’s Investors Service and A from Fitch Ratings and Kroll Bond Rating Agency.
Murphy stuck by his plan to raise taxes during a news conference Wednesday while expressing openness to alternative proposals if financially viable. He also expressed need for meaningful long-term changes to right New Jersey’s fiscal ship.
"For eight years, my predecessor kicked the can down the road from the right, and I'm not just going to do the opposite and kick the can down the road from the left and call that change," Murphy said. "It's time to fix what's broken and make sure that everyone is paying their fair share."
Given the complications the new federal tax law created for raising the state income tax rate, Harrison said a safer political sell might be increasing the corporate rate since businesses received a break under the congressional tax legislation and might be better positioned to withstand a hike.
This strategy could include a compromise to have surcharges on corporations above the $1 million threshold sunset after two years, which Harrison noted would provide political cover for state senators who don’t face re-election until 2021.
Hale also said a plan to raise taxes that expire in two years could be sprung as an avenue to tackle short-term structural budget woes while also not setting the state up for further long-term tax pain. He expects Murphy and the legislature to forge an agreement last minute that would avoid another shutdown.
“A government shutdown would be disastrous for Democrats,” said Hale, given that they won't be able to blame anyone else as they control the levers of power. “I think they will cut a deal.”