Will third time be the charm for Murphy's millionaire's tax?
New Jersey Gov. Phil Murphy's latest budget proposal, unveiled Tuesday, again employs a millionaire's tax, but this time lawmakers may back the revenue-raising measure, which they opposed the previous two times it was proposed.
Murphy's proposed $40.9 billion 2021 fiscal year budget relies on an estimated $500 million of revenue from the tax on the wealthy. Although his party controls the state legislature, the Democrat was rebuffed the first two times he tried for a millionaire’s tax, but Senate President Steve Sweeney, D-Gloucester, indicated this week he would back the plan in exchange for increased pension funding for public employees.
Sweeney spokesman Richard McGrath told The Bond Buyer the Senate president wants a payment of $1 billion to the state’s underfunded pension system in additon to the record $4.6 billion pension payment already budgeted. The payment budgeted for 2021 is 10%, or $794 million, higher than the current year, and would put the state at 80% of the actuarially determined contribution level. The governor said he intends to make another $279 million payment into the pension system for the 2020 fiscal year.
The pension funding boost planned for fiscal 2021 would put New Jersey on track to be at a full ADC funding ratio by 2023, but S&P Global Ratings says the state as of June 30, 2018, only had enough funding to cover 38.4% of current and future retirement benefits.
“I am somewhat skeptical that this is the start of a negotiation that will end with a millionaire’s tax and a significant up-sizing of the pension contribution,” said Lisa Washburn, managing director at Municipal Market Analytics. “Senate President Sweeney has opposed the tax in the past two budget cycles unless there was pension reform and now it’s shifted to support the tax only if a pension contribution about twice the size of the revenues generated is made.”
S&P credit analyst David Hitchcock said Tuesday a $1 billion boost to the pension system would be “significant,” but cautioned what's important is to create a funding level that is sustained above 40%. New Jersey’s steep pension burden triggered 11 bond rating downgrades under previous Gov. Chris Christie. The Garden State’s general obligation debt is now rated A3 by Moody’s Investors Service, A-minus by S&P, and A by Fitch Ratings and Kroll Bond Rating Agency.
And the pension underfunding is still holding down the rating, Hitchcock said. “If the net result from any proposal is a sustainable funding ratio above 40%, it could lead to a rating improvement.”
Murphy did not give specifics on his millionaire's tax plan Tuesday, but has previously proposed raising the marginal rate on annual income above $1 million to 10.75% from 8.97%. The state began levying a 10.75% marginal tax rate for those earning at least $5 million annually in the 2019 fiscal year as part of a budget compromise when lawmakers resisted Murphy’s first attempt at a millionaire’s tax.
Ben Dworkin, director of Rowan University's Institute for Public Policy and Citizenship, said Sweeney's softened position on a millionaire’s tax is a big change in tone from the past two years and could lead to a compromise.
“The most important thing is that the millionaire’s tax is now on the table,” said Dworkin. “There will be give and take.”
The 2021 budget attempts to raise the state surplus to $1.6 billion, which Murphy said is triple the level it was at under his predecessor. He said the administration will contribute $300 million into the rainy day fund for 2020 on the heels of a $401 million deposit in 2019, marking the state’s first back-to-back deposits in 20 years.
“A stronger surplus, and another payment into the rainy day fund, are important signs to New Jerseyans that we, like them, understand that we can’t rush out and spend everything we have, without regard to future risks,” Murphy said in his remarks. “And, it sends an unmistakable signal to the credit-rating agencies that we will not follow the irresponsible ways of the past that led to 11 consecutive downgrades.”
Murphy delivered the address three days after announcing he will undergo surgery in early March to remove a kidney tumor, which is likely cancerous. The 62-year- old former Goldman Sachs executive said his prognosis is “very good,” as the tumor was detected early. Lt. Gov. Sheila Oliver will be acting governor while Murphy recuperates.