New Jersey Budget Eyes $1 Billion in New Taxes, Most From Millionaires

New Jersey Governor Phil Murphy on Tuesday proposed more than $1 billion in new taxes -- mostly from millionaires -- and $4 billion in borrowing to support spending after the novel coronavirus sent revenue plunging.

The governor, a first-term Democrat and retired Goldman Sachs Group Inc. senior director, would make a record pension payment and boost the surplus. He also counts on $1.25 billion in spending reductions during an unprecedented budget cycle, shortened to nine months.

The overall spending plan is less bleak than Murphy’s earlier doomsday assessment of finances in a state hit harder than most by the virus. He plans no cuts to school and municipal aid and intends to restore funding for the popular Homestead Benefit and Senior Freeze property-tax abatement programs.

He also proposes “baby bonds,” or $1,000 gifts for infants from low-income families. The proceeds could be withdrawn at age 18 for education, home buying or to “pursue other wealth-generating activities,” according to budget documents. That would cost the state about $72 million.

Though Murphy won a fight in the state’s highest court this month to borrow as much as $9.9 billion to fill revenue holes, he’s now counting on using less than half that. Still, if the revenue doesn’t materialize to repay those bonds, New Jerseyans would face higher sales and property taxes.

Historic Crisis

“Besides setting off an unprecedented public health crisis, this pandemic also unleashed an economic crisis that can only be rivaled by two other times in our state’s entire 244-year history: the Great Depression and the Civil War,” Murphy said at SHI Stadium at Rutgers University in Piscataway.

The open-air venue was chosen over the Trenton statehouse to reduce the chance of viral transmission. Almost 16,000 deaths in New Jersey have a lab-confirmed or probable coronavirus link, and Murphy has yet to reopen indoor dining, gyms and theaters.

Since March, 1.4 million unemployment claims have been filed. In June, the jobless rate hit 16.8%, while the Great Recession’s peak was 9.8%.

In 12 months during that crisis, sales tax revenue declined by $672 million. In just four months of the pandemic, it dropped $505 million. The current fiscal year has a $1.44 billion revenue shortfall, led by sales and use tax declines.

Record Payment

The fiscal 2021 budget amount, $34.91 billion, is an anomaly: It covers Oct. 1, 2020 through June 30, 2021, nine months that follow a 15-month year. The typical cycle is 12 months; the state extended it to reflect a delayed tax deadline and to allow flexibility after revenue plummeted when Murphy closed nonessential businesses March 21.

The governor pledges a $4.89 billion pension contribution, a 32% increase over the current fiscal year. Although a record high, the amount is 20% short of the actuarially required payment, the fallout after previous governors from both parties skipped or shorted contributions, increasing the burden.

Murphy’s budget also leaves a $2.24 billion fund balance -- 8% higher than that for the extended fiscal year -- “a much-needed cushion against revenue shocks from a second wave,” the governor said.

Eric Friedland, director of municipal bond research at Jersey City-based Lord, Abbett & Co. LLC called the spending plan “very measured” by incorporating revenue increases and spending cuts. He also noted the state didn’t include potential congressional stimulus aid, which has been scuttled by a partisan stalemate in Washington.

“There are some states out there that are factoring in large amounts of further stimulus money into their budgets, if they don’t get it will have to take some pretty dramatic actions,” said Friedland, whose employer has $30 billion in municipal bonds under management, including New Jersey debt. “New Jersey is willing to swallow some of the medicine now by imposing revenue increases and taking some cuts.”

The budget marks the third time -- fourth, if counting Murphy’s scuttled February plan -- that the governor has proposed a millionaires tax. Each time it was blocked by Senate President Steve Sweeney, a fellow Democrat who has cited New Jersey’s highest-in-the-nation property taxes, averaging $8,767 last year, and other steep living costs.

The new marginal tax rate on such earners, 10.75% rather than 8.97%, would apply to every dollar in excess of $1 million. Murphy anticipates raising $390 million, the biggest amount among the proposed new levies. The higher rate already applies to those earning $5 million or more, a change Murphy put into effect for the 2018 tax year.

Political Will

“This might be the year he succeeds -- he has the political will and the political argument to voters for this tax,” Dora Lee, director of research for Belle Haven Investments, said in an interview. Belle Haven, in Rye Brook, New York, has $12.9 billion in assets under management, including New Jersey debt.

The Democratic-controlled legislature must approve the budget before Murphy signs it. State Senator Paul Sarlo, a Wood-Ridge Democrat and chairman of the Senate budget committee, said he was “confident that we can come together on a spending plan that makes the most of limited resources and does the best to address the needs of New Jersey in a time of crisis,” according to a statement issued by his office.

Four Republican committee members, though, criticized Murphy in a joint statement.

“He wants to borrow billions, which will compound to billions more in interest and fees, to support a budget that demonstrates not one shred of creative cost-cutting reform,” said Senator Declan O’Scanlon of Little Silver.

Business Surtax

In all, Murphy anticipates $1.02 billion from new taxes. The budget proposes making permanent a 2.5% corporate business surtax, to raise $210 million; a cigarette-tax boost to $4.35 per pack, for $143.1 million; a higher fee for health-maintenance organizations, for $102.7 million; a surcharge for those with qualified business income greater than $1 million, for $75 million; and higher rates on limousine services, yacht and boat sales and firearm and ammunition taxes, for $26.3 million.

For the 12 months ending June 30, 2021, New Jersey will have budgeted $42.57 billion. The fiscal 2021 spending plan that Murphy proposed on Feb. 25, prior to New Jersey’s first reported coronavirus case, was $40.9 billion.

To make up for lost revenue, the governor has said the state needs tens of billions of dollars from borrowing, including from the U.S. Federal Reserve’s municipal liquidity fund, plus as-yet-uncertain federal grants.

©2020 Bloomberg L.P.

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