Tax Day Meets Groundhog Day on the Issue of Tax Cuts

Here we go again. Last year’s storyline about tax cuts, New Jersey’s struggling economy, and the politics of blame is to be replayed this year. The only big difference is that the governor and all 120 seats in the legislature are on the ballot in November. So, welcome to Groundhog-Tax Day in New Jersey.

After hinting at it in his February budget speech but making no provision in his proposed budget, Gov. Christie today officially revived his push for the tax cut proposal that died last year. The same deadly forces appear to be at work on this year’s proposal.

The governor is proposing, through a conditional veto of a bill restoring the Earned Income Tax Credit (EITC), an income tax credit of 10 percent for New Jersey homeowners making less than $400,000. By 2017, the credit would be equal to 10 percent of the property taxes paid (up to $10,000) in the previous year, with a cap of $1,000 per household. The governor says he will also accede to the Democrats’ priority of restoring the EITC that he and the Democratic legislature cut in 2010, but – for the third time – only in exchange for other gubernatorial priorities.

The governor’s announcement follows reports last week that Senate President Sweeney was gauging the appetite of his caucus on the prospects of reviving a tax cut. It is not clear which tax cut version he is discussing with his colleagues: the compromise he reached last year with the governor (which is essentially what the governor is now proposing), or the plan that was passed by both houses last year (and vetoed by governor) that would have supplemented the base plan with additional revenue generated from a higher tax on millionaires. (The governor is pushing for a tax cut without said increase; the presumptive Democratic gubernatorial nominee, Sen. Buono, says it should be part of the discussion.)

It’s important to put the first year of the four-year tax cut in perspective. All the fuss and blunder is over this question: should families that report taxable income of less than $400,000 be “treated” to a tax cut in April 2014 that improves their income by $1.92 a week (a family of four saving up can enjoy a supper of a Whopper and small drink once a month)? That is only for those who own their own homes. Renters will be limited to “savings” of 96 cents a week. In short, the Great Battle of 2013’s campaign comes down to an invisible tax cut.

Regardless of what plan is being considered, the legislature needs to answer three key questions before enacting a tax cut.

First, Can New Jersey Afford the Immediate Cost of About $200 Million?

Last year’s discussion centered on whether the FY 2013 budget could afford the $180 million cost when it was built on the most optimistic revenue estimates in the nation, despite an economy that lagged the nation in recovering from the Great Recession. The discussion this year will clearly follow a similar track.

Last April, the Office of Legislative Services (OLS) projected revenue that was $537 million below the administration’s budget message. By late May, OLS had increased its shortfall estimate to $1.3 billion and the administration acknowledged a shortfall of $700 million. The Democratic leadership rejected the governor’s tax cut proposal, enacting a budget that made the tax cut contingent on the administration hitting its revenue targets. That didn’t happen, and so neither did the tax cut.

Now OLS is projecting revenue that is $637 million below the estimates in the governor’s proposed budget. What really counts are the tax collections pouring in right now, the sum of which will be reported next month. In late May we will have a clearer notion if FY 2014 budget can support the loss of $220 million to $225 million from the first year of the tax cut.

However, the Democrats can nullify the affordability issue by enacting the same plan they sent the governor last year, which paid for the tax cut with a higher tax on millionaires. The chances that the governor would sign a tax cut paid for by millionaires are zero (your bet that the Chicago Cubs will sweep the World Series this year is more sensible).

Second, Can New Jersey Afford the Full Cost of $1.6 Billion Each Year?

Since our struggling economy and poor revenues dominated last year’s tax cut discussions, there was practically no focus on the long-term impact of a tax cut. The state would lose over $1.6 billion in annual revenue once the tax cut was fully implemented in 2017, regardless of whether the proposed cut is matched by a higher tax on millionaires in the beginning.

The legislature must examine how this revenue loss – coupled with built-in increases in expenses like the phase-in of pension payments, debt service and retiree health benefits coverage – will affect New Jersey’s ability to meet the needs of its residents through school aid, higher education, social services and other areas.

Third, Even if New Jersey Can Pay for the Tax Cut, Is That the Best Way to Restore Jobs and Prosperity?

If the legislature were to decide that the state can afford both the long and short term costs of a tax cut, it is crucial that the discussion pivot from affordability to impact. Could all, or some, of this $1.6 billion be put to better use each year to grow the state’s economy and serve its citizens?

There is no argument that the regressive property tax is a heavy burden on lower- and middle-income New Jerseyans. As such, a 10 percent reduction in that tax might be the best use of the $1.6 billion if it is really available. But we need to carefully consider the alternatives, some of which would include:

• Make college more affordable and make the public colleges engines of economic development by increasing higher education funding for operating and student aid while investing in modern facilities.

• Reduce the property tax burden while improving educational outcomes by fully funding the school aid formula, a change that would add significant sums to New Jersey’s middle-income school districts.

• Improve educational outcomes by expanding New Jersey’s high-quality preschool program beyond the 31 Abbott districts to the other districts that educate more than half of the students from poor and very poor families.

• Practice budgetary prudence by accelerating the payments for pensions or by starting to set aside funds for the astronomical costs associated with post-retirement medical coverage.

If New Jersey hopes to restore its economy and re-capture high value-added jobs, it must invest in the talent and motivation of its residents and in creating centers for research and innovation like it did in the late 1980s and early 1990s. The payoff from attracting the world’s best scientists, engineers, and researchers was huge.

Conclusion

Assuming that OLS is correct on revenues, the question of whether the state budget can support a tax cut will once again be front and center. Last year, the Democratic leadership actually was more conservative than the governor and wisely rejected the tax cut. One would think the same decision would be made this year. However, there is one addition to the equation – the gubernatorial and legislative elections – that could alter the thought process of the Democratic leadership.

By July 1, we will know which route the Democratic leadership chooses: to walk away from any tax cut, to acquiesce to the governor’s plan or to again move forward with a more aggressive plan that includes money from a tax increase on millionaires. And, just maybe, to introduce options that move New Jersey from the tail end of the pack in creating jobs and economic activity.

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