Tax and Budget Policy Do’s and Don’ts During a Health Crisis

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The COVID-19 pandemic is a major threat to New Jersey, presenting unique and pressing challenges to the state’s public health infrastructure and broader economy. As the number of positive cases climbs daily, state and local leaders have called for mandatory business closures and restrictions, as well as a voluntary curfew to contain the spread of the virus. These are necessary measures to avoid inundating the state’s health care system, but they come with an enormous cost to working families who will see their hours cut or jobs eliminated entirely. 

The economic fallout from COVID-19 will not be felt evenly. Those who earn the least are the most likely to suffer from a loss of income or loss of health coverage as a result of business closings and quarantines. New Jerseyans of color will particularly be harmed as they have fewer earnings on average and minimal amounts of wealth to fall back on in an emergency. And, because the state has not sufficiently invested in its Rainy Day Fund to help mitigate the challenges of the pending recession, the damage to people of color will be even greater. As such, the tax and budget policy decisions made by state lawmakers in the coming days and weeks will be critical in determining the size and scale of New Jersey’s recovery — and whether or not those harmed most by COVID-19 are centered in the state’s response. What follows is a list of tax and budget policies to pursue and avoid to help ensure New Jersey has the resources necessary to support and protect its residents in the coming months.

Do: Strengthen and Stabilize State Finances

New Jersey requires significant financial resources to adequately address the combined public health and economic crises from COVID-19. However, as the pandemic unfolds, unanticipated public health care costs will inevitably increase while state revenues, specifically from income and sales taxes, decline sharply. Implementing a more progressive tax code in this year’s budget will provide the state with the necessary revenue and flexibility to rapidly respond with targeted interventions. Restoring the millionaires tax and estate tax, strengthening the inheritance tax, and extending the corporate business tax surcharge would ensure wealthy individuals and corporations who have not been paying their fair share in taxes finally do so.

In addition, the state must continue to prioritize investment in its Rainy Day Fund. New Jersey has fewer resources to address this crisis because it went a full decade without building up any emergency funds. Going forward, the state must make consistent and significant investments in its Rainy Day Fund so that it can better respond when a future crisis or economic downturn arises.

Do: Prioritize Health and Social Benefit Programs

Workers who become unemployed, have their work hours reduced, or are laid off will be the first to experience economic insecurity under this health crisis. Therefore, lawmakers must expand access to all workers in the following state programs: earned sick days, temporary disability insurance, family leave insurance, and unemployment insurance. Access for these interventions can be improved by waiving eligibility requirements, removing waiting periods that prevent workers from accessing benefits right away, speeding up application and approval processes, and utilizing emergency funds to pay for these policy expansions. It is paramount that New Jersey leave no one behind in the COVID-19 recovery. 

In addition, state lawmakers must ensure that existing social safety net programs remain well-funded so that more families have their needs met, even if the state experiences a revenue shortfall. More families will likely need public assistance during this crisis. Programs like emergency nutritional assistance, food pantries, Medicaid coverage, cash assistance (TANF), subsidized child care, shelters, and other critical services provide necessary and stabilizing support and they must be funded to deliver payments and benefits as fast as possible. 

Finally, New Jersey must respond to this health crisis by eliminating barriers to health care. For instance, the state can waive costs for everyone seeking treatment for the COVID-19 virus. Funding should be provided to support better outreach regarding policies implemented in response to the pandemic so that all communities stay informed of critical developments. This means communicating in multiple languages and working directly with institutions like worker centers, school districts, community clinics, as well as state agencies who are providing services. Finally, the state should expand access to CHIP and NJ FamilyCare to ensure all New Jersey children have comprehensive health coverage and can get the care they need during these challenging times.

Do: Provide Relief Directly to Small Businesses Who Need It

One immediate concern created by this crisis is the increased likelihood of small businesses laying off employees and closing down as the economy heads into a recession. During an ordinary recession, a sizable stimulus could be expected to keep businesses afloat and put people back to work. With a health crisis also underway, workers and businesses could be shut down for weeks if not months, leaving them unable to earn or spend money.

While some policymakers have proposed payroll tax cuts or sales tax holidays to provide relief to small businesses, those interventions are severely flawed and would do much more harm than good (as explained below in Don’ts). Instead, policymakers should focus on interventions that work quickly and target the most at-risk businesses. As the crisis unfolds, states need to implement policies that will directly encourage businesses to keep their employees and continue paying them

Rather than throwing hundreds of millions of dollars at major corporations, the state should be prioritizing main street businesses and smaller firms. While the state Economic Development Authority (EDA) is largely known for providing tax subsidies to already wealthy and well-connected corporations, it would be much better off prioritizing smaller businesses, especially during this crisis. By extending lines of credit to troubled businesses, offering low or no-interest loans, and focusing the benefits of tax credits on those businesses most at-risk of employee layoffs and closure, New Jersey can help them stay afloat and protect local economies. 

Finally, as much as possible, policymakers should seek to tie employee protections to any business assistance programs. The primary goal of providing relief to businesses is for them to maintain payroll and avoid layoffs. As such, the New Jersey Department of Labor should work in conjunction with the EDA and other organizations to ensure businesses guarantee they will meet these requirements and pay their workers as a condition for receiving assistance from the state.

Don’t: Declare a Sales Tax Holiday or Cut the Sales Tax

The sales tax is one of the biggest sources of revenue for the state of New Jersey, generating approximately $1 billion on a monthly basis. In 2016, New Jersey cut the sales tax from 7 percent to 6.625 percent, reducing revenue to the state by about $600 million a year and growing; by fiscal year 2022, the loss is expected to be $655 million annually. 

The combined challenges of the coronavirus pandemic and pending recession will create a crisis of consumer demand in the short and long term. If people can’t get to work or don’t have disposable income to spend, suspending the sales tax won’t cause them to make purchases. In fact, they will end up doing more harm than good, starving the state of much needed revenue at a time when New Jersey needs to expend resources and expand public health services and assistance to workers, families, and businesses hit hardest by the fallout from this crisis.

Other sales tax holiday proposals are designed to delay the collection of sales tax for several months. This would not have the intended effects of stemming a recession or spurring consumer spending. It would do little more than withhold critical resources from the state at a time when it needs revenue and resources the most. Furthermore, New Jersey’s sales tax already exempts food and clothing, meaning there is little benefit to low-paid families and those in poverty who are already struggling to afford basic needs. This is easily understood by reviewing the regressive impact of New Jersey’s 2016 sales tax cut. 

Don’t: Cut or Eliminate the Payroll Tax

Cutting or eliminating the payroll tax is not well-targeted and would not provide meaningful or immediate relief. A recent brief by the Center on Budget and Policy Priorities provides a helpful scenario:

Consider, for example, a payroll tax cut of 2 percent of workers’ earnings:

A single parent getting by on $25,000 a year would receive just $500 over the course of a year, even as a couple with a combined $275,400 income (with each spouse earning half this amount) got $5,500. Even if the tax cut’s dollar value were capped, only higher earners would get the maximum benefit. That’s not sound economic policy, since affluent households generally spend a much smaller share of any added income than lower-income households do.

Chye-Ching Huang, Center on Budget and Policy Priorities

Further, cutting the payroll tax would not benefit people without earnings, even though they are most likely to spend any additional resources they receive on basic and immediate needs. This group includes those who are laid off from their jobs and no longer receiving a paycheck, as well as seniors and people with disabilities. Those supporting children or other dependents would also not receive any additional help from a payroll tax cut.

A payroll tax cut would benefit big businesses, however, as half of the payroll tax is paid by employers. Eliminating the employer side of these taxes would provide a windfall to corporations and other businesses that are not at greatest risk for failure. Better interventions would be extending lines of credit and no-interest loans to businesses in need of support.