New Jersey is not alone, according to a new report by the Center on Budget and Policy Priorities (CBPP), as states across the nation are facing what could be the largest budget shortfalls ever recorded. Federal lawmakers have already provided states with some fiscal relief through the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, but states are limited in how they can use these funds. As it stands, significantly more aid will be necessary for states to address the ongoing public health emergency, provide relief to families and small businesses who need it, and avoid drastic cuts to public services that would disproportionately harm communities of color and only prolong the nation’s ultimate recovery.
CBPP estimates that state budget shortfalls could total more than $500 billion, with most of the revenue loss concentrated in the upcoming fiscal year. These are conservative estimates as they do not include the substantial new costs that states are incurring to contain the COVID-19 virus, nor do they account for revenue shortfalls at the local, territorial, or tribal levels of government. Overall, these figures far exceed the federal aid given to states thus far, as well as what states already have saved up in their rainy day funds. What’s worse for New Jersey (and many other states) is that it will quickly exhaust its Rainy Day Fund, if it hasn’t already, as lawmakers left the state’s reserves empty for a full decade before finally making a modest deposit last year. To ensure a strong recovery from COVID-19, Congress should prioritize substantial and immediate fiscal relief in its next stimulus package.
What happens if the federal government does not provide states with significantly more aid?
One unattractive option is to make enormous cuts to state spending. This would mean laying off teachers and other public employees, as well as slashing spending on state programs and services that families rely on, especially during a crisis like the one we are living through. As we saw firsthand in the wake of the Great Recession, a cuts-heavy response to a downturn worsens the economy’s fall, slows the state’s recovery, and causes long-term harm to families and communities who are already struggling to make ends meet. It’s important New Jersey learns from this experience and does not make the same mistakes of the past.
So what else is there to do?
Another option is to borrow funds to support critical needs. Normally, New Jersey would not be allowed to borrow funds to cover operating expenses, but there is an exception in the state Constitution for “purposes of war, or to repel invasion, or to suppress insurrection or to meet an emergency caused by disaster or act of God.” In response to the COVID-19 pandemic, the Federal Reserve will buy up to $500 billion in bonds from state and local governments across the country to help shore up their finances. Governor Murphy has already expressed interest in borrowing up to $9 billion from the Fed, and NJPP has come out in support of that proposal, as President Brandon McKoy said the pandemic, “justifies, if not demands,” such action. Borrowing would help New Jersey avoid damaging cuts, which would help speed the state’s recovery from the recession.
But even if the state borrows to fill budget holes, more resources and funding will be needed to pay off these bonds in the short-term and stabilize the state’s finances in the long-term; after years and years of disinvestment and austerity, this should surprise no one. State lawmakers can accomplish this by ending tax breaks passed under the previous administration for the state’s wealthiest households and biggest corporations, as well as by reforming the income tax code to ensure that the top 5 percent of earners pay their fair share. Raising new, sustainable revenue will help New Jersey recover from the current economic downturn, prepare the state for the next one, and build an economy that works for the many, not just a chosen few.
To read a PDF version of this policy brief, click here.
The COVID-19 pandemic hit New Jersey with a ferocious punch, leaving the state scrambling to contain the spread of the virus, save lives, and provide financial relief to the families and businesses who need it most. Depending on how quickly the state economy gets back on track and how much aid the federal government provides to offset New Jersey’s budget shortfall, many state programs and services are in serious danger of cuts or, worse, elimination. The economic fallout from COVID-19 is a stark reversal of the healthy state economy of the past two years that allowed New Jersey to expand investments in areas like pre-K education, free community college, transit infrastructure, the state’s reserves, and much more. Unfortunately, New Jersey’s recent deposits in its Rainy Day Fund will not be enough to weather this downturn; the state ran out of time, and now the departments tasked with running state government and responding to the COVID-19 crisis are facing an uncertain future, much like the rest of the economy.
Without proper funding, state government cannot fully serve the needs of the public, especially during a time of crisis when the demand for services is at an all-time high. Unfortunately, New Jersey lacks the reserves to help shore up these departments, as outlined in NJPP’s latest report. Making matters worse, tax revenue from income, sales, and corporate business taxes is collapsing at an unprecedented pace. Federal aid to help state budget shortfalls is essential to contain the damage, but it has yet to be considered in a serious way by Congress. If anything, the crisis has put a glaring spotlight on the damage done by a decade of government disinvestment. To ensure a strong and immediate recovery from the COVID-19 crisis, New Jersey cannot afford to repeat the mistakes of the past.
In response to the Great Recession, New Jersey lawmakers and Governor Christie made brutal cuts to state agencies and public programs, ultimately slowing the state’s recovery. Even before the COVID-19 pandemic hit, these cuts continued to hamper New Jersey’s ability to provide critical services that New Jersey families, communities, and the broader economy rely upon. Taken as a whole, staffing levels across all departments dropped by over 20 percent since the Great Recession in 2008. Today, funding for departments has yet to reach pre-recession levels and, for many, staffing is at a record-low for the past two decades.
Departments of Health and Human Services
During normal times, and especially now in the middle of a global pandemic, the state departments of Health and Human Services ensure the safety and well-being of New Jersey’s most vulnerable populations, including the elderly, the disabled, those in addiction recovery, and children living in deep poverty. Taken together, the Department of Health (DOH) and the Department of Human Services (DHS) now function with less funding (6 percent) and about a third less staffing (30 percent) than they had at the onset of the Great Recession in 2008.
Without the necessary financial resources and workforce, it is near-impossible for the departments to promote public health. For example, the state is unable to ensure that community hospitals are in compliance with safety standards like adequate nursing staff levels, putting patients and their communities at risk. The lack of adequate resources and proper oversight has also plagued DOH’s medical examiner system, which The Star-Ledger described as a “national disgrace” in their 2017 Death and Dysfunction report. Despite a larger workload in recent years due to the overdose epidemic, the state medical examiner offices have 20 percent fewer employees than 10 years ago. Similarly, local health departments — the frontline of the state’s COVID-19 response — have been underfunded for decades, leaving them ill-equipped to handle the workload in response to the viral outbreak. Compared to other states, New Jersey fell to the bottom quarter for spending per person on local health departments at less than $30 per person. For reference, states like New York and Maryland invest at least $70 per person in local health departments.
Department of Labor and Workforce Development
Once shelter in place became the new norm, much of New Jersey’s economy ground to a halt, with record numbers of residents losing their jobs and closing their businesses. Since the COVID-19 pandemic hit, more than 718,000 New Jersey workers — representing more than 15 percent of the state’s workforce — have filed for unemployment benefits to make ends meet.
However, many of these workers are unable to file their claims, as the department lacks the necessary staff and resources to handle all of the applications. Inadequate staffing and out-of-date software have paralyzed the department to the point where Governor Murphy has called on retired employees to return to work and help with the backlog. While the state Department of Labor and Workforce Development’s funding has remained stable since the Great Recession, it is operating with far fewer employees now than it did over a decade ago; since 2008, the department has experienced a 25 percent cut in staffing levels. This significant drop flew largely under the radar until now as residents go weeks without receiving their unemployment benefits.
Department of Community Affairs
Far too many jobs in our economy do not pay enough or provide enough hours for families to meet their basic needs. As a result, thousands of New Jersey families struggle to afford necessities and rely on state assistance to help pay for their utilities and rent. The demand for these services was acute before the COVID-19 pandemic and even more so now as residents lose their jobs and struggle to pay their bills. But an inflation-adjusted 42 percent drop in funding since just before the Great Recession means less resources for the Department of Community Affairs to do its job and help those hit hardest by this crisis.
By providing low-income households much-needed energy assistance or affordable housing opportunities now, the state could play a vital role in helping the state economy recover more quickly — but only if it has adequate funding to do so. Even the Treasury Department has had to make do with almost half the funding it used to receive, undermining its ability to develop and enforce the tax laws that secure financial resources for all of these departments.
When in a Hole, Stop Digging it Deeper
When state government finds itself in a hole, as it does now in the COVID-19 crisis, cuts will only dig the hole deeper. Scaling back essential government services should not be an option, as the safety net programs administered by New Jersey’s departments and agencies will act as the foundation for the state’s ultimate recovery. To fund these investments and prevent cuts that would be devastating to families in every corner of the state, New Jersey must find new revenue as part of its response to COVID-19 and the resulting economic fallout. We suggest starting with targeted changes to the tax code, like making the income tax more progressive and extending the corporate business tax surcharge, to help fund New Jersey’s recovery.
Methodology
State funding figures are from the New Jersey Office of Legislative Services Summary of Appropriations Act and are inflation-adjusted to 2020 U.S. Dollars. Staffing level figures are for full-time employees, according to the New Jersey Department of the Treasury, Office of Management and Budget, Comprehensive Annual Financial Report (CAFR) for FY 2008 to FY 2019, and the Governor’s Budget Message for FY 2009 and FY 2021 . The staffing levels represent total staffing, including positions funded by the state and federal government. State funding and staffing level figures are combined for the Department of Health and Department of Human Services to account for offices and responsibilities that have been transferred from one department to the other over the time period reviewed in this analysis.
Departments of Health and Human Services
In FY 2008, combined state funding for the Department of Health and the Department of Human Services was $8.1 billion; in FY 2020, state funding was $7.6 billion. In FY 2008, total full-time staffing was 17,634; in FY 2019, total full-time staffing was 12,279. In FY 2008, 66 percent of full-time staff were funded by the state and 34 percent were funded by the federal government. In FY 2019, 32 percent of full-time staff were funded by the state and 68 percent were funded by the federal government.
Department of Labor
In FY 2008, state funding for the Department of Labor was $167 million; in FY 2020, state funding was $172 million. In FY 2008, total full-time staffing was 3,418; in FY 2019, total full-time staffing was 2,547. In FY 2008, 6 percent of full-time staff were funded by the state and 94 percent were funded by the federal government. In FY 2019, 6 percent of full-time staff were funded by the state and 94 percent were funded by the federal government.
Department of Community Affairs
In FY 2008, state funding for the Department of Community Affairs was $1.6 billion; in FY 2020, state funding was $923 million. In FY 2008, total full-time staffing was 1,129; in FY 2019, total full-time staffing was 849. In FY 2008, 15 percent of full-time staff were funded by the state and 85 percent were funded by the federal government. In FY 2019, 10 percent of full-time staff were funded by the state and 90 percent were funded by the federal government.
On Thursday, Governor Murphy announced that the state could borrow as much as $9 billion from the U.S. Federal Reserve to fill budget holes brought on by COVID-19. In response to this announcement, New Jersey Policy Perspective (NJPP) releases the following statement.
Brandon McKoy, President, NJPP:
“The ongoing health and economic emergency New Jersey faces from the COVID-19 pandemic justifies, if not demands, the borrowing proposed by Governor Murphy.
“New Jersey faces unprecedented challenges that endanger the economic security of families and small businesses, and stretch thin the financial resources our state relies on to help those in need. Without significantly more aid from the federal government, we are forced to choose between devastating cuts to public services that families need and borrowing billions of dollars to enable state government to meet its growing responsibilities to its residents.
“Borrowing, especially at the levels that would be required in this crisis, should always be viewed with skepticism, especially because New Jersey in the past has too often justified massive borrowing to support tax cuts that reduced the state’s ability to invest in the building blocks of economic growth. This situation is different. Borrowing now will speed our recovery out of this recession. This will require a disciplined approach that includes reforming the state tax code to make it fairer by calling upon the wealthiest to pay their fair share toward repaying, on schedule, what the state borrows.
“Policy decisions made in the next few weeks will set the path for New Jersey’s recovery. The worst thing the state could do when it’s in a hole like this is to keep digging. As we learned after the Great Recession, a response centered on cutting services and reducing investments in public needs will only slow New Jersey’s economic recovery, prolong the suffering of those harmed most by the pandemic, and worsen existing racial and economic inequality. Borrowing funds to plug budget holes, while far from ideal, is the best way for lawmakers to avoid harmful cuts in the short-term and maintain a strong social safety net for residents losing their jobs and businesses.”
To read a PDF version of the full report, click here.
Crafting a state budget is a tricky task in the best of times as lawmakers juggle competing needs while attempting to predict future economic conditions. This year, however, the COVID-19 pandemic has turned the fairly straightforward FY 2021 budget season into one that will force lawmakers to address sudden and dramatic changes in New Jersey’s finances and the state’s broader economy.
New Jersey is facing a dual threat from the COVID-19 pandemic: a public health crisis that requires mandatory business closures and social distancing, along with the economic fallout from these necessary measures. The state is taking in dramatically less revenue in income, sales, and corporate business taxes, stretching its finances thin. At the same time, lawmakers are hoping to ramp up spending to curb the spread of COVID-19 and provide relief for workers and families struggling to make ends meet. The Murphy administration has already frozen $920 million in planned expenditures in anticipation of a significant drop in revenue collections.[1] New Jersey’s Rainy Day Fund, which is meant to offset the impact of unexpected emergencies, is not sufficient to meet the state’s pressing needs in the coming days and months. Progressive sources of revenue will be needed to ensure the state has the resources to meet our rapidly growing public health and economic needs.
Under the first two years of the Murphy administration, New Jersey has moved away from trickle-down strategies and toward progressive tax structures that enable sufficient investment in public services and assets. Unfortunately, these policies have not been in place long enough to undo decades of underinvestment, nor has there been enough progress to blunt the impact of COVID-19 on the state’s economy. By implementing new, reliable sources of revenue, state lawmakers can avoid harmful cuts to vital services, protect New Jersey families harmed during this economic downturn, and build an economy that works for the many.
New Jersey’s Revenue Problem
New Jersey has a revenue problem. In fact, the state has failed to bring in enough revenue to cover annual expenses since at least 2002. Looking at the latest available data, New Jersey has the worst fiscal deficit in the nation at 91.1 percent.[2]
This lack of revenue has resulted in flat funding and cuts to department budgets, the raiding of trust funds and emergency savings to make ends meet, and forgoing investments into our Rainy Day Fund. For instance, over $300 million in dedicated funds meant for the Affordable Housing Trust Fund were diverted over the course of the last decade to cover chronic budget shortfalls, severely hampering the state’s ability to construct affordable homes and address its continuing housing and foreclosure crisis. Similarly, the New Jersey Department of Environmental Protection has a limited capacity to hold big polluters accountable and enforce clean air, water, and waste standards as its funding was cut 35 percent since the Great Recession.[3] All in all, these fiscal decisions have not only limited the ability of state government to do its job, but have also led to an unenviable record of 11 credit downgrades by the major credit rating agencies since 2010, making borrowing for capital improvement projects more expensive.[4]
To make matters worse, the Garden State has turned its back on working families by relying on trickle-down economic policies, namely lopsided tax cuts for the ultra-wealthy and large corporations and deeply flawed economic development strategies that put a tremendous burden on the state budget for years to come. Under the Christie administration, New Jersey cut taxes and reduced revenue by a cumulative $15 billion while awarding over $8 billion in tax subsidies to already wealthy corporations.
The state’s failed experiment with trickle-down economics started in 2010 when the millionaires’ tax was allowed to sunset, giving wealthy families a cumulative $5 billion in tax breaks and undermining property tax relief programs that allow low-income seniors and adults with disabilities to remain in their homes. In 2018, the estate tax was fully repealed, which was only paid by the wealthiest 4 percent of households in the state. Since the repeal of this tax, wealthy heirs have collectively benefited to the tune of $923 million at the expense of middle-class families. What’s more, in 2017 the state began gradually reducing the sales tax from 7 percent to 6.625 percent. This small decrease in the sales tax has cost New Jersey $1.7 billion in lost revenue, making it even more difficult for the state to fund key priorities, build a healthy Rainy Day Fund, and meet its existing obligations.
These cuts also have deepened structural inequality in the very communities that have been historically deprived of meaningful investments. Already, 25 percent of New Jersey families don’t have enough savings to withstand an emergency without falling into poverty, despite the state’s ranking as one of the wealthiest in the nation.[5] It’s disproportionately worse for New Jersey’s Black households at 45 percent and Hispanic/Latinx households at 60 percent. For these families, a layoff or a visit to the emergency room can easily translate into a financial crisis.
What’s worse, everyday New Jersey families now pay a higher percent of their income in state and local taxes than the state’s wealthiest households do. Middle-income earners — those who make $74,800 to $132,000 annually — pay the highest effective tax rate. They also pay the highest percentage of their annual income in property taxes, at an average of 5.8 percent. Those in the top one percent pay a much smaller share of their income in property taxes at an average of 2.2 percent. The state tax code also disproportionately harms households of color, who are more likely to earn less (due in large part to the nation’s legacy of slavery and generations of discriminatory state and federal policies), and thus pay a larger share of their incomes in state and local taxes than white households.
Breaking Bad Habits: Governor Murphy’s First Two Budgets
The first two budgets enacted under Governor Murphy’s tenure were a good start to repairing years of flat funding, raids on dedicated funds, and disinvestment across the board. Collectively, they were the most progressive budgets New Jersey has seen in at least a decade due to a commitment to tax fairness that, in turn, reinvested in key assets that create strong communities and help grow the state’s economy.
In the last two years, New Jersey made back-to-back record-breaking pension payments, protecting the retirement security of 800,000 public workers. Major investments were made in New Jersey’s most important assets like pre-Kindergarten expansion, K-12 education, and NJ Transit after years of neglect. The state prioritized working families and those struggling to get by with an expanded state Earned Income Tax Credit (EITC) and a new Child and Dependent Care Credit for low-paid working parents. Tuition-free community college was offered for the first time, giving 18,000 low-income students a path toward a more prosperous future. Funding for property tax relief programs improved and state-funded care workers, who are disproportionately women of color, were given an overdue raise. Finally, cash assistance for families living in extreme poverty, including 20,000 children, was raised twice, by a total of 32 percent, after 30 years without an increase.
The state’s last two budgets also prioritized good faith negotiation tactics and addressed an overreliance on budget raids. Through collective bargaining, the Murphy administration successfully secured about $800 million in real and lasting savings in the delivery of public employee health care in the FY 2020 budget — a 16 percent year-over-year decrease from the previous budget. This year’s budget also moved further away from the habitual raiding of the Clean Energy Fund and the Affordable Housing Trust, boosting their funds by $70 million and $59 million, respectively.
Finally, the state made its first, long overdue deposit of $401 million into the Rainy Day Fund, which had been empty since the height of the Great Recession. Though a relatively small investment — national budget experts recommend states save 16 percent of their annual spending in reserves — it is an important step in rebuilding an emergency savings account that the state can use during tough times without having to make detrimental cuts which commonly put low-income communities of color at the most risk. Unfortunately, it is likely to be used up quickly in response to the COVID-19 crisis.
All these investments were possible due to a steady job growth rate, a stable economy, and an administration that, over the last two years, prioritized new, renewable sources of revenue after a decade of tax breaks for wealthy families and large corporations. By restoring the 10.75 percent income tax rate on earnings over $5 million (a part of the millionaires tax that sunset under the Christie administration), applying the sales tax to purchases made on the Internet, closing corporate tax loopholes, and enacting a new (but temporary) surcharge on corporate profits, New Jersey has established a more fiscally sound foundation for the future — albeit one that is now at severe risk due to the harmful effects of the coronavirus pandemic.
Regardless of the current crisis, these last two years demonstrate how a budget can promote tax fairness and help New Jersey families gain economic security by making meaningful investments in their communities. Decades of neglect cannot be fixed in just a few years, however. Many departments that provide critical services and programs remain flat-funded and the raiding of dedicated funds to fill budget holes has continued. More will have to be done to help the state rebuild its assets and invest in long-term initiatives again.
Looking Ahead to FY 2021: Governor Murphy’s Budget Proposal
Prior to the COVID-19 pandemic, Governor Murphy’s FY 2021 budget proposal relied on healthy economic growth and adequate resources to fund new investments. That view has now shifted significantly to mitigating harm from a once-in-a-lifetime public health crisis while providing critical economic relief for workers, families, and small businesses.
As is, the $40.85 billion proposal commits to making substantial investments in affordable housing, education, and NJ Transit, as well as expanding programs designed to address racial, gender, and economic disparities. Like previous budgets under Governor Murphy, the FY 2021 proposal restates the importance of budgeting responsibly by scaling back on raids of dedicated funds, making the next scheduled pension payment in full, and growing a healthy surplus and Rainy Day Fund to better weather unexpected shortfalls without resorting to damaging cuts.
The Murphy administration and legislative leaders must now find a way to retain the overarching values of this proposal without shortchanging measures most needed during this pandemic. It is imperative that the state continue to adequately fund essential services to protect public health and provide relief to all affected workers and local businesses. The state’s modest Rainy Day Fund will be wiped out almost immediately, leaving it in no shape to handle immediate emergency needs. To sustain current needs, prop up the state economy, and reduce the harm to families and communities, Governor Murphy has requested at least $20 billion in aid from the federal government as part of a $100 billion multi-state package.[6] As of this writing, the federal government has provided $3.44 billion in support to New Jersey.[7] It seems that most, if not all, of the relief package is meant for COVID-19 specific interventions rather than helping New Jersey replace lost revenue due to the burgeoning economic recession. Regardless, if the state is to successfully tackle these challenges, the federal government will need to provide much, much more economic relief that is flexible for New Jersey to use as it needs. Only then can New Jersey policymakers begin to piece together a state budget that meets the needs of families and communities without making dramatic cuts during these extraordinary times.
In response to the COVID-19 crisis, New Jersey is going to have to think outside the box. The effects of this crisis on New Jersey’s economy will create major upheaval for the state budget due to a surge in demand for public services just as multiple sources of revenues needed to fund them begin to evaporate. Federal support for NJ Transit and COVID-19 response has been approved, but without knowing how long this public health crisis will last, New Jersey’s fiscal outlook is precarious at best. Policymakers have a choice: either prioritize and increase resources to protect the most vulnerable New Jersey families or continue giving massive tax breaks to the well-connected.
In these challenging times, it is more important than ever that New Jersey resist the impulse to cut vital programs and services. That would be a repetition of the mistakes made during the Great Recession, mistakes which slowed the state’s recovery and set it further back.[8] Raising revenue in a progressive manner is crucial to having the resources for a proper emergency response. Without additional revenue, the state won’t be able to fully assist workers, families, and businesses who are vulnerable to economic calamity during this crisis.
In order to provide critical relief, state lawmakers should prioritize and even expand existing programs that can support and protect frontline workers like first responders, health care providers, childcare staff, and those employed by businesses providing essential services like groceries and garbage pick-up. Workers who may not qualify for federal assistance because they lack income tax filing information must also be given priority. Programs that are best positioned to protect vulnerable households from losing their home or going hungry need to be protected. Extra funding will be needed to mitigate the spread of the virus among the incarcerated and the homeless population, too. All programs that make public colleges and universities more affordable must also be spared. College tuition aid and grants for community colleges play a critical role during an economic downturn, helping jobless workers expand their skills now for economic prosperity in the future.
The next state budget must prioritize tax policies that deliver very targeted benefits to families most in need. The scheduled increase of the state’s EITC to 40 percent must remain in place as should plans to expand the eligibility to young adults without children.[9] It would also be prudent to establish a state-level child tax credit, designed to help working parents meet the costs of raising children, during this time of economic instability. The lack of a robust social safety net is precisely why so many families are at increased risk by the economic fallout brought on by COVID-19.
Lawmakers must table all efforts to cut taxes and instead focus on relief for those most in need by generating short- and long-term tax revenue from those who are in the best position to contribute: wealthy households and successful corporations. The Governor’s proposed budget, although crafted before the coronavirus pandemic, includes $1.2 billion in new sources of revenue through a true millionaires tax and a variety of fees and sin tax increases. To mitigate the harms posed by the current crisis, reverse revenue shortfalls, and enhance widespread prosperity and racial equity, the state must continue to prioritize responsible and progressive budgeting practices to overcome the current challenges. The proposed package of tax reforms is a good start, but it could and should go further.
For example, Governor Murphy has proposed applying the 10.75 percent income tax rate to earnings over $1 million — a 2-cent increase on every dollar earned over $1 million — to raise an additional $500 million in annual revenue. There is, however, a better way to make the income tax code more accurately reflect the lopsided income gains made by the top 15 percent of households over the past 40 years. Under the current tax code, individuals earning slightly over $75,000 are in the same bracket as those who earn just under $500,000. Creating new brackets between $250,000 and $2.5 million would make the tax code fairer and ensure budgets are not balanced on the backs of middle-class families. Further, New Jersey lawmakers should increase the marginal tax rate on annual incomes over $5 million. These changes would raise twice as much revenue as Governor Murphy’s proposal for property tax relief, school funding, and municipal aid.[10]
Governor Murphy’s proposed budget also contains a new health insurance assessment.[11] This was previously levied by the federal government but was repealed as part of the 2017 federal tax cuts. Governor Murphy’s budget estimates the new state-level policy would generate $280 million in its first year, the majority of which would support subsidies for New Jerseyans purchasing health insurance. This new revenue source is slated to generate up to $500 million annually after FY 2021.
The Governor also proposed a tiered fee for private employers that have more than 50 employees receiving state Medicaid benefits. The fee is designed to encourage large corporations to improve the quality of their health benefits and reduce their reliance on state resources. However, national budget experts warn this untested policy may only encourage employers to resort to a variety of tactics to avoid the fee, potentially leading to discriminatory hiring practices and lay-offs that would disproportionately impact people of color, single mothers, and young workers.[12] There are other more-direct and proven ways to ensure large corporations are paying their fair share in taxes. New Jersey could instead raise revenue through extending the 2.5 percent corporate business tax surcharge, closing tax avoidance loopholes, and reversing business tax cuts made in 2013.
There are multiple sources of revenue that must be put back on the table during these extraordinary times. Here are other policy recommendations to consider:
Revise taxation on inherited wealth to reverse the $500 million in tax breaks now going to wealthy heirs.
Repeal the 2016 sales tax cut and broaden the sales tax base by including services typically utilized by wealthy households, such as limousine services and chartered flights.
The purpose of fair taxation is to raise revenue in an equitable manner that can fund the critical public services and assets New Jersey families rely on with enough left over to save for a rainy day. A progressive tax code is also crucial to improving racial equity and undoing centuries of discrimination that have left communities of color behind,[13] making them particularly vulnerable during moments of crisis.[14] Unfortunately, New Jersey spent the last decade largely ignoring these important priorities. Had the state spent that time making annual investments in the Rainy Day Fund that match what it made last year, we would have nearly $4 billion to help tackle the COVID-19 crisis instead of the $401 million currently available. Going forward, implementing sound tax policies that help the state plan for future challenges will be paramount.
New Jersey’s economic future is at risk with the ongoing COVID-19 pandemic, the associated economic fallout from social distancing measures, and the uncertain amount of federal assistance New Jersey will ultimately receive. Workers, families, and businesses need real help and the state needs to prepare and act quickly. State lawmakers simply cannot afford to fall back on old habits by cutting government services and waiting out the storm. New Jersey needs new, reliable sources of revenue to build up a healthy surplus, avoid harmful cuts to vital services, and protect those most at risk during this economic downturn. Only then can we say with confidence that our state budget lives up to the values we all share and hold dear.
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.
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.
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.
