Topic Category: Tax and Budget

What’s Included, and Missing, in Gov. Murphy’s FY 2022 Budget Proposal

Posted on by Sheila Reynertson

As state lawmakers chart the course of New Jersey’s pandemic recovery in next year’s budget, two unique factors could shape their decisions. For the first time ever, New Jersey will be starting the new fiscal year with over $6 billion in surplus. A number of factors made this possible, including better than expected revenue collections, borrowed funds from last year’s budget, and much-needed federal aid. Second, the country as a whole is facing a moment of reckoning in the face of massive racial inequities laid bare by COVID-19, which disproportionately harmed low-paid workers and Black and Latinx/Hispanic families.

The Fiscal Year (FY) 2022 budget provides a unique opportunity to address racial disparities head-on by making meaningful investments in the building blocks of a strong economy and continuing to support those who have been harmed by the catastrophic events of the past year. As the state rebuilds its economy, it must also ensure that no one is left behind.

It is safe to say that the state’s economy is on the mend. But viewed through a racial lens, the recovery is more complicated, especially among communities who never recovered from the Great Recession. New Jersey’s low-paid workers and residents of color were hit the hardest by the public health crisis and are historically the last to bounce back from an economic downturn. Targeted policies that enhance racial equity must be a critical piece of the next state budget. Otherwise, New Jersey could hamper its comeback. But, to do so successfully, lawmakers must take a multi-year view of the state budget, a practice that has long been lacking in the budgeting process.

In many ways, Governor Murphy’s budget proposal gets it right. It is a legitimate attempt to both meet the needs of New Jersey families reeling from the pandemic and make responsible payments toward long-term obligations. There are ample proposals in this budget that are both good economic policy and popular, such as investments in education, health care, and support for small businesses ravaged by the pandemic. But just as noteworthy are the pitfalls in the governor’s proposal, like providing insufficient pandemic relief for excluded immigrant workers, relying on non-renewable funds, and raids of dedicated funds that could leave the state vulnerable to cuts in the not-too-distant future.

Soon, the Legislature will release their budget proposal, and final negotiations between the legislative and executive branches will begin. With that in mind, the following review of the governor’s FY 2022 budget proposal highlights investments that will guide the state’s recovery and ways the Legislature could improve upon them to ensure the state budget meets the current moment with intention.

Unexpected Revenue

The $44.8 billion spending plan in the governor’s proposed FY 2022 budget is a clear declaration that investing our way out of the crisis is the only path forward to a strong state economy. The overall price tag of the proposed budget is more than 10 percent higher than FY 2021’s budget, with significant increases in funding going to schools, affordable housing, and the state’s colleges and universities.

These investments were made possible due to better-than-expected revenue collections and borrowed dollars. The state secured these borrowed funds last fall in the face of a very uncertain future with limited options. A second wave of the pandemic was expected, and there was no promise of future federal aid given the upcoming elections for president and control of congress. New Jersey could have plunged forward without borrowing, but that would have exposed the state to potential revenue shortfalls followed by deep cuts to the very services and programs that New Jerseyans rely upon during tough economic times. Together, the Legislature and the governor settled on borrowing $3.7 billion through an emergency sale of general-obligation bonds to address direct costs of the pandemic response and shore up the state’s finances through the end of June 2021.

The good news is that New Jersey has emerged from the second wave of the pandemic on solid footing due to economic growth. Those signs of economic recovery — including strong revenue collections — allowed the governor to propose making a full payment into the state’s public worker pension system for the first time in 25 years. That additional $1.7 billion investment would save the state $860 million over the next three decades. It would also signal fiscal prudence to credit rating agencies; improvements to New Jersey’s credit rating bring down future borrowing costs.

A better fiscal outlook for next year plus the extra cushion of borrowed dollars opens up another long-overdue opportunity — starting FY 2022 with a $6 billion surplus. New Jersey has a long history of passing budgets with razor-thin margins with very little backup savings. A healthy surplus provides extra revenue for state services and programs, if needed, instead of turning to deep, painful cutbacks to balance the budget. The governor’s proposal indicates that two-thirds of the surplus would be spent on the pandemic response and residents’ high unemployment needs. The remaining $2.2 billion would remain in surplus for the following fiscal year.

However, the governor also has plans to spend down the entire rainy day fund of $1.4 billion during FY 2022. These dollars are typically reserved for unexpected downturns or natural disasters. The governor points to the ongoing public health crisis to justify using the emergency funds. This decision may change now that New Jersey has received an additional $6 billion in aid through the federal American Rescue Plant.

About $6.24 billion is slated for state government aid and $3.6 billion for counties and local municipalities. This is additional to the $4 billion New Jersey already received in the first round of federal aid through the CARES Act last fall. This round, however, is a bit more flexible and includes sizable expansions of tax credits for working families, dollars to lower health care costs and help schools reopen safely, small business grants, and more funding for vaccine distribution efforts. These significant COVID-related investments should help New Jersey stretch existing resources or grow an even larger surplus to better address the ongoing economic fallout of the pandemic or unexpected shortfalls in the future. Because, once the federal aid is spent, which New Jersey is required to do by the end of 2024, the state is on its own again.

That brings us to an important consideration: The FY 2022 budget relies on about 10 to 14 percent of non-recurring revenue, putting the notable investments below in jeopardy after the federal aid is spent. New Jersey lawmakers must keep their eyes peeled on the not-so-distant future and find ways to protect these new and expanded programs long-term — because sustainable funding is a non-negotiable component of advancing racial equity through the state budget.

Notable Investments

Health Care

Cover All Kids

The governor proposed funding most components of Cover All Kids, an initiative that would provide improved and new pathways to health coverage for all children, regardless of their immigration status. Cover All Kids aims to address the remaining gaps in coverage that have left more than 80,000 children in the state uninsured. The proposed budget would eliminate premiums in the Children’s Health Insurance Program (CHIP), end the 90-day waiting period for those children who were voluntarily removed from employer insurance, and expand outreach efforts. These investments, including technological updates needed for the expansion of eligibility, amount to $20 million. Legislation will be necessary to expand eligibility to children who are not currently covered due to immigration status.

GetCovered NJ and Other Health Care Subsidies

This past year, New Jersey opened its state-based exchange, GetCovered NJ, and provided additional state subsidies to help families with their monthly premiums. The recently enacted state Health Insurance Assessment (HIA) on health insurers funds these subsidies. Now, the governor proposed adding $25 million more toward subsidies for FY 2022. Along with the extended enrollment period for GetCovered NJ through the end of December 2021, these investments will provide unprecedented access to affordable insurance for thousands of New Jerseyans who have lost coverage during the pandemic or who have sought to get covered for the first time during this crisis.[i]

Reproductive Health Care

Coverage for reproductive health care for the uninsured has been at a standstill for years, and the lack of significant investment in resources threatens the health and wellbeing of thousands of New Jerseyans. Previous years’ budgets committed $3.8 million annually for limited prenatal services for uninsured residents. Yet, funding often ran out by the end of the first quarter, pushing pregnant people off one program and into another funded with Charity Care dollars. This budget proposes replacing this patchwork coverage with a new $19 million Reproductive Health Care Fund that would seamlessly cover prenatal costs and provide contraceptive services for the uninsured for the first-time. Additionally, the budget proposal commits $450,000 to create a state doula registry, which would connect expecting parents with trained doulas whose services are covered under Medicaid, as was announced in February 2021.[ii]

In addition to expanding reproductive health services, the governor seeks to extend Medicaid coverage of postpartum care from only 60 days to 12 months, helping an estimated 8,700 mothers per year.[iii] This $8.5 million investment (that the federal government will match) would greatly reduce the risk of pregnancy-related deaths, a top priority of the Murphy administration.[iv] For Black mothers — who are seven times more likely than white mothers in New Jersey to die during or after childbirth — this expansion of care is crucial, as Medicaid covers half of all births for Black women.[v] The Biden Administration’s American Rescue Plan builds upon this expansion by extending 12-month postpartum care coverage and removing administrative barriers.[vi]

Charity Care

Despite the advancements of health insurance marketplaces and Medicaid expansion under the Affordable Care Act (ACA), many New Jerseyans remain uninsured and underinsured. The Charity Care program helps address this gap by providing funds to help cover eligible uninsured and underinsured patients when they seek certain emergency and needed care at New Jersey hospitals. This budget proposes increasing funding for the program by $10 million to $279 million, covering more people and costs. Further funding increases and reforms would better support the state’s health care needs and address possible future public health crises.

Office of Minority and Multicultural Health (OMMH) and Graduate Medical Education (GME)

Programs that help diversify the medical profession and better address racism in health care are critical for improving the health outcomes of Black and Hispanic/Latinx residents, who are disproportionately without insurance and more vulnerable to pandemics and other public health crises.[vii] But not if these programs are cut or flat-funded year after year (flat-funding is tantamount to a cut because the costs of services increase every year). Under the governor’s budget proposal, OMMH is flat-funded at $1.5 million for its work in promoting health equity.  Similarly, the GME program also remains flat at $242 million. An alarming shortage of physicians, especially in areas serving communities hit hardest by the COVID-19 pandemic, demonstrates the continued need for increased funding for GME.[viii]

Economic Security

Child and Dependent Care Credit (CDCC)

The CDCC helps offset the cost of caring for children and dependents in the form of a tax credit. As currently structured, the credit reduces a tax filer’s tax liability, and accordingly, only benefits households that owe taxes. The governor proposes making this tax credit fully refundable, substantially expanding access for families who earn little or no income. In addition, the proposed budget would increase the maximum income threshold from $60,000 to $150,000. Together, these changes would more than double the number of families who qualify for this credit.

Temporary Assistance for Needy Families (TANF)

Now more than ever, New Jersey must help families living in deep poverty. The FY 2022 budget improves the TANF program to better meet the needs of families struggling to make ends meet and put food on the table. The governor’s budget proposes increasing the child support funds, extending the period to meet program requirements, and providing additional dollars for support services for those at risk of losing their benefits.

Detention and Deportation Initiative

All immigrants facing detention and deportation deserve access to meaningful legal representation. Yet, many immigrants are left to navigate the complex immigration system without legal counsel due to the high cost. In 2018, New Jersey took an important step toward addressing this gap by launching a legal representation program for immigrants detained by Immigration and Customs Enforcement (ICE). The proposed budget offers the successful program another $2 million for a total of $8.2 million. While this increase falls short of the level needed to fully fund representation for all who need it, the boost in funding would bring New Jersey one step closer to ensuring due process protections for all immigrants facing detention or deportation in the state.

What’s Missing

Since the drafting of the governor’s budget, the state has received significant federal aid, which provides a welcomed opportunity to revisit and prioritize overlooked or underfunded programs. This includes shortcomings already covered in this report, like excluding New Jersey’s undocumented children from health care coverage. But there are other areas that, if improved, would make an immediate difference in the lives of struggling families and better prepare New Jersey for unexpected emergencies in the future.

Rainy Day Fund Deposit 

New Jersey currently has one of the lowest Rainy Day Funds in the nation as the reserves were never replenished after the Great Recession. Regular deposits made by the Murphy administration paved the way for rebuilding the emergency fund if not for the global pandemic. The governor’s proposal spends down the small reserves as part of the state response to the ongoing economic fallout. But now, with federal aid and a larger than expected surplus, lawmakers should consider putting this idea on ice and instead make a modest deposit into the fund. It sends a signal to credit rating agencies that New Jersey will never again allow reserves to be treated like a slush fund or a second-tier obligation as the state recovers from the public health crisis.

Pandemic Relief for People Excluded from Federal Aid

Many New Jerseyans who have suffered financial hardship this past year have benefitted from federal program support, including unemployment insurance and stimulus payments. However, more than 400,000 New Jerseyans are not eligible for these forms of assistance. While several states have stepped up to address this gap, the proposed budget neglects targeted funding for excluded workers and families. Since the proposed budget release, Governor Murphy has announced a $40 million allocation of federal funds to support New Jersey residents excluded from federal relief. While this investment is an important first step, this aid will reach only a small number of New Jersey’s excluded workers and is insufficient to meet the needs of those who have been without relief for over one year. Lawmakers should build upon this and allocate additional dollars for excluded workers and families.

Full Earned Income Tax Credit (EITC) Expansion

While New Jersey’s EITC provides a financial boost for thousands of New Jerseyans, too many workers and their families are still left out of this critical anti-poverty program. The proposed budget expands access to the credit for childless workers over 65, but young workers under 21 who do not claim children as dependents would continue to be ineligible for the state-level EITC. Further, workers who file taxes using an Individual Taxpayer Identification Number (ITIN) are excluded from the EITC entirely. Lawmakers should permanently remove these discriminatory barriers to the EITC.

TANF Cash Assistance Increases

Cash assistance provides a critical lifeline for families living in deep poverty, especially during recessions and extraordinary circumstances like the COVID-19 pandemic. While the governor’s budget proposed expanding child support funds in the TANF program, cash assistance levels remain flat at about one-third of the federal poverty level ($559 for a family of three).[ix]Lawmakers should increase the monthly cash assistance amounts to at least 50 percent of the federal poverty level and make sure to adjust it yearly for inflation to better help families and avoid increased hardship during this ongoing crisis.

 

 

End Notes

[i] Washburn, Lindy (2021). “Deadline for buying health coverage on GetCoveredNJ extended, Phil Murphy says.” NorthJersey.com. 29 March. Online: https://www.northjersey.com/story/news/health/2021/03/29/getcoverednj-obamacare-health-coverage-deadline-extended-nj/7052485002/

[ii] Office of Governor Phil Murphy (2021). “First Lady Tammy Murphy and New Jersey Department of Human Services Announce New Medicaid Initiatives to Help Improve Maternal & Infant Health.” 2 February. Online: https://www.nj.gov/governor/news/news/562021/20210202b.shtml

[iii] New Jersey Department of Human Services (2021). DHS Response to OLS Questions. Pg. 28. Online: https://www.njleg.state.nj.us/legislativepub/budget_2022/DHS_response_2022.pdf

[iv] Georgetown University Health Policy Institute (2020). “MACPAC Recommends One Year of Postpartum Medicaid Coverage at 100% Match.” Online: https://ccf.georgetown.edu/2021/02/01/macpac-recommends-one-year-of-postpartum-medicaid-coverage-at-100-match/; The Commonwealth Fund (2019). “Increasing Postpartum Medicaid Coverage Could Reduce Maternal Deaths and Improve Outcomes.” Online: https://www.commonwealthfund.org/blog/2019/increasing-postpartum-medicaid-coverage

[v] Hogan, V. K., Lee, E., Asare, L. A., Banks, B., Benitez Delgado, L. E., Bingham, D., Brooks, E, Culhane, J., Lallo, M., Nieves, E., Rowley, D. L., Karimi-Taleghani, P. H., Whitaker, S., Williams, T. D. & Madden-Wilson, J. (2021). The Nurture NJ 2021 Strategic Plan. The State of New Jersey, Trenton, NJ. Online: https://nurturenj.nj.gov/wp-content/uploads/2021/01/20210120-Nurture-NJ-Strategic-Plan.pdf

[vi] Stan Dorn and Joe Weissfeld (2021). “The American Rescue Plan Makes the Greatest Improvements to Health Coverage and Affordability in More Than a Decade.” Families USA. Online: https://familiesusa.org/resources/the-american-rescue-plan-makes-the-greatest-improvements-to-health-coverage-and-affordability-in-more-than-a-decade/

[vii] New Jersey Policy Perspective (2020). “Unprecedented and Unequal: Racial Inequities in the COVID-19 Pandemic.” Online: https://www.njpp.org/publications/report/unprecedented-and-unequal-racial-inequities-in-the-covid-19-pandemic/

[viii] New Jersey Hospital Association (2017). Physician Workforce: A Strategy for New Jersey. Online: http://www.njha.com/media/401356/Physician-Workforce-Strategy-JBS.pdf

[ix] Safawi, Ali and Ife Floyd (2020). “TANF Benefits Still Too Low to Help Families, Especially Black Families, Avoid Increased Hardship.” Center on Budget and Policy Priorities. 8 October. Online: https://www.cbpp.org/research/family-income-support/tanf-benefits-still-too-low-to-help-families-especially-black

Five Ways to Strengthen Tax Credits for Workers

Posted on by Vineeta Kapahi

The American Rescue Plan (ARP), which was signed into law by President Biden in March 2021, is set to provide critical relief to workers and families hard hit by the COVID-19 pandemic. The law, widely considered the biggest anti-poverty plan in decades, includes expansions to tax credits for workers, unemployment benefits, health coverage, and food and housing assistance.

Notably, this relief package substantially, but temporarily, expands two key tax credits: the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). For the CTC, which helps working families offset the costs of raising children, the ARP expands eligibility to include all children with a Social Security number except those in households with the highest incomes and increases the maximum credit amount. In addition, ARP expands the Earned Income Tax Credit (EITC) for workers who do not claim dependent children by broadening age restrictions and increasing the maximum credit amount. Unfortunately, most of these changes are scheduled to expire after one year. Federal lawmakers should extend these investments to build a more equitable recovery and permanently strengthen these programs.

In the absence of permanent changes to address inequities in the federal EITC, access to this vital program remains limited: it has age restrictions for workers without dependent children, excludes immigrants, and can penalize survivors of domestic violence. In addition, the permanent version of federal CTC excludes many of the households who need it most. The good news is that New Jersey does not have to wait for the federal government to address these issues — the state can strengthen its own state-level tax credits. Here are five steps New Jersey lawmakers can take right now to improve the economic security and wellbeing of low-wage workers and families.

1. Stop Excluding Immigrant Workers Who File Taxes 

Both the federal and New Jersey EITC exclude immigrants who do not have a Social Security number (SSN)> altogether. As a result, tens of thousands of immigrant households are excluded from this program, even if they file taxes using an Individual Taxpayer Identification Number (ITIN). This arbitrary exclusion pushes immigrant households who are struggling to make ends meet further behind. New Jersey can make this tax credit more inclusive by removing this discriminatory barrier and extending access to New Jerseyans who would qualify for the credit but for the type of number they use to file their taxes. In addition to expanding access to the state EITC, New Jersey should also provide ITIN filers the value of their denied federal EITC so they receive the same total tax credit as other workers.

2. Permanently Remove Age Restrictions to EITC Eligibility

For workers without qualifying children, eligibility for the EITC is subject to age restrictions – workers who do not claim children as dependents are only eligible for the federal EITC if they are between the ages of 25 and 64. In 2020, New Jersey took an important step toward addressing this shortcoming by lowering the minimum EITC eligibility age for workers without qualifying children from 25 to 21. New Jersey can build on this progress by eliminating the age limits for workers without qualifying children altogether, allowing young people under 21 and seniors over 65 to benefit from this important program. The state should also address the gap created by the federal EITC’s narrow eligibility rules by providing these workers with the full amount of the federal EITC that they are denied.

3. Expand the EITC Income Eligibility and Increase Credit Amount for Workers Without Dependent Children

For workers who are not raising children at home, the EITC is limited in two big ways: the maximum credit amount is lower than for residents with children, and the income eligibility threshold is much lower, meaning fewer workers qualify. The maximum state EITC that a worker without dependent children can claim for the 2020 tax year is just $215 compared to $1,434 for a worker with one child. For the same tax year, the maximum income threshold is only $15,280 for a single adult – less than what a person earning the minimum wage and working full-time would have earned in 2020  – compared to $41,756 for a single worker with one child. New Jersey could provide a more meaningful boost for individuals earning low wages by raising the maximum credit amount for workers without qualifying children and by increasing the income cap to match the earnings of a full-time worker earning the minimum wage.

4. Expand EITC Eligibility for Domestic Violence Survivors

Individuals who file their taxes with the status “married filing separately” are ineligible for any EITC. This limitation penalizes some survivors of domestic violence; individuals who leave a relationship in the latter half of the tax year or have not legally divorced are typically required to file their taxes as married filing separately, and as a result, are not eligible for the EITC. By allowing tax filers who are unable to file a joint return because of domestic violence to claim the EITC, New Jersey can better support the safety and economic security of survivors.

5. Establish a State Child Tax Credit and Make the Child and Dependent Care Credit (CDCC) Fully Refundable

Regardless of whether or not federal lawmakers extend the temporary expansion of the federal CTC, New Jersey can build upon and address gaps in the CTC by creating a state version of this credit. In addition, New Jersey can make its current CDCC more inclusive by making this credit fully refundable.

Expanding Tax Credits for Workers  Benefits Working Families and the Economy Alike

Expanding access to New Jersey’s tax credits for working families would not only relieve financial hardship for low-wage workers ― many of whom are essential workers ― it would also serve as a fiscal stimulus. By putting money in the hands of people who need it and are likely to spend it immediately, these credits increase demand for goods and services, strengthening the broader economy and local communities across the state.

Structure of New Emerge Tax Credit Program Must Prioritize Equity and Transparency

Posted on by Sheila Reynertson

The following comments on the draft Emerge program rules were delivered to the Economic Development Authority on April 16, 2021.

New Jersey Policy Perspective (NJPP) has researched and analyzed the state’s economic development programs for over twenty years. We closely monitor the tax credits awarded by the state Economic Development Authority (EDA), how many jobs created and maintained the state gets in return, and regularly compare New Jersey’s corporate subsidy programs — and the laws that guide them — against those in other states across the nation.

These comments on draft rules implementing the new Emerge program under the New Jersey Economic Recovery Act are intended to ensure the job creation program is structured and administered in an equitable and transparent manner. The following feedback focuses on seven sections of the proposed rules including application requirements, review process, community benefit agreement, and evaluation transparency.

19.31-22.3(a)5 Eligibility criteria

“The award of tax credits, the capital investment resultant from the award of tax credits, and the resultant creation and retention of new and retained full-time jobs will yield a net positive economic benefit to the State…”

Given that the EDA’s “net benefit” methodology is hidden from public scrutiny, a debate about who is most qualified to analyze them or about the standards being used to estimate the efficiency of tax incentives is seemingly impossible. The result is that the public doesn’t know if the costs and benefits are calculated in a way that accurately captures the local economy and its unique needs. Does it estimate the employment benefits, particularly the proportion of new jobs likely to go to local, unemployed residents? What effect would the wage rate have on similar local jobs? Does the analysis look at wage gains across the income distribution and per capita income growth? Can the existing infrastructure accommodate the expected job growth, and can the local government absorb the added costs that come with new residents?

Public access to this methodology should be made available. Absent that, NJPP agrees with the recommendation made by Governor Murphy’s Task Force on EDA Tax Incentives (“the Task Force”) that “the EDA implement a recordkeeping requirement that permits [an auditor] to conduct effective examinations [of the analysis used for approval decisions]. This requirement would promote transparency and accountability in the EDA’s decision-making process and promote the effectiveness and efficiency of any future audits of the EDA.”[i]A paper trail of the net benefit analysis is also in the best interest of taxpayer resources.

19.31-22.4 Restrictions

(a)“The Authority shall not enter into an incentive agreement with a business that has previously received incentives administered by the Authority unless the capital investment incurred and new or retained full-time jobs pledged by the business in the new incentive agreement are separate and apart from any capital investment or jobs underlying the previous award of incentives.”

Given the recent history of bad actors forced to rescind their tax credits,[ii] this exception should be contingent upon a record of good standing with the EDA based on the previous tax incentives awards. In fact, any company whose tax credits were subject to early termination by the EDA for non-compliance should not be eligible for future tax credit award in perpetuity.

19.31-22.5 Application Submission Requirements 

(a)1“Each application to the Authority made by a business shall include the following information in an application format prescribed by the Authority…”

Among the listed business information requirements (1.i-xiv), NJPP recommends the inclusion of the New Jersey lobbying number of the authorized agent hired to assist the business with the application process.[iii]

We understand it is common for companies that apply to the EDA for tax incentives to engage the services of professional consultants to guide companies through the complex process of applying for incentives. However, without safeguards in place, these consultants can manipulate the process for financial gain. As described in the Task Force’s final report, “one consultant fabricated and altered documents before submitting them to the EDA on multiple occasions.”[iv]

The Task Force recommended the EDA hold consultants accountable for improper conduct by requiring they adhere to a code of ethical conduct — similar to how company executives are currently required by the EDA to execute certifications prior to the company’s award of tax credits.

However, given the blatant abuse of the past, this does not go far enough. Any site selection consultant or real estate broker should instead be required to register as a New Jersey lobbyist. Since accepting “success fees” is considered overt incentive for bribery under the law, this requirement removes consultants motivated by commissions out of the process entirely.

19.31-22.7 Review of Completed Application

During the review of an application, the proposed rules as currently written do not allow the public an opportunity to comment on the business applicant and/or the proposed location before the application is reviewed by the Board. To promote additional transparency of the Emerge program and shed light on an applicant’s standing among workers and in the community, the EDA should inform interested parties of pending applications and provide the opportunity to comment in advance of the final Board meeting.

NJPP recommends two ways to keep the public informed and engaged during the application process. The EDA should create and maintain a public web-based application tracker, which is updated on a rolling basis as new applications are submitted for review.  Such a tracker should include the applicant business name, the municipality and county in which the business seeks to relocate or expand, and the date the application was submitted. The tracker should also include application status and advance notification. A public tracker for business tax incentives maintained by Louisiana’s economic development authority is an exemplary model.[v] The EDA should also provide 30 days in advance a public notice of Board meetings at which an application will be reviewed, which would trigger a comment period leading up to the final Board meeting. An example of public notices can be found at NYC Industrial Development Agencies.[vi]

19.31-22.9 Approval Letter and Commitment Agreement

(c)19 A provision requiring a community benefits agreement if the total project cost equals or exceeds $10 million.

Communities are rarely at the table of a statewide economic development strategy. A community benefit agreement (CBA) can address this, but too often the corporation receiving the tax break dictates the terms, downplaying community participation and crucial benefits that would meet their needs. Given the level of fraud that was allowed to prosper under the previous economic development legislation, the EDA must play a stronger role to ensure community voices are heard and that compliance with this type of agreement is enforced.

(d)1 “The business shall enter into a community benefits agreement with the Authority and the chief executive of the municipality or, if requested by the chief executive of the municipality, the chief executive of the county, in which the qualified business facility is located.”

New Jersey Economic Recovery Act states that “[p]rior to entering a community benefits agreement, the governing body of the county or municipality in which the qualified business facility is located shall hold at least one public hearing.” However, in the proposed rule above, the EDA interprets the term “governing body” to mean the chief executive of the municipality or county. NJPP takes issue with this interpretation as it carves out multiple perspectives found on a multi-person governing body and leaves decisions that affect the entire community to a singular mayor or county executive. NJPP recommends the rule be amended to define the governing body to mean a municipality council or board of commissioners to ensure adequate community input.

“At least one” public hearing before the establishment of a CBA has all the characteristics of a token gesture. The process of creating and monitoring a CBA needs to encourage meaningful community engagement and input. In fact, recipients of tax credits should first be put on mandatory probation for year one, and if compliance of a CBA is not established, the EDA should have the authority to rescind and recapture the tax credits.

In distressed municipalities, job training should be a non-optional main component of the CBA given its proven long-term economic impact, even if the subsidized jobs no longer exist. The EDA should also require that the advisory committee accurately reflect the demographics of the community.

Finally, the various components of the CBA should be made publicly available to community residents on the municipality website and the EDA website. These include the final terms of the CBA, the annual reports produced by the community advisory committee, notice of non-compliance and resulting forfeit of tax credits, and certifications that the CBA has been satisfied.

(d)8 “An eligible business shall not be required to enter into a community benefits agreement pursuant to this subsection if the eligible business submits to the Authority a copy of the eligible business’s redevelopment agreement and approval letter that is certified by the chief executive of the municipality in which the project is located.”

A good community benefits agreement ensures that new development serves the needs of local residents and their communities, not just developers. And the role of local elected officials can ensure community voices are heard and that economic development delivers meaningful benefits. However, this exemption allows one local elected official to sign away the CBA agreement without adequate input from community members. NJPP recommends that this exemption be certified by the municipality’s council or the county’s board of commissioners, not the mayor or county executive, in which the project is located.

19.31-22.14 Reduction and Forfeiture of Tax Credits

(f) “The Authority may recapture all or part of a tax credit awarded if an eligible business does not remain in compliance with the requirements of a project agreement for the duration of the commitment period.”

NJPP again strongly recommends that companies subject to the recapture of all or part of a tax credit due to non-compliance be banned from all EDA tax incentive programs in perpetuity.

19.31-22.19 Reports on Implementation of Program

NJPP supports a regular, independent evaluation process to effectively analyze the design, administration, and effectiveness of the Emerge program. The biennial, independently produced report with a detailed analysis of the program’s effect on a business’ relocation decision, the return on investment for the award, the impact on the state’s economy, and other metrics based on national best practices is an important tool of accountability.

NJPP recommends that the implementation reports and EDA responses to those reports be posted publicly on the EDA website to allow public scrutiny of the overall effectiveness of individual programs.

Finally, NJPP recommends the creation and maintenance of a publicly available and exportable database of projects in the Emerge program as they are approved. The most relevant information should include the name of the company, sector, city, county, award amount, eligibility period, commitment period, number of retained jobs, number of new jobs, number of construction jobs, and status of the CBA agreement, if applicable. For an example of such a database, please refer to the Travis County Financial Transparency Portal.[vii]

End Notes

[i] Governor Murphy’s Task Force on EDA Tax Incentives Third and Final Published Report, July 2020. https://www.njleg.state.nj.us/OPI/Reports_to_the_Legislature/eda_task_force_07092020.pdf

[ii] Ibid at 1

[iii] The Wall Street Journal, Meet the Fixers Pitting States Against Each Other to Win Tax Breaks for New Factories, May 2019.

[iv] Ibid at 1

[v] Louisiana Economic Development, Business Incentives, last visited April 16, 2021. https://fastlaneng.louisianaeconomicdevelopment.com/public/search/bi

[vi] NYC Industrial Development Agencies, last accessed April 16, 2021. https://edc.nyc/nycida-board-meetings-public-hearings

[vii] Travis County Economic Development, Travis County Financial Transparency Portal, last accessed April 16, 2021. https://financialtransparency.traviscountytx.gov/StarsEcoDev

Tools for Building a Healthy Budget

Posted on by Sheila Reynertson

The COVID-19 pandemic has brought public budgeting into uncharted territory, with states facing shortfalls and an uncertain economic recovery.[i] Making matters more complicated for New Jersey, the state’s budgeting process is an insider’s game that incentivizes politics and short-term decision-making — not good governance or long-term sustainability. Take, for example, the new corporate tax subsidy program. The price tag of this economic development incentive package ballooned from $3 billion to $14.4 billion behind closed doors. This flawed process threatens the future of public schools, health care, and reserve funds for uncertain times. Fortunately, New Jersey can raise the standards of state budgeting by embracing transparency and proven best practices to better face the fiscal challenges at hand.

Improvements that can both de-politicize and more effectively shape New Jersey’s budget include:

  • Comprehensive consensus revenue forecasting
  • Multi-year forecasting of expected revenue
  • Multi-year forecasting of expected spending
  • A stronger “Rainy Day Fund”
  • Budget “stress tests”
  • More transparency in the budget process

 

Adopting these tools of good governance would raise the level of debate that the current process avoids and, optimistically, would break the cycle of politically easy maneuvers that have contributed to New Jersey’s deep financial hole. This report examines these best practices further and how they can improve New Jersey’s budget process for residents and lawmakers alike.

Comprehensive Consensus Revenue Forecasting

Each year, New Jersey estimates how much money it will collect through taxes, fines, and fees during the upcoming fiscal year. Lawmakers rely on that figure to know how much the state can invest in public goods like education, health care, mass transit, and other services critical to New Jersey’s future prosperity. But the process is inherently politicized, as the executive and legislative branches produce their own competing revenue forecasts.[ii] Disagreements over these estimates often overshadow and distract from important conversations regarding where resources should be allocated and what programs should be prioritized in the budget. In the end, the governor has the authority to determine the official estimates. If the finalized revenue projections are overly confident and inaccurate, it can lead to mid-year budget cuts and accounting gimmicks to keep the budget in balance. If the projections are too low, they can be a barrier to needed investments that the state had the resources to pay for.

In the years after the Great Recession, the state budget would come up short before the end of the fiscal calendar, leading the administration to find extra dollars with one-time measures such as raiding special revenue funds or postponing payments like property tax relief for senior citizens.[iii] The overreliance on these temporary measures led to large budget shortfalls and several credit downgrades by major credit rating agencies.[iv]

The Legislature, governor, and independent experts such as economists, should instead work jointly to produce a revenue forecast. This type of “consensus” process is employed by more than half of the states (28), helps to reduce the chances of political gridlock, and increases the revenue estimate’s value as a trusted starting point for writing the state budget.[v] It’s also a best practice endorsed by a variety of fiscal policy institutions including the Center on Budget and Policy Priorities, the Volcker Alliance, the Urban Institute, and Stockton University’s William J. Hughes Center for Public Policy.[vi]

Consensus revenue forecasting would not only produce a more accurate forecast but also center budget debates on a single revenue estimate for everyone to work from.[vii] This, in turn, would make the budget process more transparent and accessible to the public and Legislature alike, resulting in a more democratic debate and ultimately greater fiscal discipline 一 something bond rating agencies value in their state bonding assessments. A 2015 bill to establish a consensus-forecasting board passed both houses of the Legislature but was ultimately vetoed by Governor Christie.[viii] Recent attempts to put similar legislation on the desk of Governor Murphy have also failed due to conflicting design preferences.[ix]

Overall, the consensus revenue forecasting would be improved by enacting the following changes:

  • The revenue estimate should be developed early in the budget process, reviewed periodically, and agreed to by the governor and Legislature. Given New Jersey’s July-June fiscal year, a hypothetical timeline could be: in November, the budget committees and governor agree to a revenue estimate to frame the following year’s budget; in February, the estimate is revisited and revised if necessary; in May, the estimate is reviewed a final time before the budget is passed in June. Throughout this process, the assumptions and documentation behind the estimates would be public and thus subject to inspection and debate by outside stakeholders.
  • The revenue estimating body should include outside experts. By including independent economists, along with economic and budgeting experts from state government, lawmakers could further depoliticize the revenue estimate and improve trust in the forecast.
  • Revenue forecasting meetings — or at the very least, minutes of the meetings — should be open to the public. This openness can be a marked contrast to states where the estimate is prepared by staff in back rooms or through negotiations among leadership. An open process builds trust among elected officials outside the inner circle who must vote on the budget, as well as the media and the public. They gain access to the information needed to evaluate budget policies based on the facts before decisions are made. Revenue estimating meetings are open to the public or minutes of the meetings are made publicly available in 30 states.[x]

 

Multi-year Forecasting of Expected Revenue

The pandemic and its long-lasting impact on New Jersey’s economy offer a unique opportunity for lawmakers to move away from short-term and politically convenient budgeting. Instead, they should assess revenue estimates using a long lens, which would allow lawmakers and the public alike to see how changes in tax policy would impact future revenue collections.

While fiscal experts in both the legislature and the Department of the Treasury produce revenue estimates beyond the upcoming fiscal year, there is neither a formal process for coming up with estimates nor an obligation to share them with the public. Projecting how much revenue the state should collect beyond a single year gives lawmakers the ability to anticipate and respond to predictable changes and evaluate newly enacted tax policy over several years. Without the full fiscal picture, budget policy proposals can become fodder for debate based on political potshots rather than credible, impartial information.

Fiscal analysts in the executive or legislative branches may be reluctant to share long-term projections given the potential for forecasting error. To address this apprehension, lawmakers could designate this budgeting best practice as a non-binding planning tool. Even so, a multi-year forecast lessens the chances of unexpected surprises and last-minute tax-cut proposals that rob the state of needed resources in the near-future. So far, 22 states have committed to making longer-term projections for at least three years as part of their budget process.[xi] Ideally, the executive and legislative branches should jointly produce these multi-year estimates to avoid a wasteful and unnecessary political fight over the correct revenue projection.

Multi-year Forecasting of Expected Spending

Projecting what the state spends on programs beyond a single year can provide insight into how to adequately support critical public services over the long-term. This practice can also be used to project the real-world impact of changes in the tax code on specific programs and the communities they serve.

Known as “current services” or “baseline” budgeting, this best practice takes into consideration predictable spending fluctuations, like inflation and per-person costs, expected uptake of services, or scheduled adjustments like the current ramp up toward fully funding both the pension fund and school funding formula. Forecasting in this way provides lawmakers and the public the opportunity to analyze whether a program is meeting expectations given higher operating costs or whether more revenue will be needed to cover a program in the future. Crafting a current services budget does not bind lawmakers to fund the programs and services at the designated levels. This practice simply allows policymakers and the public to better understand the consequences of those funding choices on programs, services, and residents over time.

Currently, 19 states and Washington, D.C. prepare current service estimates beyond the upcoming fiscal year.[xii] Five states publish multi-year projections that provide the cost of current policies in future years and then demonstrate how certain policy changes could affect that cost.[xiii] Transparency is enhanced when current service estimates and its methodology are published alongside the detailed budget, allowing the public, press, and service providers to assess how program cuts or expansions will impact the budget years down the line.

New Jersey should project revenues and current services spending for at least three years to help chart a clear and sustainable fiscal course out of today’s crisis. If New Jersey enacted both current service budgeting and multi-year revenue forecasting, its politicized budget debate could be a thing of the past. High-quality, long-term revenue and expenditure forecasting would shine a light on the underlying structural imbalance between revenue and spending that has chronically held back New Jersey’s economy. Incorporating these forecasting practices would give policymakers the time and the tools to understand the full impact of policy proposals and make course corrections as needed.

A Stronger Rainy Day Fund

Of course, forecasting tools cannot predict economic downturns or when catastrophic events like the coronavirus or climate change disasters hit the state. But building healthy reserves can blunt the damages of these events without having to resort to drastic spending cuts or accounting gimmicks. Despite warnings issued by budget experts over the years, lawmakers have failed to make the emergency fund a priority.[xiv] That lack of planning meant New Jersey’s rainy day fund was near-empty when the COVID-19 pandemic hit and decimated the state’s revenue collections.

New Jersey law dictates how reserves are designated and under what circumstances the state can access them. There are two distinct funds for excess revenue, each with their own rules. The Undesignated Fund Balance is comprised of leftover revenue, or surplus, at the end of the fiscal year. The Surplus Revenue Fund, also known as the “rainy day fund,” is comprised of revenue from better-than-expected tax collections.[xv] Surplus dollars in the Undesignated Fund Balance can be used for any purpose. But money in the rainy day fund can only be “unlocked” under certain circumstances, such as when:

  • The governor declares that spending will exceed revenues.
  • The Legislature determines that using the fund is preferable to a tax increase to cover a revenue shortfall.
  • The governor declares an emergency and notifies the Legislature.

 

Lawmakers have habitually relied on the fund to balance budgets instead of replenishing the reserves to levels that would buffer New Jersey’s finances against unforeseen emergencies. For example, in the wake of the Great Recession, a cycle of overly optimistic revenue projections resulted in the state not having enough resources to pay for everything included in the budget — let alone having any revenue leftover for reserves. As a result, deposits into the rainy day fund ceased and the fund remained empty for 11 straight years.[xvi] That level of neglect has left the state underprepared for the pandemic as well as the next recession or superstorm. The lack of ample reserves also leaves the state vulnerable to another credit downgrade, which would lead to higher borrowing costs.

Leading up to the pandemic outbreak, most states were better prepared by having more money in an emergency fund than at the start of the Great Recession, both in nominal terms and as a percentage of state expenditures.[xvii] Guided by lessons learned during the Great Recession, these states made deliberate policy changes to deposit rules and other mechanisms of their reserve funds to further strengthen their rainy day fund balances.

With new sources of sustainable revenue and stabilized economy, the Murphy administration has tripled the state’s surplus and was on schedule to make a second deposit into the rainy day fund, building upon FY 2020 $401 million deposit.[xviii] But it’s just a fraction of what should have been put into savings compared to the rest of the country. Since FY 2010, the national median rainy day fund balance as a percentage of general fund spending grew from 1.6 percent to 7.8 percent in FY 2020, a new all-time high due to improved revenue conditions.[xix] In the same period, New Jersey’s rainy day fund balance grew from 0 percent to 1.8 percent.[xx]

Finally, New Jersey can’t allow reserves to be treated like a slush fund or a second-tier obligation. To address this, a change to statutory language should be made to mandate a replenishment schedule with deposit targets based on revenue forecasts.

Budget “Stress Tests”

To better plan for potential economic downturns, New Jersey should build regular hypothetical exercises, known as “stress tests,” into the forecasting process. Based on a similar analysis required of banks under the 2010 federal Dodd-Frank Act, stress tests give budget officials the opportunity to develop state-specific responses to drastic revenue shortfalls or sharp increases in spending in response to an emergency.[xxi] Stress tests can also help analyze tax reform proposals and spending approaches by looking at the potential volatility of either. For example, when the state adopts a progressive revenue source that may be volatile, this type of analysis highlights the importance of setting aside some of the revenue from this tax when it brings in more revenue than anticipated.

New Jersey already uses stress testing to analyze the long-term solvency of the public employee pension system.[xxii] Due to the pandemic, revenue declines called into question whether New Jersey would be able to ramp up its annual pension payment. But stress test data convinced the governor and legislative leaders to increase the pension contribution despite a lagging economy.[xxiii] If lawmakers can rely on nonpartisan, data-driven analysis of the pension system, surely they could enact stress testing of state finances as a best practice measure.

Annual stress tests on the state budget are equally important because they give lawmakers guidance on how to recover from multi-year shortfalls and help establish attainable reserve goals. Stress tests are also a smart way to examine turbulent revenue streams, which can inform decisions about how to reduce risky volatility.

A Transparent and Responsive Budget Process

“In difficult fiscal times, legislators and governors can be tempted to forgo best practices and sacrifice fiscal stability for short-term fixes to maintain as many government services as possible. Yet states may find that long-term commitments to improved budget processes will leave them better able to deal with the natural disasters and fiscal crises that inevitably occur.” – The Volcker Alliance, 2018[xxiv]

Recently, the Volcker Alliance graded the transparency of states’ budget documents based on four key disclosure practices.[xxv]They include:

  • An accessible website of budget procedures, schedules, and data like reports on unfunded liabilities, capital budgeting, economic forecasting, and reserves.
  • Clear, accessible, and detailed tables showing the amount of debt owed by the state and debt service costs.
  • A report on the cost of deferred infrastructure maintenance for assets like roads, bridges, and buildings.
  • Regular accounting of the cost of tax exemptions, credits, and abatements used to attract or retain economic development and jobs.

 

Overall, New Jersey received a “B” for following most of these practices, with the exception of disclosing deferred infrastructure maintenance costs.[xxvi] In fact, only three states — Alaska, California, and Tennessee — received an “A” because they prioritize documentation of what needs to be spent in the long-term to keep publicly owned physical assets in good shape. While mandated procedures and reports may look good on paper, New Jersey is failing to maintain meaningful transparency in practice.

On the website of New Jersey’s Office of Management and Budget (OMB), one can find archived state budgets dating back to 1987 and financial information in the Comprehensive Annual Financial Reports (CAFR) going back to 2002.[xxvii] A budget lays out the annual spending plan using tax income and other revenue and a CAFR reveals the state’s overall financial condition. Budgets are intentions, CAFRs are detailed financial evaluations. However, the various access points and static nature of the documents hardly translates to a level of transparency that could convey a full picture of the state’s fiscal stability. This kind of convoluted disclosure makes policymakers blind to the impact of their budgeting decisions or, worse, allows decisions to be driven by politics rather than good budgeting practices. The Department of Treasury ought to produce a more accessible and interactive online archive of these documents as well as the annual Debt Reports and mandated report on New Jersey’s tax credit programs, the Unified Economic Development Budget.

Transparency in the state budget process itself is just as important as crafting a sustainable one. Unlike the governor’s budget, which is mandated to be released by a certain date, the Legislature’s proposal is not subject to a timeline. The result is a vacuum whereby leadership crafts a deal behind closed doors and releases a budget just days, and sometimes hours, before it must be voted on and signed into law. This ad hoc process has become so commonplace, it is practically treated as a normal course of action. But, in reality, it removes meaningful analysis and debate about the most consequential legislation of the year. Placing sunshine on the final stage of resolving differences could put an end to the habit of bypassing public scrutiny.

Finally, providing clear and easily accessible information can help the public better understand the scope of New Jersey’s responsibilities and challenges and guide policymakers to make better-informed decisions about how to allocate resources. Lawmakers could improve access to budget documents in the following ways:

  • Consolidate disclosure documents in an interactive format to better track budgetary needs and challenges. These should include data on revenue volatility, deferrals of spending, long-term obligations, and spending and revenue trends and forecasts.
  • Establish a uniform format design of the state budget documents to improve searchability for research purposes.
  • Mandate a publication date for the legislature’s proposed budget and establish a timely process to allow for a more inclusive public debate in the final weeks before budgets are signed into law.

 

Better Budgets Can Pave the Way to a Better Future

Striving for the best possible information about a state’s fiscal health is the key ingredient to a productive debate about annual and long-term policy priorities. Taken together, these proven budget methods provide a more complete picture of the real costs of obligations and investments and the resources necessary to fund them. They may not guarantee better outcomes by themselves, but these proven budgeting practices can reduce uncertainty and improve policymakers’ ability to plan for the future.

 

Endnotes

[i] Center on Budget and Policy Priorities, States Grappling with Hit to Tax Collections, August 2020. https://www.cbpp.org/research/state-budget-and-tax/states-grappling-with-hit-to-tax-collections

[ii]The Legislature’s Office of Legislative Services provides revenue estimates for its members. The administration’s Office of the Chief Economist, Office of Revenue and Economic Analysis, and Office of Management and Budget collaborate to provide revenue estimates for the governor. Official revenue estimates are made for both the current fiscal year and the budget fiscal year. The governor formally certifies the revenue estimates per the New Jersey State Constitution.

[iii] NJ Spotlight, Raids on Dedicated Funds Climb Under Christie, July 2013. https://www.njspotlight.com/2013/07/13-07-08-raids-on-dedicated-funds-climb-under-christie/; NJ Spotlight, A Look at the Fuzzy Math of NJ’s Homestead Tax-Relief Program, September 2019. https://www.njspotlight.com/2019/09/a-look-at-the-fuzzy-math-of-njs-homestead-tax-relief-program/

[iv] Reuters, New Jersey credit rating cut for 11th time under Christie, March 2017. https://www.reuters.com/article/us-new-jersey-downgrade-moody-s/new-jersey-credit-rating-cut-for-11th-time-under-christie-idUSKBN16Y2LF

[v] Center on Budget and Policy Priorities, Improving State Revenue Forecasting: Best Practices for a More Trusted and Reliable Revenue Estimate, September 2014.https://www.cbpp.org/research/state-budget-and-tax/improving-state-revenue-forecasting-best-practices-for-a-more-trusted?fa=view&id=4185

[vi]Center on Budget and Policy Priorities, Improving State Revenue Forecasting: Best Practices for a More Trusted and Reliable Revenue Estimate, September 2014.https://www.cbpp.org/research/state-budget-and-tax/improving-state-revenue-forecasting-best-practices-for-a-more-trusted?fa=view&id=4185; The Volcker Alliance, Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis, December 2018. https://www.volckeralliance.org/truth-and-integrity-state-budgeting-preventing-next-fiscal-crisis; Stockton University William J. Hughes Center for Public Policy, State Revenue Forecasts: Building a Shared Reality,February 2017. https://stockton.edu/hughes-center/documents/2017-0203-state-revenue-forecasts.pdf

[vii] Center on Budget and Policy Priorities, Improving State Revenue Forecasting: Best Practices for a More Trusted and Reliable Revenue Estimate, September 2014.https://www.cbpp.org/research/state-budget-and-tax/improving-state-revenue-forecasting-best-practices-for-a-more-trusted?fa=view&id=4185

[viii] New Jersey Bill No. A4326/S2942 https://www.njleg.state.nj.us/2014/Bills/A4500/4326_R1.PDF

[ix] NJ Spotlight, Could Advisory Board Health NJ Avoid Last-Minute Budget Shortfalls?, December 2018. https://www.njspotlight.com/2018/12/18-12-12-could-advisory-board-to-forecast-annual-budget-help-avoid-last-minute-shortfalls/

[x] Center on Budget and Policy Priorities, Improving State Revenue Forecasting: Best Practices for a More Trusted and Reliable Revenue Estimate, September 2014.https://www.cbpp.org/research/state-budget-and-tax/improving-state-revenue-forecasting-best-practices-for-a-more-trusted?fa=view&id=4185

[xi] Center on Budget and Policy Priorities, Better State Budget Planning Can Help Build Healthier Economies, October 2015. https://www.cbpp.org/research/state-budget-and-tax/better-state-budget-planning-can-help-build-healthier-economies

[xii] Center on Budget and Policy Priorities, Better State Budget Planning Can Help Build Healthier Economies, October 2015. https://www.cbpp.org/research/state-budget-and-tax/better-state-budget-planning-can-help-build-healthier-economies#_ftn10

[xiii] Center on Budget and Policy Priorities, Better State Budget Planning Can Help Build Healthier Economies, October 2015. https://www.cbpp.org/research/state-budget-and-tax/better-state-budget-planning-can-help-build-healthier-economies#_ftn10

[xiv] NJ Spotlight, How We Got Here: New Jersey’s Long Record of Not Putting Enough Money by for a Rainy Day, June, 2020.https://www.njspotlight.com/2020/06/how-we-got-here-new-jerseys-long-long-record-of-not-putting-enough-money-by-for-a-rainy-day/

[xv] New Jersey Treasure, Office of Management and Budget, State Financial Policies: Basis of Budgeting. https://www.nj.gov/treasury/omb/policies.shtml (last updated May 5, 2020)

[xvi] The Pew Charitable Trusts, States’ Financial Reserves Hit Record Highs, March 2020. https://www.pewtrusts.org/en/research-and-analysis/articles/2020/03/18/states-financial-reserves-hit-record-highs

[xvii] The Pew Charitable Trusts, Rainy Day Funds Help States Weather Fiscal Downturns, April 2020. https://www.pewtrusts.org/en/research-and-analysis/articles/2020/04/09/rainy-day-funds-help-states-weather-fiscal-downturns

[xviii] New Jersey Treasury Department, Testimony of State Treasurer Elizabeth Maher Muoio Before Assembly Budget Committee Hearing, May 28, 2020. https://www.state.nj.us/treasury/news/2020/05282020.shtml

[xix] National Association of State Budget Officers, Fiscal Survey of the States: Spring 2020, June 2020. https://www.nasbo.org/reports-data/fiscal-survey-of-states

[xx] National Association of State Budget Officers, Fiscal Survey of the States: Spring 2020, June 2020. https://www.nasbo.org/reports-data/fiscal-survey-of-states

[xxi] The Pew Charitable Trusts, Rainy Day Funds Help States Weather Fiscal Downturns, April 2020. https://www.pewtrusts.org/en/research-and-analysis/articles/2020/04/09/rainy-day-funds-help-states-weather-fiscal-downturns

[xxii] The Pew Charitable Trusts, New Jersey to Make Largest Pension Contribution in State History, October 2020. https://www.pewtrusts.org/en/research-and-analysis/articles/2020/10/01/new-jersey-to-make-largest-pension-contribution-in-state-history

[xxiii] The Pew Charitable Trusts, New Jersey to Make Largest Pension Contribution in State History, October 2020. https://www.pewtrusts.org/en/research-and-analysis/articles/2020/10/01/new-jersey-to-make-largest-pension-contribution-in-state-history

[xxiv] The Volcker Alliance,Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis, December 2018. https://www.volckeralliance.org/truth-and-integrity-state-budgeting-preventing-next-fiscal-crisis

[xxv] The Volcker Alliance,Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis, December 2018. https://www.volckeralliance.org/truth-and-integrity-state-budgeting-preventing-next-fiscal-crisis

[xxvi] The Volcker Alliance, State Budget Practice Report Cards and Budget Resource Guide: New Jersey, 2020. https://www.volckeralliance.org/sites/default/files/Volcker%20Alliance-StateBudgetingReport-Tearsheet-NewJersey-FY17-19.pdf

[xxvii] New Jersey Treasury Department, Office of Management and Budget, Publications. https://www.nj.gov/treasury/omb/index.shtml#currentpubs

New York Approves $2.1 Billion Relief Fund for Immigrants — New Jersey Should Do the Same

Posted on by Vineeta Kapahi

The COVID-19 pandemic has brought increased recognition of immigrants’ critical contributions to our communities and economies. Our nation’s immigration policy and safety net programs, however, still do not reflect this reality. Undocumented immigrants are both disproportionately represented among industries experiencing job loss due to the pandemic and essential workers who risk their lives to perform critical work, including caring for our loved ones, keeping our stores stocked and running, and growing, preparing, and delivering our food. While most people facing financial hardship can benefit from government aid, including the federal stimulus payments and unemployment insurance, discriminatory eligibility criteria bar many immigrants from the same access to financial assistance. 

The good news is that states do not have to wait for the federal government to act. This week, New York took a big step toward expanding access to critical relief by passing a state budget that includes a $2.1 billion fund for undocumented workers who were excluded from pandemic aid. New York’s Excluded Workers Fund — which is expected to benefit an estimated 290,000 workers and provide substantial economic boosts across the state — creates two levels of aid. Tier 1 provides $15,600 (the equivalent of $300 per week for one year) for undocumented workers who are able to meet strict standards of proof of eligibility. While this amount falls short of what other jobless workers received in unemployment benefits, it will make a substantial difference for families facing financial hardship. The second tier provides $3,200 per worker, matching the amount of three rounds of economic impact payments that many Americans received. 

Source: Fiscal Policy Institute Analysis of Excluded Worker Fund (2021)

Even though New Jersey has one of the largest shares of immigrants in the country, the state’s investment in its immigrant communities pales in comparison to New York and many other states. While only 14 percent of the total U.S. population is born outside of the United States, nearly one in four (23 percent) New Jersey residents is an immigrant. Following national trends, immigrants in New Jersey have higher rates of labor force participation than non-immigrants. In addition,  immigrants have lower median earnings than U.S.-born workers in New Jersey, and this disparity is particularly stark for non-citizen immigrants. Undocumented immigrants make up 6.5 percent of New Jersey’s workforce — an even larger share than in New York’s workforce (4.9 percent). Moreover, the majority (209,400) of undocumented workers in New Jersey’s workforce (294,000) are essential workers whose labor was critical during the pandemic. 

New Jersey lawmakers have yet to establish a program that comes close to addressing the scale of the current crisis, despite the outsized contributions of immigrants to New Jersey’s communities and economy, and the disproportionate health and financial impacts of the COVID-19 pandemic on these same communities. While New York is the most recent and largest example, it is not the only state to take action to support its immigrant communities. Several other states, including Oregon, Washington, New Mexico, Colorado, Illinois, and California, have also created programs to support workers and families excluded from relief. New Jersey lawmakers should follow their lead and support our immigrant communities.

The State Budget Must Support Those Harmed Most by the Pandemic

Posted on by Sheila Reynertson

The following testimony on the FY 2022 state budget was delivered to the Assembly Budget Committee on March 10, 2021.

Good morning, Chairwoman Pintor Marin and members of the Budget Committee. My name is Sheila Reynertson and I am here today representing New Jersey Policy Perspective (NJPP) and the For The Many budget coalition.

The most important priority for the FY2022 budget must be supporting those who were disproportionately harmed by both the public health crisis itself and the economic fallout that continues to this day. Black women, Hispanic/Latinx women, essential workers, immigrant workers, low-income households — these are the residents who were immediately at higher risk of contracting the deadly virus, the most likely to lose their jobs, and typically the last to recover from an economic downturn.

It may have been convenient to avoid these glaring disparities before, but the ferocious nature of the pandemic exposed all of it. We cannot turn away from the challenge and opportunities to advance racial and gender equity through the tax code and through sustainable programs that are proven building blocks of a strong state economy.

The FY2022 budget as proposed by Governor Murphy goes a long way to address the uneven impact of this past year in several commendable ways that will make an immediate difference in the lives of children, students, struggling families and seniors. Again, we strongly agree with this approach. Invest in the people and the economy will recover. Invest in the most vulnerable people and the economy will grow stronger than ever.

We support the health care investments focused on low-income families like subsidies for health insurance, a full year of Medicaid coverage after childbirth, funding for reproductive health care services for those without a path toward health insurance, and securing health insurance for every last child in the state.

We support the EITC expansion proposal to include 70,000 low-income, senior workers without kids and making the Child and Dependent Child Care Tax Credit fully refundable so those who need it the most can access it. We also support the state’s role in keeping families together with the increase in funding for legal representation for immigrants facing detention or deportation.

However, it is unfathomable that financial assistance for immigrants has been excluded from pandemic relief. A solution must be found to protect these vulnerable households from becoming impoverished. New Jersey can’t simply turn a blind eye to one its greatest assets: our immigrant communities. The EITC should also be increased and expanded to include immigrants as ITIN filers, low-income workers without children, and to those between the ages of 18 and 21.

Of course, we support the full pension payment a year ahead of schedule, a bigger allocation into the school funding formula and the expansion of pre-K education to another 1,800 children in 25 districts. The $100 million in new funding for higher education is exactly the type of building blocks of a state economy that we have long advocated for.

But to ensure adequate funding for years to come we remind the Assembly budget members to keep an eye on the not-too-distant future. Once the borrowed dollars have been spent and the federal aid is gone, New Jersey can’t expect economic growth alone to make up the difference. And certainly not with corporations looking to cash in their tax subsidies.

The topic may be getting a pass this year, but new sustainable revenue must be on the table before so we can both fund these increased investments well into the future and pay off the billions of dollars that the state just borrowed. New Jersey has a decision to make and we can’t afford making the wrong one: We can either turn a blind eye to the looming shortfalls in future budgets that will put millions of residents at risk of falling further behind or we can recommit to creating a modernized and equitable tax code to ensure a strong state recovery for everyone, especially those hit hardest by the events of the past year. Thank you.

Gov. Murphy’s FY 2022 Budget Address: 5 Key Takeaways

Posted on by Louis DiPaolo

With the nation still reeling from the COVID-19 pandemic, Governor Phil Murphy unveiled a state budget proposal that once again rejects austerity and makes major investments in New Jersey’s economic recovery. The proposal, buoyed by borrowed funds and stronger than expected revenue collections, includes significant funding for public health, schools, transit, and economic support for workers and businesses alike — all key drivers of strong communities and a strong economy. With a full pension payment, which would be the first since 1996, the budget also protects the retirement security of nearly 800,000 public workers and looks to shore up one of the state’s biggest financial obligations.

Here are key takeaways from the governor’s address:

1. All Kids Health Coverage

Universal health coverage for all kids. If that sounds like a big deal, it’s because it is. As it stands, there are approximately 80,000 uninsured children in New Jersey, but that would change under Governor Murphy’s proposed budget. With Black and Latinx/Hispanic children representing three-quarters of those uninsured — during a health crisis that has catastrophically and disproportionately harmed Black and Latinx/Hispanic families — policies that promote health equity are necessary for a strong recovery.

Providing affordable coverage to all children works hand-in-hand with the reopening of schools, keeping workers and their families safe, and the promotion of the positive health and economic outcomes tied to childhood health conditions. By funding All Kids Health Coverage, the governor’s budget provides protections for children and families so that they may not only survive the current crisis, but also have the resources to thrive in the long-term.

Other big health care investments include $19 million for a new Reproductive Health Care Fund, an extension of Medicaid coverage for postpartum care to a full year, and an additional $25 million to state subsidies on the state-based exchange (GetCoveredNJ), which boosts enrollment and keeps costs low.

2. Tax Credits for Low-Paid Senior Workers

The governor’s budget proposal expands who can qualify for the Earned Income Tax Credit (EITC), a powerful tool for providing income support to low- and moderate-income families. Currently, workers who do not have dependent children at home are only eligible for the federal EITC if they are between the ages of 25 and 64. This year’s budget proposal removes the upper age limit for workers without dependent children, increasing the after-tax income of thousands of New Jersey’s low-wage seniors who earn less than $15,980 per year.

While removing the maximum age threshold is a welcome change, there is much more the state could do to improve access to the EITC. Lawmakers could remove the minimum age threshold, allowing more young workers to benefit from this important program. Similarly, lawmakers could provide a more meaningful boost for more families by raising the benefit level for childless workers. Further, lawmakers should extend the credit to include all tax filers, regardless of where they were born. Right now, the EITC explicitly excludes workers who do not have a social security number, even if they file taxes using an Individual Taxpayer Identification Number (ITIN). By removing these barriers, lawmakers can help more New Jersey residents cover the cost of basic needs and provide a much-needed boost for state and local economies.

3. Child Care Tax Credit Expansion

The Governor’s proposed budget expands eligibility of a vital tax credit for working parents — the Child and Dependent Care Tax Credit (CDCC) — and boosts benefits for the state’s lowest-income families. This credit is available for working parents with kids under age 13 and for workers supporting parents or other dependents. It helps offset child care expenses, providing critical relief, but it is available only to a narrow set of families. This leaves working families with the lowest earnings with no benefit at all. By making the credit fully refundable and expanding the eligibility income cap from $60,000 to $150,000, the proposed budget substantially expands the reach of the program.

4. Full Pension Payment (One Year Early!)

Stronger than expected revenue collections, paired with $4.5 billion in borrowing from last year, has allowed Governor Murphy to make a bold proposal: a full payment into the state’s pension system, one year ahead of schedule. This would be the first full payment made by the state since 1996 — a stark reminder of New Jersey’s long history of raids on the pension fund by past administrations of both parties. The proposed payment, at $6.4 billion, is approximately $600 million more than what the Murphy administration intended to make as part of a scheduled phase-in. Now, one of the country’s most underfunded pension systems is on the road to solvency without shortchanging approximately 800,000 public workers. Here’s hoping credit rating agencies will take notice and reward New Jersey’s financial improvements with credit upgrades.

 5. No Pandemic Relief for Immigrant Workers

While the proposed budget includes several critical investments that will support workers and families across New Jersey, many immigrants are once again pushed further behind. New Jersey’s immigrant communities have faced disproportionate harm from the current health and economic crises. Unlike most other New Jersey residents who have access to support, however, certain immigrants are excluded from programs like federal stimulus payments and unemployment insurance when they fall on hard times. Nearly one year since the onset of the COVID-19 pandemic in New Jersey, state lawmakers have yet to take action to address this gap. To ensure strong recovery from the current crisis, is it critical that all New Jersey residents have access to financial support needed to cover the cost of basics.

Gov. Murphy’s Budget Makes Big Investments to Fund the Pandemic Recovery

Posted on by Brandon McKoy

Earlier today, Governor Murphy unveiled his FY 2022 state budget. The proposal makes critical investments in public health, education, support for working families, and much more. In response to the budget address, New Jersey Policy Perspective (NJPP) releases the following statement.

Brandon McKoy, President, NJPP:

“In the face of an ongoing public health crisis, the governor’s budget meets the needs of the moment with big investments in public health, housing, schools, and much more. These are the building blocks of strong communities and a strong economy, both during normal times and especially now during a pandemic.

“State government has an important role to play in New Jersey’s economic recovery, and Governor Murphy’s budget recognizes that reality. Learning the lessons of the past — specifically that investments made today will make the difference between a sluggish recovery and a strong one — the budget proposal rejects austerity and spending cuts that only served to fuel racial and economic disparities. Yes, the budget is supported in part by borrowing, but those funds are buffered by strong revenue collections that are being invested in smart, fiscally responsible areas with long-term benefits. This is a marked difference from budgets of the past that borrowed funds to simply support regressive tax cuts for the wealthy and well-connected.

“While this budget has a lot in it to celebrate, it falls woefully short in one key area: it lacks pandemic relief for undocumented residents. This is a frustrating development that will harm our immigrant neighbors and loved ones who are suffering through the pandemic more than most. Immigrants are an integral part of New Jersey’s communities and economy, and while other states have prioritized critical pandemic relief, we continue to fail on this important front. We look forward to working with the Legislature to fix this in the final budget. It’s imperative that no one is left behind in New Jersey’s pandemic recovery.”

New Jersey Policy Perspective (NJPP) is a nonpartisan think tank that drives policy change to advance economic, social, and racial justice through evidence-based, independent research, analysis, and advocacy.

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For The Many NJ Calls on Gov. Murphy and Lawmakers to Fund the Recovery in the FY 2022 Budget

Posted on by NJPP Staff

February 22, 2020 – Earlier today, a diverse group of advocates and community leaders from across the state called on Governor Murphy and legislative leaders to pass a budget that fully funds New Jersey’s pandemic recovery. Members of the For The Many NJ coalition convened virtually on Zoom and Facebook Live to stress the need for bold public investments in public health, education, housing, and more in response to the economic downturn brought on by COVID-19.

“A strong recovery requires a steady drumbeat of investments to keep the economy going,” said Sheila Reynertson, Senior Policy Analyst at New Jersey Policy Perspective (NJPP). “In the face of an ongoing public health crisis, the state’s primary obligation must be to respond to the demands of the moment, not short-change them. Policy decisions made today will make the difference between a sluggish recovery and a strong one.”

Members of the coalition pointed to New Jersey’s sluggish recovery from the Great Recession and warned lawmakers against trickle-down tax and budgetary policies that stifle economic growth.

“Our spending requests run the gamut from housing to utility assistance, to an expansion of the Earned Income Tax Credit (EITC) and child tax credits, to health coverage for all children and direct cash assistance for working immigrants excluded from COVID relief,” said Dena Mottola Jaborska, Associate Director of New Jersey Citizen Action. “It’s a large investment package, but one necessary to ensure a recovery for all, the only kind of recovery that can be effective — a recovery that invests from the bottom up and not the other way around.”

After the last recession, New Jersey responded with tax cuts for corporations and big businesses, and spending cuts that damaged the state’s ability to respond to COVID-19.

“New Jersey already knows what austerity life feels like,” said Sue Altman, Executive Director of New Jersey Working Families. “It feels like cuts to beloved school programs. It feels like rickety, dangerous bridges and potholed highways. It feels like closed parks and dirty air. It feels like layoffs and cut wages for public workers. We are not going down that road again. New Jersey’s best days can be ahead of us if we reimagine and reinvest in an economy that works for us all. Not just the chosen few.”
Members of For The Many NJ stressed that the last decade of spending cuts necessitate new investments, especially in public health infrastructure.

“If the coronavirus pandemic taught us anything, it is that we can no longer turn a blind eye to infectious disease outbreaks,” said Debbie White, RN, President of Health Professionals and Allied Employees (HPAE). “We have come to understand that investment in New Jersey’s public health infrastructure and in the oversight of New Jersey’s health care systems must become our paramount priority.”

Advocates for strong public schools joined For The Many NJ to highlight the chronic underfunding of public education, including higher education. Schools need resources now more than ever to adapt to the pandemic and ensure places of learning are safe for students and staff alike.

“Members of the Our Children/Our Schools network are united in affirming the need to preserve and expand resources in every school district to allow all students and schools to re-emerge stronger from the current public health and economic emergency,” said Greg Stankiewicz, Statewide Coordinator of the NJ Community Schools Coalition, an OC/OS member organization.

Professor Todd Wolfson, President of Rutgers AAUP-AFT echoed those sentiments, saying, “On the heels of the pandemic it is time for New Jersey to make a deep investment in public higher education. We are calling for a New Deal for Rutgers and Higher Education that prioritizes debt-free education for New Jersey residents, Support for first-generation and students of color, and a diverse, world-class faculty for our colleges and universities.”

The coalition also called for the state to support New Jersey’s 500,000 undocumented immigrants families, who have been almost entirely excluded from state and federal pandemic relief. Providing relief to immigrant families is not only the right thing to do, but good economic policy.

“Immigrants makeup nearly 1 in 4 of New Jersey residents and have overwhelmingly served on the frontlines of the essential workforce, service industry, and care economy,” said Amy Torres, Executive Director at the New Jersey Alliance for Immigrant Justice. “Immigrant workers were excluded from federal relief, but New Jersey’s steep disparities in wealth inequality existed long before the COVID-19 pandemic. That’s why the Alliance is proud to stand alongside the For The Many coalition to demand an equitable budget where wealthy families and large corporations pay their fair share.”

Latino Action Network President Christian Estevez called for a recovery for all that leaves no one behind, saying, “State investment in the capacity of Hispanic Serving Community Based Organizations with proven records of conducting successful outreach is critical to an equitable response to the COVID-19 crisis that does not leave the Latino community behind. Latino families are over-represented in overall COVID-19 infections and deaths and woefully underrepresented in those that have access to vaccines.”

For The Many NJ was quick to point out that, even before the pandemic hit, far too many New Jersey families were falling behind and in need of support, as evidenced by the latest ALICE report by United Way of Northern New Jersey. In 2018, nearly four out of ten families in New Jersey were living in poverty or right above the party line but still unable to afford basic needs.

“The public health and economic crises of nearly a year have laid bare the injustices that fall disproportionately on low-income residents who are primarily Black and brown people and women,” said Anti-Poverty Network of NJ Executive Director, Renee Koubiadis. “New Jersey must continue to create tax fairness and justice that started with the passing of the millionaire’s tax last fall, by creating new sustainable revenue sources that can lay the foundation for comprehensive and just relief for those most impacted by the pandemic.”

Rev. Sara Lilja, Director of Lutherans Engaging in Advocacy Ministry, added, “Budgets are moral documents. How we, as a state choose to raise funds and spend dollars communicate our common priorities and shared values. In short, our actions and choices speak louder and clear. We must put families and those most vulnerable first in this budget!”

“Fair Share Housing Center of NJ stands in solidarity with our partners,” said James Williams, Director of Racial Justice Policy at the Fair Share Housing Center. “Our efforts for housing justice are tied directly to fiscal equality and transparency from our elected officials. More importantly, we look forward to Gov. Murphy’s continued support to fund the Affordable Housing trust fund.”

Advocates for the environment tied the state’s public and economic health to its environmental health.

“The budget is a statement of priorities, it sets the state’s moral compass. DEP’s 2020 Global Warming Response report recommends over 150 actions. They are critically needed to Fund The Recovery and address the overlapping health, economic, racial justice and climate crises we face,” said Amy Goldsmith, New Jersey State Director, Clean Water Action. “The resources are there — the Biden federal stimulus, new toll hike revenue, COVID-19 emergency bonding, millionaire’s tax, and corporate tax reform. Governor Murphy and the State Legislature must support working families and disadvantaged communities and ensure the wealthy and large corporations pay their fair share and create a just green recovery.”

Jeff Tittel, Director of the New Jersey Sierra Club, added “As New Jersey moves forward and comes out of the coronavirus pandemic, we need a budget that is fair. A budget that protects the environment and moves us forward. More importantly, we need a budget that is equitable, that closes tax loopholes, and stops subsidies and raids to critical funds. We cannot continue to raid critical funds for brownfields, clean energy, and more to balance the budget. We need to get money out there for clean energy. We also need a dedicated funding source for NJ Transit so that people can get to work. It is critical to fund and move New Jersey forward when it comes to green jobs, renewable energy, reducing greenhouse gases, protecting overburdened communities, and safeguarding the environment.”

“The time to end the raids on the Clean Energy Fund and move forward on dedicated funding for NJ Transit is in this budget cycle – the clean energy economy and mass transit needs this investment more than ever before,” said Doug O’Malley, director of Environment New Jersey. “Clean Energy Fund diversions hamper the transition to clean energy and these raids won’t solve NJ Transit’s capital budget deficit. We urge Gov. Murphy to use the FY 2022 budget to fulfill his pledge to end these raids and move towards dedicated funding for NJ Transit.”

To fund new investments, the coalition called on state lawmakers to close corporate tax loopholes, such as those in New Jersey’s combined reporting law, and the reverse ill-advised tax cuts of the past, like the recent micro-cent sales tax cut and the elimination of the estate tax. These changes alone would raise over $1 billion in recurring revenue.

Watch a recording of the press conference here.

For The Many is a statewide coalition of more than 30 organizations working collectively to expand funding for essential services and improve budget practices to adequately meet current and future needs, especially for communities that have been historically marginalized.

Tax Break on PPP Loan Expenses Will Cost New Jersey More Than $1 Billion

Posted on by Sheila Reynertson

In an unexpected windfall, New Jersey businesses that received federal grants through the Paycheck Protection Program (PPP) can now exempt the forgiven loan from state taxation and claim a deduction on expenses paid by the loan.

This unprecedented move would allow companies to receive a tax cut on both sides of the ledger – one for receiving the money, and another for spending it – costing New Jersey up to $688 million in lost personal income tax (PIT) revenue[1] and at least another $560 million in lost corporate business tax (CBT) revenue.[2] Of note and concern is the fact that this tax break is likely to disproportionately benefit white-owned businesses given the inequitable distribution of the original loans and difficulty that Black-owned businesses had in accessing the program.[3] Based on a sampling of PPP loans, more than 80 percent have been granted to white-owned businesses.[4] Black-owned businesses received less than 2 percent of the loans while 6.6 percent went to Hispanic-owned businesses, according to the Center on Public Integrity.

In light of the moral obligation to fund an equitable pandemic recovery, despite foreseeable revenue shortfalls in the not-so-distant future, lawmakers giving the green light to a $1.2 billion double tax cut on loan forgiveness raises serious concerns about the state’s ability to support other, potentially more urgent, needs.

Background

Last year, Congress created the Paycheck Protection Program, a large loan assistance program designed to help businesses and stabilize local communities during the COVID-19 crisis. So long as the loans were used for allowable business expenses like payroll and rent, the loan would be forgiven and converted to a grant.

Since expenses paid with PPP loans are exempt from taxation, the Internal Revenue Code (IRC) directed that they could not be deducted in calculating taxable income. In other words, PPP loan forgiveness was to be treated as tax neutral, which is standard practice.

Then, just days before the calendar year came to a close, federal legislation reversed that directive, granting businesses both tax exemption and deductibility of expenses covered by their PPP loans. This change turned PPP loan forgiveness into a net tax benefit. So, in addition to having wages reimbursed through forgiveness of the loan that paid for them, PPP recipients are now set to get a federal tax cut.

New Jersey plans to offer the same tax cut, even though it is under no obligation to do so. And the cost is staggering — more costly to New Jersey coffers than other tax breaks in the CARES Act and a larger amount than the projected revenue from the newly passed “millionaires tax” — because of how many PPP loans have been granted.

Conformity Matters

New Jersey businesses pay state taxes either through the corporate business tax code or the personal income tax code, depending on how they are incorporated. Each code regards the IRC differently.

The state’s personal income tax code does not use IRC as a starting point, and its treatment of loan forgiveness is already tax neutral. In other words, the forgiven loan is taxable, but the expenses associated with the loan can be deducted. A recent announcement by Governor Murphy changes this. Pass-through businesses with a forgiven PPP loan on the books can now avoid gross income taxation of the forgiven loan and be allowed to deduct associated payroll and other expenses as normal business expenses.

The state’s corporate business tax code already uses the IRC as a starting point, meaning the new federal treatment of PPP loan forgiveness will be automatically replicated at the state level. By choosing not to decouple from the IRC, New Jersey is on track to lose at least $560 million in revenue, based on the $6.9 billion in PPP loans granted to corporations in 2020.

The last-minute, bipartisan change at the federal level turned a tax-neutral program designed to protect jobs into a tax cut for businesses that received federal aid. But let’s be clear: that policy change does not mean that these businesses are entitled to receive an additional tax break here in New Jersey. The state has to affirmatively choose to do so, which it has, thus weakening its ability to fund other needs central to pandemic recovery. Worse yet, thanks to the racial inequities of PPP disbursement, it will inherently exacerbate disparities among businesses ravaged by the economic downturn.

End Notes

[1] Legislative Fiscal Estimate on S3234, December 28, 2020. https://www.njleg.state.nj.us/2020/Bills/S3500/3234_E2.PDF

[2] Based on $6.9 billion in PPP loans granted to NJ corporations in 2020.

[3] Boston Business Journal, PPP data shows Black-owned businesses received fewer loans, despite efforts, December 29, 2020. https://www.bizjournals.com/boston/news/2020/12/29/updated-ppp-data-shows-black-owned-businesses.html

[4] The Center on Public Integrity, Small Businesses Loan Data Includes Little About Race, July 2020. https://publicintegrity.org/health/coronavirus-and-inequality/small-business-loan-data-includes-little-on-owners-race-paycheck-protection-program/

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