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Budget Cuts Loom as Shortfall Tops $700 Million

OLS: Sandy reconstruction, income tax surge will help, but not enough.

With New Jersey facing a $705 million budget shortfall that could easily double by June, the Senate Democratic budget chairman yesterday called upon the Christie administration to lay out a plan to close the gap before the size of the deficit becomes virtually unmanageable.

Senate Budget Committee Chairman Paul Sarlo (D-Bergen) urged Gov. Chris Christie “to face up to the realities of the growing shortfall” and make the necessary midyear budget cuts.

“Every month that we delay, the options grow more limited,” Sarlo warned. “Certainly, we don’t want to be where the House [of Representatives] was, falling off a fiscal cliff” at the end of the budget year.  

David Rosen, budget officer for the nonpartisan Office of Legislative Services, told Sarlo’s committee yesterday that it would be “optimistic” to expect the current $705 million gap not to grow over the next six months.

“Every month that revenues fail to grow by the 8 percent that Treasury projected adds to the deficit,” Rosen noted, and no state in the nation is experiencing consistent 8 percent growth.

Proclaiming that the “New Jersey Comeback has begun,” Christie last year insisted upon enacting a $31.7 spending plan that anticipated the highest budget growth in the nation. He branded Rosen the “Dr. Kevorkian of the numbers” and charged that he was serving Democratic interests when he projected in May that state revenues for the 14 months ending June 30, 2013, would come in $618 million below Christie’s certified projections.

Christie spokesman Michael Drewniak dismissed Rosen’s analysis, saying the nonpartisan budget expert has been “persistently negative and persistently wrong about the state’s revenues.” Citing strong income tax receipts and an expected revenue boost from Hurricane Sandy reconstruction efforts, Drewniak insisted that there “are far too many unknowns as our state begins to recover to jump to any conclusions that the sky is tumbling down on us or engage the Democrats’ desire in making this a partisan game.”

Nevertheless, revenues have now come in below Treasurer Andrew Sidamon-Eristoff’s projections for 10 consecutive months stretching back to last March, and Rosen Thursday said his own projections will most likely turn out to be optimistic. With current revenues down $451 million and last year’s budget ending up $250 million short, hitting Sidamon-Eristoff’s original revenue projections is now virtually out of the question, Rosen said.

“As a result of revenue underperformance to date, the state would need spectacular revenue acceleration to hit the Executive’s budget targets,” Rosen testified. Where revenues have grown at 0.2 percent for the first five months, they would need to grow by 11.9 percent over the remaining seven months. Nothing in the national or state economic picture suggests that such growth is likely.”

At the current anemic 0.2 percent growth rate, the state’s revenue gap would be $2 billion by the June 30 end of the fiscal year, Rosen acknowledged under pointed questioning by Sarlo. But Rosen emphasized that he does not expect the final figure to be anywhere near that high.

Two Crises to the Rescue

Ironically, the state’s budget picture will be helped by a pair of crises that no one foresaw when Christie certified the revenue numbers last June -- Hurricane Sandy and the recently concluded congressional battle of the fiscal cliff.

Based on the experience of Louisiana following Hurricane Katrina, Rosen said it would be logical for New Jersey to expect a modest short-term tax loss for a few months following Hurricane Sandy that would be more than offset by a large boost in revenues once federal funding and insurance payments for reconstruction begin to flow into the state.

“The likely magnitude and timing of the bounce is difficult to project,” Rosen said.

Based on the schedule Republican House Speaker John Boehner laid out yesterday, it will take almost 12 weeks for Congress to approve significant aid for New Jersey, New York, and other states ravaged by Hurricane Sandy, compared with just 10 days to send aid to Louisiana, Mississippi, and other states devastated by Hurricane Katrina.

Further, reconstruction projects in New Jersey could be slowed by adverse winter weather, which was not an issue in Louisiana. Still, Hurricane Sandy is likely to boost state revenue by hundreds of millions of additional dollars in the current budget year.

So far, Rosen said, the good news is that Hurricane Sandy has had relatively little short-term impact on state revenues. He noted that sales tax collections for the year were down 0.3 percent through September and October -- before Sandy hit -- and were down just 0.4 percent through the end of November after a month in which many businesses were closed for a week or more.

The only revenue to take a major hit due to Sandy was the casino tax, which was up 4.7 percent through September, but was down 7.6 percent by the end of November. The decline is relatively unimportant, however, because casino taxes make up less than 1 percent of overall state revenues and are dwarfed by income, sales, and corporate business taxes.

The best news for New Jersey's budget is that the state income tax, which makes up about one-third of state budget revenue, is down just 1 percent, or $31.5 million, from the Christie administration’s projections. That tax could very well exceed its 5.7 percent growth projection by the end of the year.

Rosen, who has access to the Treasury database that is updated daily, said the December income tax numbers are “very good.” This year’s “April surprise” in income tax collections is likely to be a good one, Rosen said, due to decisions by wealthy taxpayers to cash in stocks or take additional income in 2012 before higher federal income tax rates and capital gains taxes kicked in on January 1, 2013, as a result of the fiscal cliff negotiations.

“While some of this activity, such as paying bonuses in December rather than in January or February, will have no net effect on state fiscal year revenues,” Rosen said, “special dividends paid in 2012 or capital gains taken in 2012 to avoid higher federal taxes later, will boost 2013 Gross Income Tax collections in New Jersey. The magnitude of this windfall may be hinted at when we see the fourth-quarter estimated payments, but will remain uncertain until April.”

Because New Jersey’s state income tax is one of the most highly graduated in the country, the wealthiest 2 percent of residents pay almost half of the total state income tax, making it likely that the final windfall will be in the hundreds of millions of dollars.

Continue reading on NJSpotlight.com.

NJ Spotlight is an issue-driven news website that provides critical insight to New Jersey’s communities and businesses. It is non-partisan, independent, policy-centered and community-minded.

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