Think of a tree swinging from side to side in Hurricane Sandy: That’s the 2013 New Jersey economy, and the big wind is coming straight out of Washington.
New Jersey’s economic growth in 2013 hinges to an unprecedented extent on what the federal government does -- or doesn’t -- do. It isn’t just a question of whether Congress eventually authorizes the full $60 billion in Hurricane Sandy relief, economists and tax experts agree.
New Jerseyans, particularly the wealthy, will be footing more of the bill for the fiscal cliff settlement and for President Obama’s Affordable Care Act than residents of any other state except Connecticut. (View the Interactive Map to see the states where the wealthiest taxpayers live.)
In fact, combined federal tax increases this year could top 10 percent for those earning over $450,000. The only good news is that it could have been much worse if the top tax rate for families had kicked in at $250,000, instead of $450,000.
“We’re looking at a 2 percent to 6 percent hit on disposable income in an economy that has been slowed for three years,” said Joseph J. Seneca, University Professor at Rutgers University’s Edward J. Bloustein School of Planning and Public Policy. “The payroll tax increase will certainly be felt in New Jersey when the economy is still feeling the impact of Sandy, but the extension of unemployment benefits will help.
“On the high income side, we will clearly be sending more money to Washington,” he noted. “But we also would have been overrepresented in that gap between $250,000 and $450,000, and the compromise kept that money in New Jersey households,”
However, Obama and Congress still have three fiscal cliffs to go with negotiations ahead on the debt ceiling, entitlements, and other revenues, and some of the likely options, particularly further limitations on federal income tax deductions for state and local taxes, would hit New Jerseyans especially hard. The fiscal cliff agreement approved last week simply put off for two months the battle over a scheduled 10 percent “poison pill” reduction in federal spending that could still result in major cost shifts to state and local government taxpayers in March.
New Jersey annually ranks last on return for federal dollars, with just 51 cents coming back for each tax dollar paid. But the Hurricane Sandy relief package to be voted on by the House January 15 promises to change that equation for the next two years.
“We’re talking about billions of dollars of construction in the state over the next year that would not have happened without Sandy,” said Joel L. Naroff, president of Naroff Economic Advisors. “But once again, nothing’s simple because while the reconstruction is likely to dwarf the slowdown in spending caused by higher taxes, what we don’t know is what the impact will be on the state’s tourism industry this summer.”
The normally ebullient Gov. Chris Christie, in his end-of-the-year interviews with New Jersey newspapers, sought to tamp down expectations for the recovery of the Jersey Shore economy, saying he would be pleased if the Shore was well on its way to recovery by the Fourth of July, rather than the traditional Memorial Day Weekend, which he set previously as his target.
Hurricane Sandy recovery efforts will dominate Christie’s State of the State speech tomorrow, but New Jersey’s overall economy has much deeper problems than the state of the Shore, which makes up $19 billion of the state’s $37 billion tourism industry.
New Jersey ranked 47th in the nation in economic growth in both 2010 and 2011, and while the 2012 numbers won’t be available until June, the short-term impact of Sandy over the past two months will cut into whatever gains would otherwise have occurred.
“We gained about 31,000 private sector jobs in 2011, but this year we’re going to have to stretch to get to that number,” Seneca said. “The economy slowed and we were treading water -- before Sandy -- since July, then we had a bad November and December.”
Christie's Call for Tax Cuts
Christie promises to renew his call for a tax cut as an economic solution for New Jersey’s flagging economy. But Democratic lawmakers are already asking his administration for a list of midyear budget cuts to make up for a $705 revenue shortfall identified by the Office of Legislative Services. Neither the governor nor the legislature have laid out any plan to make up for the tens of millions of dollars in property taxes that counties, municipalities, and school districts are likely to lose on properties destroyed by Hurricane Sandy.
Forecasting New Jersey’s revenue growth for the next fiscal year will be particularly difficult if Christie decides to deliver his annual budget message on the usual mid-February timetable, with Sandy reconstruction still in its early stages and Congress still debating revenue, spending, and entitlement issues that could affect future economic growth.
In renewing his call for a tax cut, Christie will undoubtedly cite the dampening effect of the federal tax hikes on New Jerseyans’ disposable income. While most of the congressional debate over whether wealthy Americans should pay higher taxes focused on where the top income tax bracket should begin, other provisions of the final agreement also raised taxes significantly, but received little attention.
“Most people don’t realize it, but the overall effect of the fiscal cliff agreement and the healthcare act could easily amount to a 10 percent increase for those making over $450,000, and there are more of those on a percentage basis in New Jersey than in almost any other state,” said Frank J. Abella Jr., president and CEO of Investment Partners Group, Metuchen. “And Congress isn’t done yet.”
Seneca, Naroff, and Abella all emphasized that Obama and Congress needed to reach an agreement to avert the January 1 across-the-board income tax hikes and 10 percent federal spending cuts that most economists believed would have plunged the nation into recession this year.
“The deep and lingering uncertainties over what the federal tax code was going to be that plagued the national economy and New Jersey economy for over a year were finally resolved,” Seneca said. “But it’s an incomplete grade because more has to be done on the expenditure side. And despite the president’s opening remarks about not wanting to go through this again on the debt ceiling, we’re going to replay it all again with profound implications for the economy still ahead.”
Both Naroff and Abella said the February negotiations on the debt ceiling and March deadline for new federal spending cuts would have a chilling effect on business investment. “Nothing’s going to happen until those issues are resolved,” Abella said. “We’re telling our clients not to make any decisions without paying close attention to what’s happening in Washington.”
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