Follow the Money!
When asked why he robbed banks, Willie Sutton is credited with a notorious answer: "Because that's where the money is." So, let’s look at three factors influencing future state budgets.
Factor 1 – Pension Deficits and Proposed Constitutional Amendment
Recent events surrounding state finances have been the source of great controversy. Let’s start with the failed attempt to place a ballot question that would amend the state constitution to require the state to pay toward pensions four times per year, rather than annually. Starting in the 2018 fiscal year, the state would have had to contribute $2.4 billion, then that amount would have been raised to $5.5 billion by 2020. In August, Senate President Steve Sweeney declined to place the question for a needed vote in the Senate stating, "Until we have resolved the Transportation Trust Fund impasse, we can't in good conscience put a constitutional guaranteed pension payment on the ballot."
Factor 2 – Transportation Trust Fund Legislation: A Mix of Increased Gas Tax and Other Tax Cuts
In a move where the timing surprised many, Governor Chris Christie, Senate President Steve Sweeney, and Assembly Speaker Vincent Prieto announced on September 30 a bipartisan agreement for broad-based tax cuts and funding for the Transportation Trust Fund (TTF). A number of legislators broke ranks with their respective parties to oppose the legislation, but their opposition did not overcome the vote of supporters.
The plan was ratified by the Legislature and provides for:
- Sales Tax Cut: On January 1, 2017, the sales tax will go from 7% to 6.875%. The following year on January 1, 2018, the sales tax will go from 6.875% to 6.625%. A .375% decrease in the sales tax is the first statewide tax cut that has been given in New Jersey since 1994.
- Tax Savings for the Working Poor: Increase the Earned Income Tax Credit for the working poor to 35 percent of the federal benefit amount beginning in Tax Year 2016.
- Tax Savings for Retirees: Increase the New Jersey gross income tax exclusion on pension and retirement income over four years to $100,000 for joint filers, $75,000 for individuals and $50,000 for married/filing separately.
- Eliminate the Estate Tax: Phase out the estate tax over the next 15 months, replacing the current $675,000 threshold with a $2 million exclusion after January 1, 2017 and eliminating the estate tax altogether as of January 1, 2018.
- Tax Savings for Veterans: Provide a personal exemption on state income taxes for all New Jersey veterans honorably discharged from active service in the military or the National Guard.
While, at first glance, the revenue raised will address New Jersey’s transit infrastructure for the next eight years, the deal received a rating of “credit negative” from Moody’s Investment Service. Moody’s noted that the Office of Legislative Services puts the tax cuts in the bill at $1 billion by Fiscal Year 2019 and $1.3 billion in Fiscal Year 2020. The Moody’s report reported that among the state’s biggest budget challenges is the rapid growth of costs associated with the state’s pension and benefit system, which is currently underfunded by some $40 billion. Based on the state’s projections, pension contributions will increase annually by an average of $711 million through Fiscal Year 2023, approximately 1.9 percent of revenues, Moody’s said. The report estimates that “the state’s revenues will have to increase approximately 4 percent annually to balance pension and other spending growth. Assuming the state takes no other actions to balance the net loss of $1 billion, revenues would have to grow 5 percent annually to balance pension and other spending growth. This growth target will be particularly challenging given the state’s below-average revenue growth of 3 percent annually since the recession.”
Factor 3 – Revocation of Pennsylvania/New Jersey Reciprocal Income Tax Agreement
Last month, Governor Christie ended, effective January 1, the Pennsylvania/New Jersey Reciprocal Income Tax Agreement that has been in place for nearly 40 years. As a result, those who work in South Jersey and commute from Pennsylvania, or work in Pennsylvania and commute from New Jersey, will pay higher wage taxes in 2017.
South Jersey employers including Subaru, Campbell Soup Co., and Destination Maternity are outraged. New Jersey-based companies with employees who live in Philadelphia and the surrounding Pennsylvania suburbs will be at a huge disadvantage, according to Kathy Davis, president of the Chamber of Commerce of South Jersey.
Nearly 250,000 workers in both states will file income-tax returns in both states. About 125,000 Pennsylvania residents commute to New Jersey, and 125,000 make the reverse trip, according to Census Bureau estimates.
Critics of the Governor’s planned action note that this will dampen business prospects for the state, further affecting revenues negatively in the long run.
WHY DOES THIS MATTER?
Back to Willie Sutton — Education accounted for 31.3 percent of state expenditures in fiscal year 2015. So where might the current and future governors go when faced with budget shortfalls? The memory of Governor Christie in 2010 ordering the freeze of $475 million in school aid payments and requiring districts instead to use excess surplus funds still lingers. Christie said the Executive Order was necessary to help plug a budget deficit. So, just like Willie Sutton, he went to where the greatest pool of money is in the state budget – state aid for education. What George Santayana wrote (in The Life of Reason, 1905) should ring true as the Governor and legislators wrestle with the next budget: “Those who cannot remember the past are condemned to repeat it.”
Oh, and by the way, have you heard the Governor speak about the "Fairness Formula," which would provide $6,599 per student for each district, a proposal he said would significantly reduce aid to urban districts while lowering property taxes in many suburban towns? The Governor promised to “make mischief” during his last year in office when he spoke about the funding proposal.
NJASA's Vision 2020 plan acknowledges the need for predictable and sufficient funding to ensure world-class performance. Let’s hope that the factors noted here and the Governor's mischief don’t wreak havoc in school funding and result in less opportunity for New Jersey Public School students during the years ahead.