New Jersey's Tax Hikes: Sowing Disaster in the Garden State

Introduction:

New Jersey's fiscal and economic climates are turning decidedly cold despite the approaching summer. The Garden State is one of only ten states that have a structural deficit for Fiscal Year (FY) 2007. Current estimates of New Jersey's poor finances range from a structural deficit of $4 billion to $5 billion (14 to 18 percent of appropriations).[1] The elimination of this shortfall within one year seems highly unlikely. Former Governor Richard Codey summed up conditions when he noted, "The state is pretty much broke."[2]

Taxpayers know all too well that New Jersey's past fiscal policies have done little to attract new residents and business that would drive economic growth and fuel accompanying budget surpluses. From 1993 to 2001, yearly population growth in the state averaged just over 0.8 percent. After 2001, however, growth has averaged a paltry 0.6 percent, with a meager 0.4 percent performance last year.[3] As Governor Jon Corzine admitted recently, New Jersey already has one of the worst tax burdens in the United States—hardly a welcoming beacon for prospective citizens. He lamented that New Jersey currently has a "high level of income taxes," and worried that raising them would burden "the state's overall economic competitiveness."[4]

Voters were likely heartened when, during his campaign in 2005, Corzine stressed, "I'm not considering raising taxes. It's not on my agenda. We have a very high-rate tax structure. I'm not considering it."[5] Voters elected him with a 239,280-vote margin over his Republican opponent Doug Forrester,[6] and five months later (in March) Corzine added during his budget address that "tax increases are a last resort."[7] Thus, Garden State voters might have been a bit startled when Corzine proposed a massive $1.8 billion tax increase (including $1.5 billion in direct taxes and over $300 million in other revenue enhancements).[8] New Jersey previously had the ignominious reputation of a tax-hiking state, but the new budget makes even the most die-hard revenue raisers blush.

New Jersey's Budget History: A Mixed Record

Unlike other states, New Jersey has actually brought in more than it spent (in total revenues and expenditures, from FY 1995 to 2004). During that period, expenditure growth averaged 4.2 percent annually, while revenue growth averaged a robust 5.5 percent per year. Over the 11-year fiscal window (1994 to 2004), the state still managed to maintain responsible levels of overall spending. Expenditures averaged 5.2 percent annually and revenue increased 6.3 percent.[9] So why, with Trenton taking in more than it spends, does it habitually raid taxpayers' wallets for more? The answer can be found during the last economic slowdown, when state expenditures eclipsed revenues by substantial margins.

From FY 2000 to 2002, spending in New Jersey increased 21 percent. As an economic slump set in that caused a rise in unemployment from 3.5 percent in June 2000 to 5.9 percent in June 2002,[10] revenues actually declined 23 percent![11] This spending splurge in Trenton aggravated the current structural deficit, produced massive problems in the state's under-capitalized pension system, and gave lawmakers an excuse to start hiking taxes.

Since then residents of New Jersey have shelled out more in taxes than almost any other state in the U.S. From FY 2002 to 2005, taxpayers and businesses have been forced to foot the bill for $3.07 billion in new levies, and the state ranked first in tax increases during FY 2003.[12] Based on the state's 2005 population, this total amounts to approximately $350 in lost income for every man, woman, and child.[13] That's money businesses don't have to expand and invest in new capital, and resources that families could have used to make ends meet. In addition, despite a 41 percent recovery-driven revenue increase in FY 2003,[14] then-Governor James McGreevey and the Legislature managed to enact over $1.3 billion in tax hikes.[15] This troubling habit has not been confined to taxing the wealthiest of Garden State residents either. All citizens have had to bear the brunt of the nation's 2nd-worst business environment.[16]

Taxpayers have seen a myriad of tax and fee increases such as: reduced exemptions for "rich" residents with $100,000 or more of income, Internet taxes, $497 million in cigarette and other tobacco taxes, $950 million in additional corporate income taxes, and over $1 billion in other taxes and fees. These increased levies, or "selected revenue enhancements" as politicians call them, fueled record growth in expenditures during FY 2005. James McGreevey and Richard Codey increased general fund expenditures 13.3 percent in FY 2005, the eighth-highest amount in the nation, and the highest amount in the Mid-Atlantic region.[17] Regrettably, incoming Governor Jon Corzine has not learned from New Jersey's profligate past, and has proposed a 9.2 percent budget increase, along with $1.8 billion in additional revenue.[18] It seems Mr. Corzine's focus on winning elections kept him from reading the history books.

The "Tax Increases are a Last Resort" Budget

Governor Jon Corzine summed up the proper action needed to address taxpayers' concerns with his budget address. "The solution is simple—stop! We must and we can." His proposal, however, gives a bright green light to massive spending increases and tax hikes. He states that the budget "exhibits a strong sense of fiscal discipline."[19] If $2.6 billion in new spending and $1.8 billion in higher taxes demonstrates fiscal discipline, what does he consider to be extravagance? Despite a large structural deficit and bonded indebtedness exceeding $30 billion, Corzine's budget proposes to make matters worse.[20]

When financial circumstances turn sour, states often find wasteful and redundant programs worthy of cuts. In order to meet constitutional balanced budget requirements (save Vermont), states cut general fund expenditures, rather than passing debt onto future generations or raising taxes that constrain economic growth and diminish competitiveness. For example, in the last two fiscal years (2004-2005), ten states managed to trim general fund spending, one (Oregon) by 12.8 percent. During this period New Jersey has averaged 7.45 percent in general fund increases.[21] The current budget does not seek to trim the fat, but add more.

One example is the budget request for the Office of Economic Growth. Most states see little need for such an office, and use low tax burdens and business friendly environments to attract potential employers. A public relations campaign might score political points, but history has shown more government does little to spur private sector prosperity and drive tax revenues. In terms of revenue growth, four states that have experienced some of the largest gains in the nation still lack a state income tax (Alaska, Wyoming, Nevada, and Florida).[22] Taxpayers of New Jersey would likely opt to keep the money that would be spent on this new office to help offset skyrocketing property taxes, which have risen an average of $1,300 in the past four years.[23] This new office might not be the driving force behind the state's budget growth, but health care and pension liabilities are, and the current request does little to address these looming problems.

In fact, many of the dedicated general fund expenditures in the current proposed budget do not obviate future tax increases or massive borrowing. The Department of Children and Family Services will see a 7 percent jump, and the Department of Human Services is estimated to grow 53 percent! The top five (in total spending) dedicated general fund expenditures will see record increases in the FY 2007 budget. The Department of Human Services (first), Department of the Treasury (second), Department of Transportation (third), Department of Law and Public Safety (fourth), and the Department of Health and Senior Services (fifth) will see a combined jump of 17.4 percent from the last fiscal year. These five departments would devour 84 percent of dedicated funds if the Governor's budget is adopted.[24]

Governor Corzine cannot honestly talk about fiscal discipline unless mandatory and dedicated funds are addressed with substantive overhauls that inject some cost control measures. Medicaid for example, which represents approximately 20 percent of New Jersey's budget, is one of several programs that will continue to squeeze state finances if not reformed.[25] Across the nation, state spending on Medicaid has increased from $67 billion in 1995 to $139 billion in 2005 (a 104 percent increase).[26] Holding the line on the Newark Museum ($2.7 million decrease) or the Paper Mill Playhouse ($1 million decrease) might appease some, but the main budget drivers will continue to fuel runaway spending.[27] And if spending cannot be constrained, politicians will use the tired rhetoric of "selective revenue enhancements" to pay their overdue bills.

The cornerstone of Governor Corzine's tax proposal is a 16 percent sales tax increase (to a statutory rate of 7 percent), which is projected to bring in $1.1 billion in new annual revenue.[28] The new 7 percent rate would comprise the second highest state-level sales tax in the U.S.[29] Sales taxes, of course, are considered to be highly regressive because they fall proportionally harder on middle-to-low income earners. According to the Bureau of Labor Statistics, citizens earning approximately $25,000 consume about 112 percent of their income. Food alone represents about 16 percent of total income. Someone earning over $118,000, by contrast, spends just 8 percent on food and consumes 65 percent of all income.[30] Furthermore, the bottom 40 percent of earners in New Jersey already pay between 5.2 and 7.2 percent of total income to New Jersey through sales and excise taxes, compared to 0.9 percent for the wealthiest 1 percent.[31] A sales tax hike will do little to enhance the "progressivity" in the Tax Code that Governor Corzine claims to be seeking. It appears as though tax increases are now option number one in New Jersey, rather than a "last resort."

As if this weren't enough, the Governor has also proposed a number of troubling "revenue enhancements" that practically beg residents and businesses to pack their bags. His budget includes a 2.5 percent corporation business tax surcharge, a surcharge on luxury car registration, a new real estate transfer tax, and an increase in the tobacco tax, among other schemes.[32]

The real estate transfer levy ($17 million in the budget) is opposed by several public interest groups including the National Association of Realtors and the United Homeowners Coalition. A higher transfer tax would have a negative impact on economic development and is a highly unreliable revenue stream given the volatility of the housing market. Once selling cools and transfer revenues fail to meet projections, policymakers could raise the rate to more punitive levels or search for other tax increases.

Tax and Spending Increases in Perspective

If enacted, Governor Corzine's $1.8 billion plan would be one of the largest tax increases in state history, amounting to about 6 percent of the estimated FY 2007 budget. To put this in perspective, if President Bush had called for such an increase on the national level, it would total about $162 billion. Since the U.S. income tax is "only" expected to bring in $998 billion this year, and total revenue will approach $2.3 trillion, this would be a radical step with dire economic consequences for the nation.[33]

At a time when New Jersey's business climate is already one of the worst in the U.S., population growth in the state is starting to stagnate, and some state revenue sources have unexpectedly declined during a period of robust economic expansion, New Jersey taxpayers can ill-afford a sixth consecutive year of tax and fee increases. In Governor Corzine's opening budget address he charged, "If you don't like what I've proposed, then give me an alternative that is as far-reaching and as fair."[34] Policy prescriptions for limited government and restrained spending have been employed for decades, but Mr. Corzine might want to follow the example of Colorado, a state that limits budget increases to population growth plus inflation.

Population growth in New Jersey has not exceeded 0.8 percent since 1995 and inflation has remained relatively tame. If yearly spending would have increased only at the rate of these two indicators since FY 1995, state expenditures would be approximately $42 billion, or about $8 billion less than current projections.[35] This difference amounts to a savings of over $900 per capita, which could have been (preferably) either refunded to taxpayers or used to address the state's structural deficit and unfunded liabilities. Other policy initiatives that could lighten future taxpayer burdens include modernizing the state government's retirement system by switching from a defined-benefit plan that is burdened by demographic constraints, to a defined-contribution arrangement. Finally, New Jersey could adopt some of the Medicaid reforms taking place in South Carolina and Tennessee, where the government might offer Health Savings Accounts and increased portability rather than the blanket coverage that has strained state and federal finances for years.

Conclusion: Trenton Must Reject Higher Taxes

After the release of the Governor's budget, one observer joked, "There are no immediate plans to tax the air we breathe—not this year, at least."[36] The proposal does not include plans to tax oxygen and nitrogen, but it does tax the water residents drink. An additional 4-cent surcharge per 1,000 gallons is just another sad example of the extent to which some policymakers will reach to capture the maximum amount of revenue while avoiding political accountability.[37] Garden State taxpayers have forked over enough money to the state in the past few years and double-digit budget increases won't deliver relief from this oppressive climate. Based on the Governor's previous remarks and business background, he is well aware of the impact of taxation and government spending, yet his rhetoric is not reflected in the budget. If he thinks simply adding to New Jersey's already high tax burden will drive economic growth and fill the coffers, why is the state still mired in deficits after soaking residents for $3 billion in additional taxes? New Jersey government has played the role of tax-hiker well over the past few years. After billions of dollars in higher taxes and increased debt, perhaps it is time to audition for a different part, one in which elected officials will learn the lines of fiscal discipline.

Notes

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