By John Reitmeyer, The Record (Hackensack, NJ)
TRENTON, NJ—The same federal tax policy that Gov. Chris Christie is now blaming for New Jersey’s $807 million budget shortfall helped save his budget last year when he was facing another sizable gap, according to a Record analysis of income tax data.
Last year, budget documents show Christie boosted his income tax projection by $406 million, even as he was lowering the forecast for other state revenues by $812 million.
New Jersey would eventually do even better than Christie had thought once all April and May income tax revenue was counted, taking in a combined $600 million more than was collected over those two months the previous year, according to The Record’s analysis.
At the time, officials from the state Department of Treasury acknowledged that federal tax changes — namely higher rates for the wealthy — played a role in producing the windfall.
But this year, Christie and his administration are saying something entirely different about the same higher tax rates, which were enacted in early 2013 when President Barack Obama and Congress decided to end Bush-era cuts for the nation’s highest income earners to avoid the so-called fiscal cliff.
Now, it’s those higher federal rates that have brought on New Jersey’s $807 million budget shortfall and thrown the state’s $33 billion budget into disarray with just two months left in the current fiscal year, Christie told reporters at a State House news conference on Tuesday.
“What we’re being told initially is this is the effect of the change in the law … by the Obama administration and the Congress to increase tax rates on upper-income individuals,” he said. “Remember, it’s the top 1 percent in the state that pays 40 percent of the income tax, so when you start to make changes, they’re going to change their behavior.”
But Rep. Bill Pascrell (D-NJ) said Christie is taking the easy way out in blaming federal tax policy changes for all his budget problems. He should have been able to predict this year’s drop-off in income tax collections after enjoying last year’s huge gains, the congressman said.
“The expiration of the Bush tax cuts for the wealthy was no secret,” said Pascrell, a member of the House Ways and Means Committee, which is responsible for federal tax bills. “Governor Christie was not complaining about state revenues seeing a windfall of $400 million last year due to people shifting income from one year to another.”
“Any responsible budget would have accounted for this in the first place,” he said.
Christie’s press secretary, Michael Drewniak, called Pascrell’s comments “partisan-based, not reality-based.”
GOP Assemblyman Declan O’Scanlon said other states are experiencing similar problems as a result of the federal tax changes, under both Democratic and Republican administrations.
“There’s no question this was due to the change in federal tax policy,” said O’Scanlon, the ranking GOP member on the Assembly’s Budget Committee.
New data from the New York-based Nelson A. Rockefeller Institute of Government sheds some light on how states like New Jersey, Connecticut and Pennsylvania, among others, struggled with projecting income tax collections amid the “unintended consequences of the fiscal cliff.” The answer may lie in how capital gains were reported by the very rich over tax years 2012 and 2013.
“The weak income tax in the fourth quarter and the weakness in the preliminary data for the first quarter suggest that the capital gains may have declined substantially in 2013 despite the strong stock market,” the report’s authors said.
More definitive information will come out once all April and early May state tax collections are counted this year, the report said.
But New Jersey’s budget problems stretch beyond just the current fiscal year. The $34.4 billion spending plan Christie has put forward for the fiscal year beginning July 1 is also in trouble. That budget assumes $1 billion in income tax growth beyond the benchmark for the current fiscal year, a mark that itself is well above actual tax collections.
State lawmakers are preparing for changes to be announced later this month as they face a June 30 deadline to adopt a new spending plan, one that the state constitution says must be balanced.
Moody’s Investors Service noted the severity of New Jersey’s financial predicament in comments it made public on Wednesday, calling the budget shortfall “a credit-negative development.”
The Wall Street ratings agency said the state has already lowered its revenue forecast and cut roughly $700 million this fiscal year to offset another budget shortfall not related to federal tax policy changes. New Jersey is likely turn to one-time revenue solutions to address the $807 million shortfall, Moody’s said in its notice to investors.
“Given that the state has relied on one-time solutions to solve midyear gaps in the current year and past several years, it is highly likely that one-time measures will be part of this solution,” Moody’s said. “The state’s continued reliance on one-time fixes underscores its financial weakness.”
Photo: Peter Stevens via Flickr