Three months of budget hearings ended May 23 with state officials projecting $2 billion less than anticipated after Gov. Phil Murphy introduced his $53.1 billion financial plan for the state earlier this year.
But what may be even a bigger issue to getting a budget deal are the priorities of the State Senate President and Assembly Speaker that could put the brakes on a business tax that Murphy and his officials have repeatedly pledged to let sunset this year.
State Senate President Nick Scutari (D-22) said the day before the last State Senate Budget meeting that he is considering an extension of the corporate business tax surcharge to fund new property tax relief programs. Scutari said he is working on property tax relief programs as well as a new program Assembly Speaker Craig Coughlin (D-19) said would “cut most seniors’ property taxes in half.”
Extending Business Tax
Scutari floated that it was a “possibility” to extend the additional 2.5% tax for corporations with over $1 million in taxable income but that he had not yet consulted the governor on the proposal. “In my thought process, obviously, we now have to have a stable funding source. And that’s the first thing that kind of pops to your head and probably mine as well,” he said.
Besides Murphy, a roadblock to that could be State Sen. Paul Sarlo (D-36), the chair of the budget committee, who reiterated at the last public budget hearing on May 23 that he wants the corporate business tax surcharge to sunset as scheduled this year.
$2 Billion Short
The news of Dem leadership intentions comes just a week after Murphy officials said the proposed budget would have $2 billion less than previously expected.
Budget officials said New Jersey is well prepared to meet the funding shortfall, offering it would cut into the state’s surplus to $8 billion from $10 billion “with relative ease.”
“We are well prepared to handle this April surprise,” Treasurer Elizabeth Maher Muoio told both the State Senate and Assembly Budget Committees during testimony, who noted New Jersey is not the only government having to deal with declining revenues. “After three years of turmoil, when we experienced precipitous drops in revenue followed by extraordinary growth, it appeared that revenues were beginning to settle back into more stable pre-pandemic growth levels….our underlying fundamentals appear to be stable.”
“This is not the cataclysmic event that it would have been 10 or 20 years ago,” added Thomas Koenig, budget and finance officer with the nonpartisan Office of Legislative Services. Officials now expect the state to collect roughly $52.8 billion in tax revenue in fiscal year 2023 and fiscal year 2024, which begins July 1.
Tax Revenue Decrease
The updates to lawmakers were an extension of the state’s monthly update released May 15. April revenue collections for the major taxes totaled were just under $7.0 billion, down $1.2 billion, or 14.3% from last April. Fiscal year-to-date total collections of $37.1 billion are now lower by $423.7 million, or 1.1% below the same period last year.
April collections for the Gross Income Tax (GIT), which are dedicated to the Property Tax Relief Fund, totaled $3.7 billion, down $1.4 billion, or 27.4% lower than April of last year. The drop in revenues was primarily caused by a reduction in final payments, which fell by $1.6 billion, or 35.8%.
Preliminary data analysis for Tax Year 2022 indicates that a significant decline in net capital gains is the main driver behind the lower final payments. Fiscal year-to-date collections of $16.0 billion were down by $1.1 billion, or 6.5%.
Stock Market Effect
Maher Muoio attributed the predicted drop in income tax collections to poor stock market performance and a significant reduction in state capital gains taxes. That revenue declined by at least 55%.
The Corporation Business Tax (CBT), the second largest general fund revenue source, totaled $1.1 billion in April, a decrease of $140.7 million, or 11.2% from last year. While the state due date for CBT final payments is not until May, April remains the key final payment month as companies continue to make payments and file returns according to the federal schedule. Fiscal year-to-date collections of $4.1 billion are down $126.1 million, or 3.0% lower than the same period last year.
Realty Transfer Fee revenues of $35.0 million were down $24.4 million, or 41.4% lower than last April, as collections continue to fall on a year-over-year basis. Treasury officials noted median home prices are well below the peak levels of last Summer, but housing inventories remain relatively low, preventing rapid declines in sales prices.
The drop in volume of home sales remains the primary driver behind the reduced Realty Transfer collections. Fiscal year-to-date collections of $409.9 million are down $108.3 million, or 20.9% from last year.
Good Financial News
Still, other revenue sources continued to perform at or above expectations, and state revenue in the fiscal year that ends June 30 is still expected to exceed last year’s forecasts, according to budget officials.
The Sales and Use Tax, the largest general fund revenue source, totaled $1.3 billion, an increase of $80.4 million, or 6.7% above last April. Fiscal year-to-date receipts of $9.8 billion are up $541.0 million, or 5.9% over the same period last year.
Pass-Through Business Alternative Income Tax (PTBAIT) payments totaled $481.0 million in April, higher by $260.9 million, or 118.5% above the same month last year. April was a key month for PTBAIT revenues, as the first quarterly estimated payment was due. Last year, the estimated payment due date was postponed to June; thusly April 2023saw significant growth. Fiscal year-to-date revenues of $3.4 billion are up $354.3 million, or 11.6% over last year.
Growth Expected to Continue
Martin Poethke, director of the state’s revenue and economic analysis office, said he expects job growth and consumer spending to slow in the coming year, but also believes growth will rebound somewhat. It was a comment that Office of Legislative Services representatives agreed with.
“We have consistently cautioned of considerable downside risks and against expectations that revenue growth will defy gravity forever,” added Koenig. “Our downward revision might therefore signal the end of the period of exuberance, but it does not herald a round of doom and gloom.”
Sarlo noted the process now moves into negotiations between legislators and the Murphy Administration. The state constitution mandates a balanced budget with no deficit must be ratified by July 1.
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