To fill New Jersey’s $1.1B shortfall, Christie considers charity care cuts, delay in tax breaks

NorthJersey.com-  A $1 billion shortfall in state tax revenue is New Jersey’s latest budget jam.

Governor Christie’s administration and non-partisan legislative analysts disclosed Wednesday that income-tax collections for the key month of April were far below the governor’s projections — forcing Christie, once again, to scramble his budget plans weeks before the close of the fiscal year, this time with dozens of small trims and maneuvers that would affect lottery winners, business tax credits and funding for hospital charity care.

Total state revenue continues to grow, but the result of missing April’s tax forecast was a nearly $1 billion shortage in funds that were expected for the state budget over two fiscal years.

“At the end of the day, it’s not a huge problem,” acting state Treasurer Ford M. Scudder told reporters after giving testimony before the Assembly Budget Committee. “Our economy remains on solid footing. Our unemployment rate is well below the national average. Job growth continues to be strong. We just have less non-wage income than we anticipated.”

The budget gap could complicate a range of unsolved problems, such as the financial crisis in Atlantic City and stalled negotiations to phase out the estate tax as a way to soften the blow of raising New Jersey’s gas tax in order to round up money for transportation projects.

The budget gap emerged after financial analysts tallied up tax collections for the crucial spring months. The $34 billion state budget relies on the state income tax for 40 percent of its revenue, and most filers send in their checks close to the April deadline.

That dynamic has made New Jersey’s income tax collections for April a useful barometer of the state’s overall economic health.

New Jersey has been adding jobs consistently and lowering its unemployment rate over the past year, but the April numbers indicate that a down year in the stock market can still take a toll on the state budget.

“Other states such as California, Massachusetts, Connecticut and Pennsylvania have reported spring income tax revenues falling short of expectations,” Frank Haines, the lead budget analyst in the non-partisan Office of Legislative Services, testified Wednesday. “While it is too soon to know exactly what is causing these results, the preliminary conclusion is that the weakness seen in spring tax filings reflects the weak stock markets in 2015.”

A $603 million revenue shortfall estimated for the current year’s $34 billion budget will require Christie to dip into the state’s rainy-day fund, Scudder said.

The governor plans to take $239 million from the surplus account. Scudder added that state agencies would end up spending $508 million less than budgeted this year, a big revision from the $226 million in savings, or “fund lapses,” he had projected in February. Those savings and other changes will give Christie enough breathing room to close the budget in the black, Scudder said.

State law requires Christie to balance the budget before the fiscal year ends June 30.

The “April surprise” in income tax collections was a double-whammy affecting not only the current fiscal year but the next. In the $34.8 billion spending plan Christie had proposed for fiscal 2017, he is now facing a $400 million budget shortfall.

The governor plans to cut $303 million in spending from a range of programs, such as $25 million from hospital charity care.

Christie is also seeking to free up $160 million in new revenue through a couple of tax-policy changes.

The first is a legislative change to the way New Jersey taxes lottery winnings, so that jackpots are taxed before players cash them in, instead of afterward. Scudder stressed that it was not a tax hike on lottery winnings; but winners would have to pay the state’s top income tax rate of 8.97 percent up-front on “large jackpots” if Christie’s plan is approved. Currently, winners pay 3 percent up-front on jackpots above $10,000, and the rest later.

The second change Christie is seeking is to delay some tax breaks for businesses to close the budget shortfall, another move that may require legislative approval. Lawmakers discontinued the state’s Business Employment Incentive Program in 2013, but firms that still had grants from that program are allowed to convert them into tax credits.

“The payment schedule of those credits will be slowed, with only 5 percent of past amounts due being paid in 2017, instead of the more aggressive 30 percent set forth in current legislation,” Scudder said.

Christie has no plans to further cut the payments he has pledged for New Jersey’s troubled pension funds for public workers, Scudder stressed.

No pension cut

Overshooting the state’s yearly revenue estimates has been a recurring problem for Christie. Faced with a more than $2 billion funding gap that also came to light after disappointing tax collections in April 2014, Christie closed the shortfall by cutting $2.43 billion from two large payments he had scheduled for New Jersey’s pension system, triggering a spate of lawsuits and credit-rating downgrades from Wall Street.

This year, Christie has no plans to touch the pension payments, Scudder said, meaning a $1.3 billion contribution scheduled for the pension funds this year, and a $1.86 billion payment for next year, are still on track.

“I do not believe a further downgrade would be warranted,” Scudder testified Wednesday. He added that Christie has been building budgets with bigger rainy-day funds, fewer one-shot sources of revenue, and more conservative revenue targets in recent years, which would make it easier to close the $1 billion budget hole over the two fiscal years.

“This is a conversation that is going on in all states right now,” Scudder said. “But I believe in New Jersey we’re better equipped to handle it based on the budgets that have been put forth over the past few years, based on us building up our surplus, based on not assuming huge rates of revenue growth and instead more reasonable levels based on where in the economic recovery we are.”

Assemblyman Gary Schaer, D-Passaic, the Budget Committee chairman, said that Christie’s plan to close the budget shortfall appeared to be “reasonable,” but he lamented that the state often has to deal with large budget problems late in the fiscal year.

“There’ll need to be changes in the way that we govern,” Schaer said after the hearing, adding that “$1.1 billion, no matter how you count it, is a lot of money.”

Haines and Scudder are expected to testify again today before the Senate Budget and Appropriations Committee.