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New Jersey Budget Issues In 2018

Because we’re here in New York, it follows that most of our posts deal with New York State. Whether it’s the business franchise tax, or the treatment of sole proprietorships, or the ways in which New York State has responded to the Tax Cuts & Jobs Act, we’ve covered a wide variety of issues from a New York perspective. While this coverage is useful, it’s also useful to occasionally take a peek at the inner workings of other states.  Given their proximity, we especially look at neighboring states such as Pennsylvania and New Jersey. Neighboring states frequently face issues similar to those which affect us here at home, so it’s very possible that the problems faced by one of these other states may be of relevance for us here in New York.  In this initial blog post on neighboring state tax matters, we’ll first take a look at New Jersey budget issues.

Facing Tough Problems

The New York State budget brought up a whole range of complex, fascinating issues.  Some of them we explored in prior blog posts on this site. Most prominently, we examined the New York State reaction to the reductions in state and local tax deduction. Among other things, we noted the difficulties involved with crafting a budget which meets both the needs of the state’s citizens and the state’s government. The State of New Jersey, likewise, tackled some pretty important issues in the course of developing its current state budget. New Jersey Governor Phil Murphy made tough decisions to address the many problems facing New Jersey. 

New Jersey Budget Pension Problems 

One of the biggest issues facing the New Jersey budget is the dwindling pool of resources available to support retiree pensions. By New Jersey’s own estimate, the state will incur a deficit of approximately $45.4 billion over the course of the next 30 years, as it tries to service retiree pensions. In response, Governor Murphy set aside $3.2 billion of the current budget specifically for retiree pension payments. This is the largest amount pension allocation in the state’s history. Even so, it’s actually substantially below the recommendation from the majority of actuaries familiar with the state’s pension problem. This $3.2 billion allocation is also just the first part of a two-pronged attempt to deal with New Jersey’s pension issue. The other prong of the fix is the increase made to both the state corporate tax rate and the individual tax rate for exceptionally high earners in New Jersey. As a result, both businesses and individuals earning over $5 million per year will face higher tax burdens.  

Band Aids

To some degree, these rate increases will help.  Are they only band-aids on a critical wound, though? The reason why is that these tax increases will sunset, or go away, in four short years.  In the meantime, they also risk alienating high earners and productive businesses from the state. If the increases drive away too many taxpayers, the budget may end up causing more harm than help. 

School Funding 

Another big item on the New Jersey budget is funding for New Jersey public schools. The new budget set aside $349 million to assist schools.  That represents a roughly 4.3% increase over the previous budget.  Unfortunately, disparate district treatment remains. Currently, funding for schools varies widely by district throughout the State of New Jersey. Numerous factors, such as enrollment trends and demographics, play a role in determining aid for districts. Even though the new budget didn’t completely settle the issue of differential funding, the budget clarified that this issue will be taken care of within seven years. New Jersey recently passed a law which limits how much money can be taken away from districts with shrinking enrollment and growing tax bases.  It removes existing caps for districts experiencing increasing enrollment. The new law makes it easier to address the differential funding issue over the next seven years. 

Quality of Life

Governor Murphy tried to focus on improving quality of life for New Jersey residents, and one step taken in this direction was maintaining the current sales tax rate of 6.625%. Sales tax impacts all state residents and so this step will have a statewide positive impact. Whatever steps Murphy took may be counteracted.  Those countervailing forces include increases to corporate and upper income individual rates. Only time will tell how much the average resident will benefit from Murphy’s efforts. 

Conclusion  

We’ve said it before, and now it’s worth saying once again.  Politics is not an easy business, and negotiating a budget is among the most difficult tasks in all of politics. Negotiation is always more difficult when funding is involved.  That’s because certain adjustments and compromises require satisfying diverse interest groups. In his new budget, Governor Murphy attempted to deal with a number of key issues.  The issue of retiree pensions was perhaps the most tricky and controversial of all. It looks as though this new budget will temporarily improve New Jersey’s situation.  Nonetheless, it’s clear that New Jersey needs to think a bit more outside-the-box than usual to permanently turn things around. Whatever the future our neighbor may be, it’s the job of our top New York City tax attorney to stay up-to-date these topics.  That way, we can best service our clients. If you have a tax issue, please reach out.  We at Mackay, Caswell & Callahan, P.C. will work on your case right away! 

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