TRENTON — State tax collections are off to a sluggish start four months into New Jersey’s fiscal year, raising the prospect of budget trouble ahead if things don’t rebound.

The good news is that the first third of the budget year accounts for less than a fourth of revenues, given that sales tax revenues crest with Christmas shopping and income-tax revenues peak when people file returns in April. So there's opportunity ahead for a course correction.

The bad news is that revenues are running just 0.1 percent ahead of last year, when the end-of-year growth target is 3.6 percent. That’s an increase of $10 million, or around $245 million behind pace, if revenues grew evenly. If year-end growth is 0.1 percent, that’d amount to a billion-dollar shortfall.

“Well, I think the concerns would be obvious,” said Assemblyman Gary Schaer, D-Passaic, the chairman of the Assembly Budget Committee. "If things continue as they are, we won’t meet those projections, which means we will effectively run out of money because our spending is beyond our revenue source.”

Schaer said it would be “fiscally imprudent at best” not to talk about what would occur if the revenue trend doesn’t change.

Assemblyman Declan O’Scanlon, R-Monmouth, the Republican budget officer in the Assembly, said revenues through October account for just 23 percent of state tax collections and depend on volatile, tough-to-predict sources such as corporate taxes. So he’s not sounding any alarms.

“Not yet,” O’Scanlon said. “You have to understand that we are front-end loaded on expenses and back-end loaded on revenue. The very first true indication, positive or negative, is once you get sales-tax figures from December, from end-of-year. We won’t know those until February.”

“Would we be thrilled if we were over our projections? I would. But this doesn’t worry me all that much,” O’Scanlon said. “You can go back in previous years, and the numbers swing wildly either way. It’s not necessarily a great sign if your revenues from this short period of time run way ahead, and it’s not something to worry greatly about if they run behind. For me, until we have those December sales tax figures, and we see what everything looks like in the aggregate, I’m not panicking.”

Of the state’s three biggest sources of revenues, sales taxes were closest to their year-end target through October – up by 2 percent, with 3 percent growth projected.

Income taxes are up by 1.1 percent, while the budget counts on 4.3 percent growth, while business taxes have shrunk almost 7 percent, rather than grown 6 percent.

Among the sources of revenues registering better-than-expected collections are taxes on fuels and home sales, as well as the lottery.

The state Department of the Treasury says revenue growth is tracking expectations. It said October collections were 1.6 percent below October 2015 because it’s processing taxpayer refunds more quickly. Refunds were $73 million higher this October than last one, but there will be fewer refunds to pay later.

The minimal growth in state tax collections reflects other tepid economic news. The economy in New Jersey has seen net job losses in six of the first 10 months of 2016, recording a total gain of just 8,800 jobs, the smallest growth in five years.

On top of those trends come the impact of the tax cuts that were enacted along with the gas-tax hike approved to replenish the state’s Transportation Trust Fund.

Some of those tax cuts start taking effect Jan. 1. Those include a reduction in the sales tax from 7 percent to 6.875 percent, changes in the estate tax that exempt more households from having to pay and an increase in the earned income tax credit.

Combined, the tax cuts are forecast to reduce revenues in the current budget year by around $170 million. The revenues from the hike in the gas tax – estimated at $715 million this budget year – are dedicated to transportation projects and not available for the general fund.

“I think everyone applauds those pieces of legislation. It will give the state an effective and robust transportation system, which is vital to our economic growth and development,” Schaer said. “But on the other hand, our well-meaning attempt to do such also carried with it loss of revenue. That loss of revenue has got to be compensated somewhere. We’re spending more than we’re collecting.”

O’Scanlon said future budgets will see a bigger impact from the tax cuts – both in the immediate reductions in revenues, which eventually grow to $1.4 billion a year, but in what he anticipates to be the economic benefits of encouraging wealthy families and retirees to stay in New Jersey.

“The way the tax cuts were put into play, they’re not going to have a dramatic impact. And that’s probably fiscally responsible right now, where we are in this recovery and in the way this year’s budget was crafted,” O’Scanlon said. “We will absolutely have to take these things into account next year.”

The revenue loss from the tax cuts in fiscal 2018 is projected by legislative staffers at $645 million to $675 million.


New Jersey: Decoded cuts through the cruft and gets to what matters in New Jersey news and politics. Follow on Facebook and Twitter.


Michael Symons is State House bureau chief for New Jersey 101.5 and the editor of New Jersey: Decoded. Follow @NJDecoded on Twitter and Facebook. Contact him at michael.symons@townsquaremedia.com.

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