Why Trump’s tax-cut promise has NJ worried about its own budget
Americans’ surprise choice for president could mean an unwelcome surprise for New Jersey’s budget.
Five months into the fiscal year, tax collections are growing at a slower-than-expected pace that would lead to a $750 million shortfall if things don’t improve, according to the nonpartisan Office of Legislative Services.
Now it appears that might be weighed down further by residents waiting to see if they’ll get a tax cut on their capital gains under President-elect Donald Trump, Catherine Brennan, OLS’ chief of revenue, finance and appropriations, told the Assembly Budget Committee at a hearing Monday.
“We think that what most people are getting is advice from their advisers right now to wait and see because with the new administration that’s coming in, there’s a lot of talk about adjustments to the capital gains tax rate,” Brennan said.
“We are expecting people to defer taking gains in the current year and taking a wait-and-see approach, with the expectation that the tax rate on capital gains will be lower in the future,” Brennan said. “So that could actually potentially negatively impact us in April.”
Such a change in behavior would be reflected in the year-end payments made in December, and recorded by the state in January, and final payments made in April.
Through November, estimated payments – one of four components of New Jersey’s gross income tax – were down 12.4 percent compared with a year earlier, Brennan said.
Adjusting for technical factors, revenues from the income tax may actually be declining by about 1 percent, Brennan said. The budget is counting on year-end growth of 4.3 percent in income taxes.
In all, income taxes are expected to account for about 40 percent of this year's state revenues -- close to $14 billion, out of $34.6 billion.
Brennan said the state budget could also be affected positively by the potential repatriation of corporate profits, depending on what tax changes Trump is able to enact.
State Treasurer Ford Scudder declined to testify at the Assembly hearing, saying he is limited from commenting publicly on state revenues while the state is in the middle of borrowing money by selling bonds.
Lawmakers searched for bright spots, but Brennan said they were unlikely.
Assemblyman Declan O’Scanlon, R-Monmouth, said rising stock markets usually mean higher capital gains, but Brennan said they’re down to date. Assemblyman Gary Schaer, D-Passaic, said Wall Street gains often mean higher year-end bonuses, but Brennan said signs are they will be lower.
Assemblyman John Burzichelli, D-Gloucester, said this year’s revenue forecasts seemed reasonable when they were adopted six months ago.
“There’s a lot of the year left to go, so hopefully we’re going to have some rebound. That would be easier on all of us,” Burzichelli said.
Brennan said it’s been weak, but agreed there’s still time for a turnaround.
Revenues had increased just 0.1 percent through October, when 3.6 percent year-end growth is forecasted, but appear to have rebounded in November. The state Department of the Treasury hasn’t yet published November results, but OLS tracks them daily.
“Unofficial preliminary figures through November suggest a slight improvement. However, after adjusting for certain technical factors, aggregate growth remains weak at about 1 percent,” Brennan said.
“More than two-thirds of the state’s annual collections are still to come in over the remaining months of the fiscal year. The initial revenue weakness, however, provides grounds for caution,” Brennan said.
Another reason for caution is that New Jersey’s performance appears to be part of a larger trend.
The National Association of State Budget Officers said in a report issued Monday that nearly half of states reported shortfalls in revenues so far in fiscal 2017, the most in seven years.
Brennan said states that rely on capital gains like New Jersey does, such as New York, Connecticut, Pennsylvania, Maryland and California, are also experiencing budget weakness.
“The states that we consider our peer states in terms of their economies and in terms of the revenue bases are also seeing the same weaknesses,” Brennan said. “The weaknesses we’re currently seeing in the sales tax, the income tax and the (business tax), states that we typically look to as either bellwethers or peers are seeing some of the same weaknesses.”
If New Jersey revenues miss their expectations, the difference – depending on its size – could be made up through use of the state’s surplus.
The size of the surplus isn’t currently publicly known. It had been estimated at $557 million in June, though Frank Haines, the Office of Legislative Services’ legislative budget and finance officer, said the Treasury Department has cautioned it may have been $70 million less than anticipated.
The actual start-of-year surplus will be identified in an annual report due for release early in 2017.
The surplus could get a boost from the impact of the tax changes approved in October. Though reductions in the sales and estate taxes that start in January will reduce revenues, and extra cash from the higher gas tax goes exclusively toward the Transportation Trust Fund, the state will no longer have to divert $350 million in sales taxes from the general budget to repay TTF debts.
All told, those changes should add $38 million to $110 million to the state surplus, Haines said.
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