Inflation, imbalance: Lots of anxiety over NJ’s $49B budget plan
TRENTON – New Jersey’s budget spends more than it takes in and isn’t sustainable in the long run, nonpartisan fiscal analysts told lawmakers at a Monday hearing – though also said that point would be moot if revenues exceed Gov. Phil Murphy’s expectations, as they expect will happen.
Considering that revenues are running billions of dollars ahead of expectations and the surplus has reached record levels, there was plenty of anxiety as the Assembly Budget Committee met to review state revenues, kicking off their intensive review of the $48.9 billion state spending plan.
Legislative Budget and Finance Officer Thomas Koenig of the Office of Legislative Services said a budget that is balanced using $1.7 billion in surplus isn’t sustainable in the long run when the surplus is $4.6 billion.
“In somewhat flippant terms, this budget proposal could be viewed as engaging in deficit spending when revenues are exceptionally energetic,” Koenig said.
However, Koenig noted, the Office of Legislative Services forecasts that the state will collect $3.2 billion more over the next 15 months than the Murphy administration thinks. If so, that would more than wipe out any structural deficit.
“Broadly speaking, we think the governor’s revenue expectations are reasonable, even though they are substantially lower than our expectations,” said David Drescher, the chief for OLS’ Revenue, Finance and Appropriations Section.
Drescher said the gap isn’t surprising and the difference will probably narrow a lot by next month, after the administration and Legislature get to review all-important April tax revenue collections.
Most of the difference stems from forecasts for corporate taxes and something called the “pass-through business alternative income tax” – which was created to work around federal limits on state and local tax deductions, which will wind up getting claimed as tax credits.
State Treasurer Elizabeth Maher Muoio said those are among the state’s most “volatile and unpredictable” revenue sources. She said she’s “very happy” OLS foresees additional revenue and that it’s understandable, given a blockbuster March. But for now, the official forecast remains less than 1% in anticipated revenue growth.
“Erring on the side of caution is not just wise, it’s warranted on the heels of a historically volatile time for revenues,” Muoio said.
Inflation was a major recurring theme at the budget hearing, amid concerns that interest rate hikes will trigger a recession. Assemblyman Hal Wirths, R-Sussex, agreed with Drescher that signs of a downturn are becoming more apparent.
“That’s just obvious,” Wirths said. “The No. 1 thing I’m hearing from my constituents over and over is they’re scared to death of the rapid inflation taking place, and we all got to be honest – God only knows where it’s going to stop.”
Retail sales are slowing compared to last year, but Martin Poethke, director of the Treasury’s Office of Revenue and Economic Analysis, said the outside experts the state consults believe they are expected to still climb 5% to 8% this year.
“Considering that the sales tax is up 17% in March, retail sales had to be up,” Poethke said. “There’s no way in New Jersey that you could have 17% growth in the sales tax if retail sales had declined.”
Muoio said the revenue forecast doesn’t anticipate a recession – but that the 8.6% budget surplus is a hedge against one.
“That’s why we are taking a more cautious approach with regard to our revenues for FY23,” Muoio said. “We’re prepared. We’re not assuming anything heroic in FY23.”
Koenig said the fiscal impact of a recession on the state budget could be significant.
“If at any point in time we enter a recession, which could happen, we can expect the loss of billions of tax revenue,” Koenig said.
In a recession, Drescher said, Wall Street bonuses would shrink, hurting income taxes. Business taxes alone could drop by $2 billion, he said, from the currently projected $5.5 billion.
“Most of our really booming revenues, the corporation business tax has every reason to be sensitive to an economic downturn. It’s so high right now,” Drescher said.
Even without a recession, inflation can alter tax collection patterns – but not all in the same direction.
Inflation would hurt gas tax revenues if people save money by driving less. Sales taxes go up, as they’re based on price – unless the overall economy contracts. Drescher said it also depends if inflation affects prices for everything or mainly food and fuel.
“That’s bad for the state because grocery food is not taxed, so there’s no sales tax, and fuel is taxed per gallon, not based on value,” Drescher said.