Revenue forecasts hold steady as budget chair floats sales tax hike

Treasurer Liz Muoio told lawmakers Tuesday that new, stable revenue forecasts are more than welcome after years of a “revenue roller coaster.” (Illustration by Alex Cochran for New Jersey Monitor)

New revenue projections unveiled at the Statehouse Tuesday contain little indication of an April surprise that would alter lawmakers’ options as they negotiate the next year of New Jersey’s spending, though looming funding needs have one legislator raising the possibility of a broad-based tax hike.

The Treasury predicted the state would draw $54.3 billion in revenue in the fiscal year that begins July 1, a $140.2 million increase from earlier projections, while the nonpartisan Office of Legislative Services forecasted $54.04 billion in revenue, a $106.5 million reduction from its earlier estimate.

“April gave us little to be either concerned or excited about. Tax collections behaved much they had behaved throughout the fiscal year — no particularly eye-catching inflows but healthy revenue collections pretty much across the board,” Oscar Mendez, a revenue and economic policy analyst with the Office of Legislative Services, told the Senate Budget Committee.

Both offices called the latest numbers a win for revenue forecasters. Such victories have eluded officials in recent years, when the pandemic and a booming market caused revenue to slump and then balloon before moderating last year.

“In forecasting terms, that’s a bullseye,” said Treasurer Liz Muoio. “And after the revenue roller coaster ride during and after the pandemic, such stability is more than welcome.

As in March, officials pointed to income tax refunds to explain the trends. Year-to-date refunds under the gross income tax rose by more than $800 million — or about 53.5% — over the same period in fiscal year 2023. And corporate business tax refunds were $450 million higher year-to-date than they were in the prior fiscal year.

Though April’s largely static revenue figures won’t create the sort of scramble often seen when revenue precipitously declines, Gov. Phil Murphy’s proposed spending plan still calls for New Jersey to operate with an expanding structural deficit that would dwindle the state’s surplus to $6.3 billion by July 2025.

Murphy has proposed New Jersey spend roughly $3.2 billion more than it takes in through taxes, fees, and other revenue in the coming fiscal year.

That deficit would expand yet further in future years if lawmakers constitutionally dedicate revenue from Murphy’s proposed corporate transit fee to NJ Transit. If Murphy’s plan wins lawmakers’ approval, money from the tax would go directly into the general fund starting July 1, and its eventual dedication would expand deficits by about $800 million.

“You can do this for one year, maybe two years, and then you’re going to run into negative territory,” Thomas Koenig, the legislative budget and finance officer, said of the deficit spending. “As you know, with the balanced budget requirement we have in New Jersey, we cannot sustain that kind of trajectory for long.”

Who to tax

The revenue forecasts presented Tuesday assume lawmakers approve Murphy’s transit fee, which would apply a non-marginal 2.5% surtax on businesses with more than $10 million in profits.

That proposal, which would apply retroactively to the first six months of 2024, is expected to raise more than $1 billion in the coming fiscal year and $818 million in future years, when its revenue is intended to be dedicated to NJ Transit.

The tax would replace a nearly identical corporate business tax surcharge that formerly applied to businesses with more than $1 million in profit. That surcharge sunset at the start of 2024.

Sen. Paul Sarlo (D-Bergen), the committee’s chair, twice raised the prospect of raising New Jersey’s 6.625% sales tax back to 7% as an alternative to the corporate transit fee.

“Going from 6.675 back to 7% would be more stable than the corporation business tax on the higher earning income companies, which could vary from year to year,” he said to Koenig.

Sarlo, who opposed extending the surcharge that ended this year, insisted he was not backing either proposal but “just saying everything is on the table.”

As a dedicated funding source, the corporate transit fee has some flaws. Corporate business tax collections — and income tax collections in general — are highly volatile and more susceptible to year-to-year economic shifts than the sales tax.

The proposed corporate transit fee would be especially volatile because it would be levied on roughly 600 highly sophisticated businesses, most of which are headquartered out of state.

But a sales tax increase is perhaps the most broad-based tax increase possible in New Jersey. It would touch most every resident and would disproportionately affect lower-income residents.

“I’m just saying we, as a Legislature, should look at all of the options available,” Sarlo said. “The business community has mentioned it. A lot of folks have mentioned it.”

Muoio declined to comment on the sales tax proposal.

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