In the waning weeks of pre-pandemic normalcy, Gov. Phil Murphy stood before state lawmakers with a progressive budget proposal to match his political vision.
Murphy, a Democrat, wanted to hike taxes on high earners, add hundreds of millions in education spending and make a historic payment to the public-worker pension fund in a $40.9 billion budget.
Six months and a protracted public health crisis later, Murphy will appear before lawmakers again Tuesday with everyone wondering just how much the pandemic hurt state revenue — and how the governor proposes to tax, cut or borrow to overcome it.
“We’re just in a strange place,” said Senate President Stephen Sweeney, D-Gloucester, one of the powerful lawmakers Murphy must win over with his new budget proposal. “I really don’t know what to expect right now. We can normally predict (revenue), and right now we really can’t. I’m hoping for the best and fearing the worst.”
And in this strangest of times, Murphy’s budget address will be delivered in a strange place: SHI Stadium in Piscataway, where Rutgers University’s football team plays. The 52,000-seat stadium obviously has far more room for lawmakers and staff to socially distance than where governors usually speak: the Assembly chamber at the Statehouse and the Trenton War Memorial a block away.
Murphy on Friday refused to reveal any specifics of his budget plan, saying the final details were still being worked out.
The coronavirus pandemic shuttered businesses, put about 1.5 million New Jersey workers on unemployment and upended the state’s revenue tax projections so much that Murphy warned of dire cuts without substantial federal aid or borrowing. Trenton is divided over the severity of the state’s financial crisis, and Murphy’s budget address on Tuesday begins debate over how the state should resolve its budget hole —however big or small it may be.
“The COVID-19 pandemic has both devastated our state’s finances and highlighted the importance of the progress New Jersey has made over the past two years,” Murphy said in a statement.
Murphy must rebalance the budget with less revenue and without assurances the federal government will provide any help. His new plan prioritizes the state’s values but also “reflects the reality of the situation that we are faced with,” Murphy said.
“Our focus remains squarely on making the essential investments we need to make to ensure our residents, businesses, and institutions don’t merely defeat this pandemic, but thrive once it is over.”
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New Jersey’s fiscal year typically runs July 1 to June 30, but the state extended its fiscal year three months to Sept. 30 and is operating on a three-month stopgap spending plan. The budget Murphy will unveil Tuesday will cover nine months of spending, through next June 30.
Murphy and Democrats who control the legislature have just over a month to hash out disagreements over spending, taxing, borrowing and cuts before the new fiscal year begins Oct. 1.
“The unprecedented economic crisis brought on by the COVID-19 pandemic will inevitably make this one of the most challenging budgets we’ve ever had to face,” Assembly Speaker Craig Coughlin, D-Middlesex, said. “The unparalleled loss of revenue and the compelling need of New Jerseyans is undeniable.”
Sweeney said he’s hopeful the administration and Legislature will be able to resolve this financial crisis amicably.
“We always start off trying to negotiate. That’s the point I’m starting from,” Sweeney said. “We can absolutely go down two tracks, but the preferred route would be to come up with an agreement. In a crisis, it doesn’t favor any of us to start with our sabers out.”
On Tuesday, Murphy will reveal just how big a budget hole he’s forecasting, though it’s expected to be billions of dollars. That is why, he’s said, he’s stressed the need for ample borrowing and federal support.
He’s has not said publicly how much debt he actually intends New Jersey to take on, but the Legislature’s already agreed to as much as $9.9 billion — though it still retains final say. The state Supreme Court upheld that borrowing plan despite a GOP-led court challenge that it violated Constitutional constraints on borrowing and spending.
Federal budget relief remains a wild card, caught up in Congressional stimulus negotiations. The Democratic House’s HEROES Act would send about $1 trillion to state and local governments, while the Republican Senate’s HEALS Act contains none.
Just last month Murphy warned he would be forced to cut $1 billion for schools if there’s no more federal cash.
“We cannot fully support our districts in their plans for the upcoming school year without help from Washington,” he said.
This declaration, and his predictions of financial doom have been met with skepticism in the Legislature, which telegraphs a potential September fight.
Republicans have accused Murphy of exaggerating the impact of the pandemic on state finances to win support for his borrowing plan and more financial aid from the federal government.
To be sure, the unpredictability of the health and economic crisis has made the difficult job of estimating tax collections all the more challenging.
In May, Murphy’s administration lowered its revenue estimates through next June by about $10 billion. Tax collections were falling off a cliff, Murphy said, and 200,000 public-sector jobs were at risk.
Months of virus fears, stay-at-home orders that limited retail and dining, and record high unemployment were taking a toll on the sales, income and corporate business taxes.
But in the months since, the projected budget holes have shrunk. And the latest revenue numbers for the first 13 months of the new 15-month fiscal year show tax collections within 1% of the same 13-month period a year ago.
“Whether revenues are better or not, we’re still solving an enormous hole,” Murphy said Friday during his coronavirus briefing in Trenton. He said it’s $5 billion “at minimum” and expects “a much bigger number” when taking into account forecasts for the first half of the fiscal year that begins next July.
The administration’s updated projections are likely to be a source of disagreement with the Legislature. Murphy’s revenue estimates have historically been are more conservative.
And experts say the recent numbers don’t mean the coast is clear. A second wave of the virus with widespread closures could upset projections once again, as would a failure to reinstate federal unemployment insurance assistance, which has been credited with propping up the economy and personal spending.
“I’m hoping for better numbers,” Sweeney said. “We already got some better numbers. I’m hoping the federal government will straighten themselves out and do the right thing for states.”
Murphy said solving the budget crisis doesn’t stop at borrowing and federal aid. The governor hasn’t said whether he’ll seek any tax increases or how much spending he plans to cut, but he has said all of these options are on the table.
His February budget proposal would have hiked taxes or fees on people with income over $1 million, smokers, opioid manufacturers, gun owners, bear hunters and corporations that don’t offer employee-sponsored health care plans and whose workers land on Medicaid.
All that new income would have helped fund a record contribution into the pension fund for public workers, a $300 million boost for k-12 funding and a pilot program for tuition-free four-year college.
Tuesday’s budget unveiling will reveal which of those proposals he wants to keep or jettison.
New Jerseyans will also learn the fate of property tax relief programs, like the Homestead credit, which were stripped of funding in the spring as fears of collapsing tax collections grew, and a planned $4.9 billion pension payment.
Similarly, it will show whether the governor plans to restore funding for dozens of small grants and programs — things like preschool expansion and homelessness prevention — that was eliminated in the stopgap budget.
Murphy has consistently pushed for the tax increase on high earners, specifically those making above $1 million a year, but the Legislature has blocked him.
The so-called millionaires tax would increase the tax rate on income between $1 million and $5 million from 8.97 percent to 10.75 percent. People with income over $5 million already pay a 10.75 percent marginal tax rate under a previous budget deal.
Murphy also could seek to extend a tax increase on corporate income that is gradually phasing out or take up the call from progressive advocacy groups to reverse a sales tax cut on purchases of yachts.
In a letter, nearly 100 professors from New Jersey colleges urged Murphy to increase the income tax rate on people with income over $250,000 and extend the sunsetting surcharge on corporate income.
Austerity at this time would be a mistake, they said.
“Large cuts would erode the health and social infrastructure needed to continue combatting COVID-19, increase inequality, and exacerbate the economic downturn. Instead of budget cuts, the state should look to raise revenues to balance its budget,” the letter stated.
Meanwhile, the New Jersey Business and Industry Association warned taxing businesses now would be “inappropriate.”
“The very businesses that would pay any new tax imposed by the state are the same ones that have been limited or closed for months under orders imposed by the state,” NJBIA President Michele Siekerka said in a statement.
When the Legislature passed the $9.9 billion emergency bond act in July, Sen. Paul Sarlo, D-Bergen, chairman of the Senate Budget and Appropriations Committee, seemed to close the door to tax increases, saying “I think we’re taking taxes off the table by allowing this borrowing to go forward.”
Sweeney said last week he wouldn’t rule out a tax increase — the corporate business surtax was his idea, after all, and he previously proposed extending it to drum up cash for NJ Transit — but, he added, “We can’t tax our way out of this.”
“That’s a conversation with the administration” he said, “because there’s going to be a lot of conversations that have to be had.”
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Matt Arco contributed to this report.
Samantha Marcus may be reached at firstname.lastname@example.org.
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