If we have learned anything in the last 20 years in New Jersey, it should be to beware of governors bearing gifts.
In the early 1990s, first-term Governor Christie Whitman promised to “pay for” her tax cuts with heroic returns from the stock market. According to her rosy scenario, the state’s pension funds would not only be fully funded, they would throw off so much extra money that the tax cuts would not mean reductions in either state aid or services. In fact, the Whitman administration even counted on the stock market returns to more than pay for a multibillion dollar state bond issue. It was the proverbial “free lunch.”
Here’s how it worked out in practice. Whitman started the first phase of her tax cuts during her first year in office. At the same time, she altered the pension laws to push pension appropriations into the future. But when the “future” came, she couldn’t even find the revenues to make the reduced pension appropriations. Instead the state sold bonds to pay for them.As the fine print reminds us, Whitman learned that past returns are no guarantee of future performance. Her dream unraveled with consequences that are still with us. The state’s pension funds are underwater by tens of billions. The state’s credit rating has been downgraded and a string of governors have patched budget holes with gimmicks and “one shot” revenues. Basically, in order to cut taxes, Whitman set up a state budget that could not afford pension appropriations then and ever since.
Unfortunately Governor Chris Christie’s proposed budget will just be more of the same. One parallel to Whitman is the commitment to a major tax cut in stages. The first phase involves some, but not massive disruption; but there is no certainty that future phases will not add to New Jersey’s fiscal imbalance. In addition the Governor’s budget scarcely addresses the state’s infrastructure needs. Its small increases in education funding merely scratch the surface of the budget crunch at the local level and at the colleges. Among the needs he ignores is basic living quality in N.J. cities which can't afford police, fire protection, libraries, etc. These should be the first things restored with rising revenues. Instead, he proposes to cut them further and give tax cuts.
So at a time when tax revenues are falling short of projections, the Governor is proposing an across-the-board 10 percent income tax cut. And how will it be paid for? Shades of Whitman, the answer lies with a projected 7.5 percent increase in tax revenues – a consequence of economic growth. (Forget for a moment that the Governor and his party deny that President Obama’s policies can lead to rapid growth in the economy and therefore in tax receipts.) By any measure, Christie's new budget represents a classic case of counting your chickens before they're hatched.
Still, the plan does have the potential to work well in one respect: it tees the governor up nicely for any future Republican primary campaign.
Of course it may be that the Obama approach is bearing fruit and new revenues are in the offing. But if we do get a small surplus shouldn’t we use it to pay down some of the state’s debt, fill some of the pension hole, or tackle the property tax burden?
Chris Christie claims to be the man to fix the current imbalance between revenues and needs. But this promise of tax cuts clearly takes us in the wrong direction.
Richard C. Leone is the former President, currently a senior fellow, of the Twentieth Century Fund, a non-profit public policy research institution supporting work on U.S. foreign policy, economic issues, media studies, and domestic affairs. From 1990 to 1994, he served as Chairman of the Port Authority of New York and New Jersey. The Port Authority operates the Hudson River crossings, the major airports in the region, the World Trade Center, port facilities, and numerous facilities ranging from a resource recovery plant to the World Trade Institute. During the 1980s, Mr. Leone was the President of the New York Mercantile Exchange and subsequently a Managing Director at Dillon Read & Co., Inc., and investment banking firm. He served as the State Treasurer (chief budget and financial officer) of New Jersey from 1973-1977. Mr. Leone earned his Ph.D. at Princeton University and was a member of the faculty there before and after his government service.