As the Governor and the Democratic legislative leadership take to the road to promote their competing versions of tax cut proposals, a new memo from the Office of Legislative Services suggests their respective persuasive powers might not matter very much because the state won’t be able to afford them.
According to the memo, April revenues from the personal income tax and the corporate tax fell below projections, adding that the specific shortfall will be released later this month. It’s certain to be one of the more highly anticipated revenue reports, both for its political impact as well as for indicating the state’s economic growth rate.
Gov. Chris Christie is standing by his recommendation for an across the board 10 percent cut in income tax rates for all taxpayers, while Senate President Steve Sweeney and Assembly Majority Leader Lou Greenwald have proposed differing plans to offer tax credits tied to property taxes, but capping income eligibility at $250,000.
Christie’s plan and the legislative plan would be phased in over three years and each would cost $1 billion, give or take, when fully implemented.
The OLS memo—while lacking detail—casts doubt on tax cut affordability, raising the prospect of spending reductions elsewhere to make up for the loss.
The Governor’s plan assumes 7 percent economic growth, a figure widely viewed as overly optimistic and probably out of reach.
Sweeney and Greenwald accepted the Governor’s prediction and developed their plans to use the money in a different way, arguing that middle income New Jerseyans need property tax relief more than an income tax cut. Their plans provide a credit against income tax liability for up to $2,500 in property taxes paid.
Greenwald increased the credit by including the reinstatement of the income tax surcharge on wealthy residents, "the millionaire’s tax," even though the Governor promised to veto it as he has done twice before.
The differing plans proposed by Sweeney and Greenwald gave the Governor an opportunity to drive a wedge between the two Democrats and the two houses of the Legislature. He scathingly dismissed Greenwald’s proposal and aligned himself with Sweeney to a point at which he suggested his and the Senate President’s ideas were much the same, a conclusion Sweeney said was greatly overstated.
One of the more intriguing elements in the debate is why the Democratic leaders did not unite behind a single proposal, clearing the way for their majorities to approve it, send it to the Governor and claim victory.
Reinstatement of the millionaire’s tax is clearly the deal breaker, a point conceded by Sweeney when he did not include it in his plan and said abandoning it recognized the political reality that it would draw a gubernatorial veto which could not be overridden, leaving the Democrats open to blame for obstructing tax relief.
The Administration reaction to the OLS memo was surprisingly mild, saying only that it would be scrutinized and, with two months left in the current fiscal year, it would await final figures. It contrasted sharply with the Governor’s reaction two months ago when he lambasted OLS, a nonpartisan research arm of the Legislature, as a tool of whichever political party held the legislative majority.
By establishing a tax cut as the centerpiece of his Administration’s agenda, Christie has taken something of a gamble on his growth rate prediction and the subsequent ability of the state budget to cover the loss.
If revenues fall considerably short and place tax cuts in jeopardy, Democrats will be able to abandon their plans and blame the Governor for miscalculating revenue growth and misleading people into believing a tax cut was possible and likely.
If the Governor is forced to forsake his plan, scale it back or delay it for a year or more, he’ll take some criticism for certain but can still make a valid argument that he will continue to push tax cuts as the most effective path to economic growth and that he will never abandon that principle.
The option of cutting spending elsewhere in the budget to cover the cost of tax cuts is not particularly appealing to the Governor or the Legislature. Reducing school aid is a non-starter while cutting funds for social service programs, for instance, will ignite a ferocious battle between the Legislature and the Administration.
Lurking in the background is the 2013 gubernatorial and legislative election and, as the tax cut debate plays out, both parties will jockey for advantage.
While it normally operates in the background, OLS may wind up playing a central and very public role in the outcome of tax cut efforts. Accustomed to occupying space on the bench, the OLS staff may instead suddenly find itself in the middle of the game.
Welcome to the NFL.
Carl Golden is a senior contributing analyst with the William J. Hughes Center for Public Policy at Richard Stockton College.