Tax hikes would ease deficits, but budget surplus still at risk, group warns

New taxes would keep New Jersey's surplus alive a bit longer, but the state will still spend billions more than it collects in coming years, a fiscal group warns. (Dana DiFilippo | New Jersey Monitor)

A new series of financial projections find New Jersey would face smaller deficits in coming years if lawmakers raise taxes to fund NJ Transit — but warn the state is still likely on a path to drain its reserves in a few years under all but the rosiest forecast.

The state would continue to face steep structural deficits under a budget that includes no new government spending other than what is already authorized by law. But those deficits would significantly shrink if the budget includes millions in new tax collections lawmakers have proposed, according to the projections from the Rowan University-based Sweeney Center for Public Policy.

David Rousseau, a former state treasurer who sits on the center’s multi-year budget group, said the report shows we’re seeing a “return to normalcy in New Jersey budgets” — where treasurers year-to-year face the kinds of budgetary pressures they have always faced.

“My guess is since this millennium or even back further than that, at least two-thirds of the budgets during that period of time had a structural deficit,” Rousseau said.

Former Senate President Steve Sweeney founded the center after losing reelection in 2021 but left its board after saying he would seek the Democratic nomination for governor next year .

The group drafted three forecasts. Under its baseline forecast, the likeliest of the three, New Jersey would face about $10.8 billion in structural deficits over the four subsequent fiscal years.

That scenario would see New Jersey drain its surplus to $493,346 by July 2027 and fall into the negatives the following budgetary year. The group’s February forecasts predicted New Jersey’s s urplus would go into the red as early as July 2026 in baseline conditions.

Gov. Phil Murphy’s budget proposal projects New Jersey will end the fiscal year that begins July 1 with roughly $6.3 billion in reserves.

The Sweeney group’s pessimistic scenario, which assumes a mild recession the state recovers from, would see New Jersey face $17.7 billion in combined deficits through fiscal year 2028 — roughly $9.6 billion more than state reserves could support.

The state’s surplus would fall $3.7 billion into arrears as early as July 2027 under that forecast, a year later than under earlier forecasts.

“I think the downside risks we were afraid of seem a little less imminent, and the upside plusses seem a little less likely, so it’s a bit of a narrowing of range,” said Charles Steindel, a former New Jersey chief economist.

New Jersey would maintain its surplus, though at much reduced levels, under the Sweeney group’s optimistic scenarios, with combined shortfalls totaling about $7 billion.

The rosiest forecast would leave New Jersey with just $1.1 billion in surplus by the end of fiscal year 2028. That low level of reserves presents fewer pressing issues than an entirely drained surplus, but it could lead to credit rating downgrades for the state and higher bonding costs, though they’re unlikely to be much higher.

“From experience, there is always a demand for New Jersey bonds,” Rousseau said.

Empty reserves also make the state less able to respond to economic shocks, making tax hikes or service cuts more likely in emergencies.

That the more recent forecasts present a slightly more encouraging picture of state finances than the center’s February report is unsurprising. The earlier forecasts assumed New Jersey would annually invest $500 million in NJ Transit beginning this July without raising any new revenue.

Lawmakers have indicated they will bridge the $766.8 million fiscal cliff NJ Transit faces in the budgetary year that begins July 1, 2025, by raising roughly $800 million in new taxes.

Murphy has pushed for those collections to come from a 2.5% surcharge on businesses with more than $10 million in profit, though budget chairs in both chambers have floated raising the state’s sales tax from 6.675% to 7% as an alternative. Both tax hikes would raise roughly $800 million.

“They can’t balance this year’s budget without one of those taxes or cuts,” said Mark Magyar, the center’s director.

Even so, New Jersey’s finances are likely to create a dilemma for lawmakers and the nascent Stay NJ tax credit program for seniors .

Among other things, Stay NJ requires the state to maintain a surplus equal to 12% of spending. New Jersey’s surplus is set to fall below that level in the fiscal year that begins July 1 and is expected to fall further in future years.

But the statutory restriction is far from absolute — lawmakers could simply write it out of law.

“If the governor tells you he wants to get something done, the legislative leaders tell you they want to get something done, you’re going to give them the options to get it done,” said Rousseau. “Now, it could mean you have to do other things and there could be other consequences to those actions, but anything is doable.”

SUPPORT NEWS YOU TRUST.

The post Tax hikes would ease deficits, but budget surplus still at risk, group warns appeared first on New Jersey Monitor .