Gov. Murphy signs record-setting $56.6B state budget

The dome of the Statehouse in Trenton (Dana DiFilippo | New Jersey Monitor)

Gov. Phil Murphy signed the $56.6 billion annual spending bill Friday after the Legislature approved it in votes divided largely along party lines, two days ahead of a deadline that would have forced a state government shutdown.

The budget, the largest in state history, calls for New Jersey to spend $2.1 billion more than it takes in but maintains full funding of the state’s pension obligations and its school funding formula, which will reach full funding for the first time since it was enacted in 2008.

“We can go back and forth and talk about what’s in the budget, and I think all of us have agreed this budget is not perfect, but there’s a lot of good in here,” said Assemblywoman Eliana Pintor Marin (D-Essex), the chamber’s budget chair.

The bill cleared the Assembly in a 55-22 vote. Assembly members Don Guardian (R-Atlantic), Claire Swift (R-Atlantic), and Sean Kean (R-Monmouth) crossed party lines to back the bill. The Senate approved the bill in a 27-13 vote. Sens. Vince Polistina (R-Atlantic) and Bob Singer (R-Ocean) were the only Republicans to vote in its favor.

The spending lawmakers approved Friday will denude New Jersey’s surplus to roughly $6.2 billion. The state’s reliance on one-shot revenue items to support the record spending and some built-in cost increases are expected to expand the structural deficit to more than $3.5 billion in the following budget year, imperiling its reserves.

Unlike the federal government, New Jersey must balance its budget. The swelling structural deficit and waning surpluses could presage the need for severe cuts or tax increases in the next governor’s first year in office. Murphy, whose current term ends in January 2026, is barred from seeking a third consecutive term.

“We’ve set the people of New Jersey up for likely both massive tax increases … and massive, devastating cuts in services to people who we’ve invited to become dependent on those services. This budget is the first test of the post-pandemic state of our finances, and it ain’t pretty,” said Sen. Declan O’Scanlon (R-Monmouth), the chamber’s GOP budget officer.

When asked directly, legislative leaders and the governor have declined to articulate a plan to constrain the deficit, instead referring vaguely to growth they said will bridge the state’s shortfalls.

“My point was we have a lot of different levers to pull, and one of them is revenue growth that i don’t think people are counting on. When I got here, the budget was treated as a static item. We didn’t grow, so if I got something, it was at your expense,” the governor said during a press conference Friday during which he declined to give growth estimates.

A new 2.5% surtax on businesses with more than $10 million in profit that will be retroactively imposed on the first six months of 2024 is forecast to bring $1 billion into state coffers. Those funds will be dedicated to NJ Transit in future years when it is expected to bring in about $800 million annually.

“We understand that it will impact some of the largest corporations here in the state of New Jersey who employ many of our citizens and constituents. So yes, it was hard, and nobody ever takes any desire or gratitude to having to compose a fee or tax,” said Sen. Paul Sarlo, the Senate budget chairman.

Business groups have derided the surtax, which revives an equivalent surcharge that was levied on businesses with more than $1 million in profit that expired at the start of 2024, and warned it will make New Jersey uncompetitive with its neighbors, especially as neighboring Pennsylvania moves to cut its business tax rate to 4.99% by 2031.

“The real victims of this corporate business tax increase aren’t corporations, rather it’s working families and seniors who will now pay more for groceries, gas, health care, and home repairs. This isn’t a tax on business, it’s a tax on all of us,” said Audrey Lane, president of center-right think tank Garden State Intiative.

Lawmakers maintained investments into the Stay NJ property tax credit program , which promises to halve tax bills for homeowners over the age of 65, investing $20 million more than the $200 million required by law and voiding through budget language a provision that would have required all investment in the program cease should New Jersey’s reserves fall below 12% of its spending. The $6.2 billion surplus New Jersey will end the year with is equal to roughly 10.9% of spending.

Costs for Stay NJ will escalate in future years. They’re expected to rise by $100 million in the fiscal year that begins July 1, 2025 — though that number could fall some because of this year’s overpayment — but the lion’s share of its costs will not come for two more years.

The program is expected to cost $1.2 billion annually beginning with the fiscal year that starts July 1, 2026. Lawmakers have defrayed its initial costs by setting money aside over multiple years, but that won’t be an option two years from now.

“The lateness of this budget was because of our commitment to continue to fund that program,” said Assemblyman Lou Greenwald, his chamber’s majority leader. “For those who say that will be a challenge, funding the pension was a challenge. Getting a reliable surplus was a challenge. Fully funding the school formula was a challenge. Transforming the transportation trust fund was a challenge. We have shown that we can step up and meet that challenge.”

Legislators approved a series of other tax hikes in advance of the budget vote, including a one-point increase to a fee leveled on health management organization premiums and the sunsetting of a poison pill provision that would have stopped the state from collecting hotel and motel occupancy fees if it did not make certain investments in art programs, a signal that such investments will pause or cease entirely.

A third bill would phase out a sales tax exemption for electric vehicle sales by July 1, 2025. Its provisions call for electric vehicles to be subject to a 3.3125% sales tax beginning in October before rising to the full 6.625% rate in July.

Republican members decried the heightened spending and new taxes, warning the additions are too big an onus for a state that already has the highest property taxes in the nation.

“If our constituents were here today and they understood and saw the bill here, they would be appalled,” said Assemblyman John Azzariti (R-Bergen). “I’m convinced if they knew the budget to the level that everyone in this room does, our constituents would largely be voting no.”

The budget reverses some cuts Murphy suggested in February — it restores $20 million in operating aid to New Jersey’s community colleges that Murphy had proposed cutting — but makes new own cuts elsewhere.

The state would provide $7.5 million less for grid modernization under legislators’ proposal than under Murphy’s, for example.

The spending bill adds a $45 million appropriation for University Hospital and $30 million to expand the state’s mental health workforce.

Other items added by legislators were more targeted. The Wood-Ridge School District — Sarlo is the town’s mayor — received $12.5 million, and Essex County’s Weequahic Park got $9 million for improvements, among numerous others.

Totaled, the budget lawmakers approved calls for the state to spend $728 million more than Murphy proposed in February, though some of that spending is up because of cost increases.

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