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New Jersey enacted significant tax changes in 2016. In this article, ITEP's Dylan Grundman discusses those changes and how they both solved and exacerbated some of the state's problems.
By Dylan Grundman
Dylan Grundman is a senior policy analyst at the Institute on Taxation and Economic Policy. Prior to joining ITEP, he worked as a Fiscal Policy Analyst at OpenSky Policy Institute, which provides research, analysis, education, and leadership around budget and tax policy debates in the state of Nebraska. Before OpenSky, he worked as a Research Associate at the Center on Budget and Policy Priorities in Washington, DC, focusing on a range of state fiscal policy issues.
Some of the biggest state tax changes of 2016 took place in New Jersey, where a protracted debate over the state's need to update its gas tax and the desire of some leaders to cut other taxes ultimately resulted in a $1.4 billion tax shift. Overall, New Jersey solved a few problems but created or exacerbated just as many.
New Jersey's gas tax had not been adjusted for inflation or rising costs since 1990, slowly wearing down the solvency of the state's Transportation Trust Fund (TTF) over the course of a quarter-century. After finding temporary ways to “ cobble together enough cash” to keep transportation projects going for one more year last spring, a true transportation funding crisis was in sight. By September 2015, Gov. Christie (R) and others started staking out the tax cuts they would demand in return for a gas tax increase, focusing on estate, inheritance, and sales taxes.
The Legislature and governor's office began trying in earnest to strike a deal early this year, but multiple deadlines came and went. Many compromises were proposed throughout the spring, but the TTF's previous funding plan expired, and most construction projects were shut down at the end of June. A bill including estate tax elimination and income tax cuts was even passed in July but vetoed by Christie, who at the time preferred a sales tax rate cut. Emergency raids of General Fund money for roads projects were ordered in mid-August. It was not until early October that a bill was finally passed through both houses and signed by the governor.
The final compromise enacted in October included a gas tax increase, estate tax elimination, a sales tax rate cut, an expansion of the existing retirement income exclusion, and an increase in the state Earned Income Tax Credit (EITC). The tax cuts add up to about $1.4 billion, the amount the gas tax increase raises, so this amounts to a shift in who pays taxes in New Jersey and where that revenue goes.
The gas tax increase means, first and foremost, that work can recommence on New Jersey's roads, bridges, and transit systems, ensuring they can continue to support its residents’, businesses’, and tourists' needs. Failing to update the tax for more than 25 years reduced its purchasing power by 47 percent and cost the state more than $10 billion in total; this bill stops and to some extent reverses that erosion, raising an estimated $1.2 to $1.4 billion per year. The rate will increase the equivalent of 23 cents per gallon, but is ultimately a 7 percent tax on gross receipts of gas sellers, so gas tax revenue will keep up with inflationary increases in gas prices from now on.
But gas taxes are also highly regressive, falling most heavily on low- and middle-income families. In this case, an analysis using the Institute on Taxation and Economic Policy microsimulation model shows the gas tax increase will average 0.54 percent of the incomes of New Jerseyans with incomes less than $25,000, while averaging 0.14 percent of income for those with incomes higher than $132,000.
The package of tax cuts amounts to $1.4 billion annually that will come out of the state General Fund, which provides funding for vital state services like K-12 schools, the university system, safety net services for New Jerseyans who fall on hard times, already underfunded pensions owed to civil servants, and aid to local governments that helps keep property taxes from rising. The state could have used targeted tax cuts to offset the regressive effects of the gas tax increase without blowing such a large hole in the funding for state services, but did not. The remaining elements of the New Jersey compromise completely wipe out the revenue gain for the state and shift taxes off of the highest-income New Jerseyans and onto those lower down the income spectrum.
The repeal of the estate tax over the course of two years, for example, sends more than one-third ($485 million in the first year and $690 million per year by 2026) of the total $1.4 billion tax cut package to about 4,000 heirs of the wealthiest estates in New Jersey, a group barely affected by the gas tax increase at all.
Expanding the retirement income exclusion by increasing the maximum excludable amounts five-fold reduces revenue about $80 million, about 74 percent of which goes to the highest-income 40 percent of New Jersey households.
Cutting the sales tax rate from 7 percent to 6.625 percent does reduce a regressive tax, but because everyone pays sales tax, it is not a targeted, cost-effective way of offsetting the gas tax increase for those whose budgets will be most affected by it. This cut amounts to more than $500 million, only about $75 million of which goes to the 40 percent of New Jerseyans who have incomes less than $49,000.
Increasing the state EITC—from 30 percent of the federal credit to 35 percent—is one positive aspect of the package. For a cost of only about $65 million, this part of the package alone offsets more than half of the gas tax increase on average for the lowest-income 20 percent of New Jerseyans (those with incomes less than $25,000) and about one-fifth of the increase for New Jerseyans with incomes between $25,000 and $49,000. Devoting more revenue to increasing the EITC, and choosing not to do the other parts of the package, could have held these groups harmless without so severely undermining funding for key state services.
The gas tax increase is the centerpiece of the 2016 New Jersey tax deal, and it is a well-crafted policy. While electric and hybrid cars and increasing fuel efficiency will continue to put downward pressure on gas tax revenue over time, the gas tax itself will now keep up with inflation and maintain the funding stream for New Jersey's transportation infrastructure for the near future, largely eliminating the chance of this year's showdown repeating itself.
For every other public service New Jerseyans value, the outlook is not so bright. The $1.4 billion tax cut package causes major trouble for the state's ability to fund services such as public safety, elementary and higher education, and pensions. And restoring state aid to local governments is effectively off the table, likely leading to property tax increases. All three major credit ratings agencies— Fitch, Moody's, and S&P—have responded directly to the tax cut package by downgrading the state's credit rating or commenting that the cuts negatively impact the state's credit outlook.
New Jersey's residents and leadership have their work cut out for them if they seek to restore progressivity to the tax code and adequate funding to the General Fund. Both took a big hit in 2016.
Copyright © 2016 Tax Management Inc. All Rights Reserved.
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