A deal struck between New Jersey Gov. Phil Murphy and state lawmakers for a tax increase on millionaires isn’t expected to make a material difference toward combating the state’s steep fiscal challenges, analysts said.
Murphy announced the agreement with legislative leaders Thursday to increase income taxes on those making over $1 million to 10.75% from 8.97% to provide annual rebates as high as $500 for families earning less than $150,000. The tax hike on the state’s wealthiest, which the Democrat governor has pushed for since getting elected in 2017, is estimated to net New Jersey around $390 million of annual revenue that would be largely offset by the estimated $340 million cost of the rebate program.
“The net result isn’t necessarily a $390 million addition to the state if they are expanding programs,” said S&P Global Ratings credit analyst Dave Hitchcock. “It’s a relatively small number relative to the overall state budget, but every little bit helps because when your scrambling money you have to add up a lot of different sources of revenue.”
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Murphy has also proposed creating a permanent 2.5% corporate surcharge, which would net the state around $210 million of new revenue in fiscal 2021. The surcharge was first imposed for fiscal 2019 and had been scheduled to drop to 1.5% in 2021 before expiring in 2023.
Lawmakers will also consider Murphy’s proposal to raise the cigarette tax to $4.25 per pack, which would yield an estimated $143.1 million.
“New Jersey’s ability to increase revenues can help the state move toward balancing its large structural budget gap,” said Moody’s Investors Service analyst Baye Larsen. “However, while it adds to the diverse set of budget tools the state will need to tap, it will only fix a small portion of the state’s $4 billion gap in fiscal 2021.”
State Senate President Steve Sweeney, D-Gloucester, and Assembly Speaker Craig Coughlin D-Fords, supported the millionaire’s tax they previously resisted. Their change of mind occurred less than two weeks before a Sept. 30 deadline to pass a budget for a shortened nine-month fiscal 2021 that commences on Oct. 1.
Rising pension liabilities and past structurally imbalanced budgets triggered 12 credit rating downgrades to New Jersey in the past nine years, with the state’s general obligation bonds rated higher than only Illinois among U.S. states. New Jersey’s GO debt is rated A3 by Moody’s, A-minus by S&P, A-minus by Fitch Ratings and A by Kroll Bond Rating Agency.
The Democratic-controlled legislature previously approved a millionaire’s tax five times during former Gov. Chris Christie’s administration that the then Republican governor vetoed.
“The revenues generated through the millionaire’s tax will allow us to do more for our schools, our communities and our property taxpayers,” Murphy said Thursday during a press briefing announcing the deal. “I’m proud that were able to arrive at this point together to move our state forward together.”
