New Jersey dug its own hole, former legislator says. Now, it’s time to climb out.

Posted Jun 27, 2019

By Gordon MacInnes

 

Twenty-five years ago, New Jersey was just one of eight states that enjoyed Wall Street’s highest AAA credit rating. How times have changed!

Today, only Illinois suffers from a lower rating. But for some reason, New Jersey’s political leadership seems anxious to claim the title as the nation’s Least Responsibly-Financed State Government.

How could any state’s leaders act willfully to increase its unfunded liabilities, and thereby increase the bill to taxpayers by hundreds of millions of dollars? It’s easy! Few citizens understand the complexities of public finance, but all voters notice increased taxes, be they local property taxes or state income, sales and gasoline taxes.

Who remembers the last successful candidate who ran on a platform of increasing your taxes to reduce your disposable income? So, how did successive legislatures and governors (abetted by the N.J. Supreme Court) dig such a deep hole?

That too was easy! In 1994, Gov. Whitman decided to cut the state’s biggest and fairest source of revenue — the income tax — which is devoted solely to cutting the property tax burden. By 1996, the tax rate had been cut by 30 percent, meaning that literally billions of dollars would be lost to moderate property tax bills.

But then, Whitman won re-election by a smidgen, thereby encouraging future governors to mimic her fiscal irresponsibility. Former Gov. Jon Corzine and, now, Gov. Murphy are the rare exceptions. There are dramatic consequences to the prevailing “let’s-sneak-by-this-year-without-looking-ahead” decisions of governors and legislative leaders that endanger New Jersey today and its future.

Consider:

  • NJ Transit has gone from the nation’s best on-time commuter rail service to 16th out of the 17 systems. How? Gov. Christie not only vetoed the critically essential Gateway Tunnel, but used capital and safety improvement dollars to balance NJ Transit’s operating budgets;
  • Operating support for public colleges and universities has plummeted, which has driven student debt levels from barely noticeable to upwards of $50,000 for today’s graduates of four-year public colleges (which helps explain New Jersey’s highest-in-the-nation percentage of millennials still living at home);
  • Property tax relief has disappeared for hundreds of thousand of the state’s families and has decreased for thousands of others; and,
  • The public employee pension and retiree health benefits are the worst-funded in the nation. Until 1994, pension obligations were paid annually as required, but in 1997 the Whitman administration borrowed $2.3 billion to meet the employer’s share of pension costs for just two years. That established the dangerous precedent of kicking the can down the road, leading to today’s $191 billion unfunded liability.

Simply put, New Jersey is bankrupt. But there is a path forward — it just won’t be solved with one budget or by one administration. It requires painful decisions by both the governor and the legislature, starting this month.

Gov. Murphy wants to begin to address the property tax burden with an increased income tax on about 18,000 of New Jersey’s 4 million households that survive on over $1 million yearly. That would generate new revenues of $500 million-plus. Unfortunately, legislative leaders say “no,” let’s solve the problem by somehow forcing consolidation of the state’s 565 municipal governments and its 610 school districts. That’s not a bad idea, but it’s not one that will see the light of day for a few decades. Past efforts have failed miserably (only two school districts and two municipalities have merged in the last 50 years).

There are other steps to be taken, and they should be taken soon. First, restoring the tax on estates with assets over $1 million could yield over $400 million. And who would notice if the sales tax on a $50 purchase at Staples turned out to be $3.50 instead of the current tax of $3.32? Ending the sales tax gimmick by returning it to 7 percent would increase revenues by at least $600 million.

New Jersey would be stronger economically if it used these revenues to improve NJ Transit, make public colleges more affordable, and reduce property tax increases for millions of homeowners. If our political leaders fail to act, New Jersey will fail to take advantage of its greatest assets: one of the nation’s best-educated work forces living in the middle of the world’s most prosperous marketplace with ready access to New York and Philadelphia.

Gordon MacInnes is a former state senator, assemblyman, and president of New Jersey Policy Perspective, an independent think tank that researches policies that promote shared economic prosperity.

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