N.J. income taxes rolling in like never before. Now Dems will fight over what to do with all that extra cash.

Posted May 14, 2019

New Jersey’s income tax collections came roaring back in April, surprising state leaders and cracking open a debate over how the state should spend its extra cash.

The mid-year recovery led Gov. Phil Murphy’s administration to announce Tuesday it is boosting its revenue forecast for the state budget year that ends June 30 by $377 million and plans to deposit all but $60 million of that money into a depleted “rainy day” fund to cushion the blow of a future downturn.

But the state Legislature may have other plans.

Democratic state Senate Budget Chairman Paul Sarlo, D-Bergen, and Sen. Declan O’Scanlon, R-Monmouth, signaled interest Tuesday in rerouting the $317 million destined for the rainy day fund to next year’s state budget, where it can replace some of the revenue Murphy’s administration wants to collect from a tax increase on millionaires.

The surprise cash alters — but doesn’t resolve — the clash between the governor, who wants to put it in savings, and legislative leaders, who are looking for alternatives to Murphy’s push for a millionaires tax.

Sarlo said Tuesday the two-year revenue updates from the state Department of Treasury bolster legislative leaders’ position.

“The pressure to do a millionaires tax is gone," Sarlo said after a Senate budget committee hearing. "The pressure of balancing the budget, that pressure is off. We don’t need that any longer to balance the budget.”

“How does the administration justify proposing a millionaires tax when you have both legislative leaders indicating the timing is not right, especially with this May uptick?” he asked the treasurer.

In her response, state Treasurer Elizabeth Muoio stressed the need to build up reserve funds which, at about 3 percent of state spending, dramatically lag the national average.

“It’s out there for New Jersey, which isn’t saying much. Frankly, we are woefully behind what we should have in that fund," Muoio said.

The state has two accounts that serve as surplus: the rainy day fund, which has been empty since 2008, and the reserve fund, which should end this year with $1.1 billion on hand. The $317 million deposit into the rainy day fund would be the first since its $734.7 million was drained in a single year amid the Great Recession.

So while the proposed surplus is high for New Jersey, Muoio said, so are the needs of the public-worker pension system, NJ Transit and public schools.

“We have to continue to make those fiscally prudent steps to get ourselves out of essentially years of fiscal neglect,” she said.

The state collected $3.6 billion in income taxes in April, confirming the Treasury Department’s suspicions the slowdown in the tax’s revenue was caused by high earners responding to the new $10,000 cap on state and local tax deductions by delaying their estimated tax payments until closer to the April filing deadline.

“While we correctly anticipated the taxpayer behavior that played out, we not only met our robust April tax collection targets, but we encountered somewhat of a surprise when Gross Income Tax collections set a new April record,” Muoio said.

The income tax gains largely drove the new revenue forecast, which is $377 million higher than the treasurer previously projected.

The Treasury Department also raised its revenue projections by $250 million for the fiscal year that begins July 1. Murphy wants to put this money toward property tax relief. He’s conditioned this extra funding for Senior Freeze and the Homestead credit on getting lawmakers to support his millionaires tax — a 10.75 percent marginal tax rate on income over $1 million.

“With the current surge in the (Gross Income Tax) outlook, the governor is proposing to take advantage of this good fortune by returning $250 million of this revenue directly back to the taxpayers in the form of property tax relief in FY20," Muoio said.

“But without the half a billion dollars generated by the true millionaires tax, the (Gross Income Tax) revenue boost will be eliminated, and funding for increased property tax relief and other priorities will be nearly impossible.”

Democrats who control the Legislature have rejected his offer, and Sarlo said after the hearing lawmakers and the administration remain at loggerheads.

“The treasurer and administration did not back down today, and I don’t think the Senate president and the speaker either are backing away from their positions,” he said.

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