Politics & Government

Revenue Shortfall Fuels Debate Over Tax Cut

Democrats question how Christie can afford to slash income tax by 10 percent.

As the governor made a triumphal tour of the morning talk shows Wednesday touting his , his Treasury Department was preparing to release revenue numbers showing that tax collections for the first six months of the fiscal year had come in $325.7 million – or 3.2 percent – short of projections.

News of the shortfall added fuel to the Democratic-Republican debate over the speed of New Jersey’s economic recovery, the likely growth of tax revenues, and whether the state could afford to cut an estimated $1.1 billion in income tax revenue from its tax base over the next four fiscal years.

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Treasury Commissioner Andrew Sidamon-Eristoff emphasized that even with the shortfall, revenue collections were $305 million higher in July-December 2011 than they were in July-December 2010. “New Jersey’s progress toward recovery made the first six months of the fiscal year brighter than the first half of last year,” he said, subtly echoing Christie’s “New Jersey Comeback” theme.

Sidamon-Eristoff could have pointed out that the $325 million shortfall would have been a lot higher if the Christie administration agreed to go along with Democratic demands last June to add $289 million more to the official revenue estimates in order to provide increased state aid to schools, counties and municipalities, and an income tax break for senior citizens’ pensions.

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But now that Christie has announced plans to implement a 10 percent income tax cut that will require more than $1.1 billion in revenue growth or budget cuts over the next four fiscal years to pay for it, the Republican Christie administration is suddenly more bullish on state revenues, while Democratic legislative leaders are the ones asking questions about over-optimistic revenue forecasts. 

“The so-called ‘New Jersey Comeback’ appears to have very been short-lived. It’s entirely missing from this fiscal year’s revenue figures,” said Assembly Budget Committee Chairman Vincent Prieto (D-Hudson). “These new numbers are cause for concern.”

The state had expected to collect $10.206 billion of its $29.4 billion in revenue by the end of December, but only $9.881 billion has come in, leaving the state $325 million short. If that trend continued through the June 30, 2012, end of the budget year, state revenues would be down almost $900 million below projections -- which would wreak havoc with next year’s budget and with Christie’s plan to use projected revenue growth to pay for the first $180 million installment of his income tax cut.

Charles Steindel, the Treasury Department’s chief economist, noted that December income tax collections came in lower than expected for the federal government and other states too. Treasury officials noted last spring that income tax collections came in much higher than expected last December: Corporate executives pushed as much income as possible into 2010 because they were worried that the Bush tax cuts would not be extended into 2011 by President Obama and Congress.

“Key indicators do not now suggest that a dramatic change in outlook is warranted for the rest of the fiscal year,” Steindel insisted. In fact, state income taxes were up 3.8 percent and sales tax collections up 3.6 percent over the past six months, compared to the same period in 2010, mirroring federal Bureau of Economic Analysis income statistics showing monthly income growth holding steady at 3.5 percent to 4 percent higher than the previous year.

The problem for Christie and his Treasury team is that they will not know if the shortfall in revenues for the first six months is an anomaly or a trend until early May when they will be able to tally the millions of individual income tax returns that are filed by April 15. That’s more than two-and-a-half months after February 28, when Christie is scheduled to deliver his budget for Fiscal Year 2013 -- and the revenue projections on which they are based -- to the legislature.

Continue reading this story in NJ Spotlight.

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