This document summarizes a presentation about funding resilience efforts in New Jersey given economic challenges. It finds New Jersey faces both a structural deficit of $1.5-10.5 billion annually due to ongoing spending exceeding revenue, as well as a cyclical deficit as revenues have yet to fully recover from the recession. The state budget relies heavily on areas like education that are important investments. Options discussed to close deficits include reducing spending, increasing existing taxes like income and sales taxes by broadening bases or closing loopholes, and generating new revenue through online gambling or sports betting, but each faces challenges.

1. “What’s Next After Rebuilding? Making Resilience Happen”
A symposium presented by the
Lincoln Institute of Land Policy and New Jersey Future
remarks by
Professor Henry A. Coleman
Edward J. Bloustein School of Planning and Public Policy at
Rutgers, The State University of New Jersey
October 30, 2014
Usual disclaimer: These are solely my views, interpretations, and
observations. They should not be attributed to the Lincoln
Institute of Land Policy, New Jersey Future, the Bloustein School
or Rutgers University.
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2. Introduction
• FY2015 New Jersey State budget = $32.6 billion, which was the same in
nominal terms as the FY2008 budget, but up significantly from the recent
low of $27.9 for FY2010.
• An important question centers on how much money will be needed to
achieve rebuilding and resiliency objectives?
• No matter what the answer to that key question, the challenges in
identifying the needed resources may prove daunting.
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3. New Jersey’s Fiscal Problem(s)
• Looking ahead, the state’s current services spending requirements are
large relative to future revenues under current policies, which reflects
both:
• A structural deficit---recurring and contractual spending obligations are
huge relative to recurring revenues
• A cyclical deficit—recession-induced spending and revenue shortfalls
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4. What is the size of the structural deficit?
• Based on non-recurring revenues in FY2015 budget = 3.6% of $32.6 billion
or $1.2 Billion
• Facing Our Future---$8.1 billion by 2017, not including unfunded
retirement obligations
• (NJ Spotlight/Magyar reporting on) OLS estimate of $6.9 billion
• Informal conversations with informed experts estimate = $1.5-10.5 billion
•
• By any estimate, New Jersey is in a significant fiscal hole even before the
State considers new initiatives.
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5. What’s the size of the cyclical deficit?
• I simply examined the pre-recession revenue peak, the trough during the
recession, and the highest level of revenues in the post-recession period.
• (in billions)
• Major tax FY2008 FY2010 Post-recession peak
• SUT $8.385 $7.523 $8.597 (six years)
• CBT $2.993 $1.999 $2.590 (not back yet)
• GIT $12.605 $10.323 $12.627 (seven years)
• All other $8.590 $8.035 $8.438 (not back yet)
•
• This means that there is at least six years of pent-up service demands and
other unmet needs that the state has not been able to address because of
inadequate revenues that will be competing with any new spending
initiatives.
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6. Other reasons to be concerned about the current situation
• NJ has a regressive revenue system (according to CTJ/ITEP January 2013
ranking)
• NJ ranks 10th among the 50 states with the widest gap between its rich
and poor residents (as reported on 24/7 Wall Street Blog)
• NJ has a “poor” business climate (ranked 50th among all states according
to recent Tax Foundation rankings)
• NJ has seen its bond rating decline (reduced 8 times over last 5-6 years)
•
This all seems to suggest that New Jersey may have a tough time dealing
with future natural disasters or major economic disruptions (we’ve had at
least one recession per decade since the 1960s, so we’re about due).
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7. What options are available within the current budget?
• State Spending
• (The percentages show spending as a percent of total New Jersey state
expenditures relative to the average among all states.)
• Primary and secondary education---(24.7/19.95)
• Higher education---(7.8/10.5)
• Medicaid (CHIP and PPACA) ---(21.6/23.7)
• Public assistance---(0.9/1.5)
• Transportation---(9.3/7.8)
• Corrections---(3.3/3.2)
• All other (including retirement obligations, open space preservation, resiliency
needs)
• There is always some waste that could be eliminated and programs that have
outlived their usefulness---the problem is identifying those areas of spending
and then building a consensus for change.
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8. Cautions
• Most of these spending areas represent:
• Investments that enhance state’s future productivity, attractiveness, and
quality of life
• Contractual obligations
• Direct efforts to assist the poor
• Moreover, for a program such as Medicaid, the dollar value of service
reduction would be doubled because of the loss of matching federal aid.
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9. State Revenues
• Overall revenue sources include:
• Borrowing (pending debt service concerns)
• Federal GIAs (no reason to be optimistic that more non-healthcare federal
assistance is forthcoming)
• Non-tax revenues, including fees/charges and gaming revenues (highly
regressive)
• Current tax portfolio (GIT, CBT, SUT, SETs, others)
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10. Concerns in implementing a new tax or revenue source
Adequacy
• Will tax be reliable over course of a business cycle?
• Will tax produce increased yield in response to economic growth?
Equitable
• NJ revenue system is already regressive
• NJ is among top ten states with largest rich-to-poor income gaps
• Vertical and horizontal equity
Efficient
• Any new tax must minimally interfere with economic growth, work
incentives, interstate competition, etc.
Compliance
• Will the new tax impose significant administrative costs?
• Will the new tax impose significant social costs?
Linkages
• For any tax that is to be dedicated to “resiliency,” there should be a
direct connection between service(s) provided and the tax. 10

11. Looking outside the box for other own-source revenue options
• 1. Preferred option---have money come down like manna from heaven
• 2. Other tax possibilities
• *Proposed increase in taxes on lottery winnings in NJ (favors select millionaires)
• *Marijuana tax on medicinal and/or recreational use (not much chance or money)
• *Increased severance taxes (not really an option unless we figure out how to tax the shore)
• *Health provider tax
• I reviewed NCSL’s summary of tax changes being considered around the country and I did not identify any
options that I thought could be suitable and productive for New Jersey.
• 3. Other non-tax options
• *On-line gambling---early revenues fell far short of estimates
• *Sports betting---likely to be denied or at least bottled up in the courts for a while
• Both options add to current regressivity of the State’s revenue system and they have questionable
adequacy implications.
•
• Given these concerns, I think that any need for significantly more revenues will almost certainly have to be
met by further exploiting existing (major) tax sources.
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12. Basic Tax Equation
• Tax revenues (R) = tax rate (t) x tax base (B)
• Focus on the difference between tax capacity vs. current tax effort
• The goal is to change the effective tax rate for a tax instrument = R/B
• All about reducing/refocusing tax expenditures
• Always preferable to broaden the base rather than raise rate
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13. Gross Income Tax
• Phase out deductions, exemptions, etc.
• Tax benefit recapture
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14. General Sales and Use Tax
• Include more services in its sales tax base (NJ taxes 74 of 168)
• Promise of revenues from Market Place Fairness Act (NJ e-commerce
revenue loss estimated at $413.4 million annually)
• Amazon Law and NJ deal
• Extend SUT to SET on gas, tobacco, alcoholic beverages, etc.
• Substitute credits for exemptions in treatment of food and clothing (less
loss of revenue and more targeted)
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15. Corporate Business Tax
• Raise minimum tax on profitable companies
• Eliminate CBT and substitute corporate franchise or net worth tax
• Return to equally weighted UDITPA formula
• Cap or eliminate intrastate/interstate tax competition through business
tax incentives (since they have not improved business activity or business
climate in the state)
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16. Concluding Thoughts
• Note that business climate may be more responsive to level, type, and
quality of services than to level and/or changes in taxes
• Note the need for a Consumption-tax credit or Total-tax credit if reliance
on regressive taxes is to be expanded
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17. • That’s my time, and I thank you for yours!
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