New Jersey, which is back under one-party rule for the first time in eight years, is on the brink of its second government shutdown in as many years. The Democratic governor and Democratic-controlled legislature can’t agree on which tax to raise to increase funding for core programs like K-12 education, mass transit and public pensions.
Gov. Phil Murphy wants to raise $1.4 billion in new revenue by restoring the 7 percent sales tax and establishing a millionaire's tax, which was a central issue of his campaign last year.
But the legislature wants to increase New Jersey’s corporate income tax, making it the highest in the country. Legislators added and passed the proposal as part of a larger $36.5 billion spending plan last week. Murphy has vowed to veto it, and unless New Jersey has a signed budget by midnight June 30, the government will shut down on Sunday.
To some observers, neither option is all that appealing. New Jersey already has some of the highest taxes in the nation. In addition to the corporate tax rate, it has the nation's fifth-highest income tax rate, the eighth-highest state sales tax and the highest property taxes in the country.
Scott Drenkard, an economist with the conservative-leaning Tax Foundation, says the tax burden has been weighing down New Jersey’s economy. The state’s economic growth has lagged significantly behind the rest of the nation, and that has played a big role in the state’s perennial struggle to balance its budget. As a result, New Jersey's credit rating has been downgraded several times. “To me,” says Drenkard, “anything that doesn’t bring down marginal rates is probably not going to solve the root problems of the fiscal situation.”
The main opposition to Murphy's proposed millionaire's tax is Democratic Senate President Stephen Sweeney. He had initially supported the idea but that changed after the federal tax overhaul in December.
Tax revisions capped the state and local income tax deduction to just $10,000. In a high-tax state like New Jersey, that’s less than half the average deduction filers who itemize their taxes take. Sweeney thinks the imposed federal limits have made income tax hikes less palatable, especially since several other states -- such as Iowa -- responded to the tax overhaul by giving residents tax cuts.
But Meg Wiehe, deputy director of the left-leaning Institute on Taxation and Economic Policy, notes that the federal corporate income tax cut also has an effect on high-income earners. Historically, shareholders have been the biggest beneficiaries of corporate tax cuts. According to her organization’s research, that means New Jersey’s wealthiest 1 percent will still see a significant tax cut. “Sweeney has narrowly focused on one part of the tax cut package,” she says.
Brigid Harris, a political science professor at Montclair State University, chalks up the impasse between Democrats to a rocky relationship. As a first-term governor, she says, Murphy simply hasn’t spent enough time with legislative leaders -- who face elections next year -- to find common ground.
“My sense," she says, “is that there is a lack of understanding on the part of the governor’s office about the kinds of issues that concern the legislature and political realities they have to deal with."