Sagging revenue, looming costs could sink big senior citizen tax cut plan

Sagging revenue and a bevy of looming funding needs in the coming fiscal year threaten to pull New Jersey’s $8.1 billion surplus below a threshold that would pause the nascent StayNJ property tax relief program before it sends out a single payment.

Revenue from New Jersey’s major taxes — like its income, corporate business, and sales taxes — were down $529.9 million, or about 2.8%, over the first six months of the fiscal year, which began July 1. The 6% drop in income tax collections accounts for the largest share of the decline.

Treasury officials predict slight revenue growth in the latter half of the fiscal year but it’s not clear such a rebound would be sufficient to meet coming costs without draining the surplus, cutting spending, or levying new taxes.

“I suspect when the budget comes out, their revenue estimate for fiscal ‘24 will be on the order of, let’s say, $2 to $3 billion less than they had in the budget,” said Charles Steindel, a former chief economist for the state. “Now, if they carry that forward, that’s a big hole in cash for fiscal ‘25. It could be $4 or $5 billion.”

In particular, the slowdown of collections threatens the viability of StayNJ, which promises to cut elderly New Jerseyans’ property tax bills in half, to a cap of $6,500. Language in the bill that approved StayNJ says it can proceed only if the state can fund the program and do the following: meet constitutional obligations on school funding, make full pension payments, maintain two $250 property tax deduction programs, and commit 12% of annual spending as surplus.

A range of funding needs New Jersey faces in the fiscal year that starts July 1 could make such a large surplus — one worth roughly $6.5 billion if spending stays level — an impossibility.

“It is possible that maintaining the surplus at 12% is going to be a problem,” said Marc Pfeiffer, a senior policy fellow at the Rutgers’ Edward J. Bloustein School of Planning and Public Policy.

Pfeiffer added that a revenue rebound, budgetary maneuvers, and state efforts to consolidate certain aid programs could help the state maintain its surplus.

Assembly Speaker Craig Coughlin (D-Middlesex), the architect of StayNJ, said he is unconcerned about the program’s future.

“StayNJ remains on track to deliver life-changing property tax relief to our state’s seniors and their families. The legislature has already demonstrated its commitment to StayNJ when the bill passed both houses with bipartisan, near-unanimous majorities,” he said in a statement.

Spokespeople for the governor and Treasury declined to comment on the viability of StayNJ.

New Jersey is expected to spend more on some of its big-ticket items next year, when state officials plan on making a final increase to state school aid. This aid for New Jersey public schools rose by $832 million this fiscal year, excluding an additional $103 million aid for dozens of districts that saw unexpectedly large funding cuts.

At the same time, New Jersey’s corporate tax collections will decline in the coming fiscal year following the expiration of a 2.5% surtax on business profits above $1 million at the start of 2024. That lapse is expected to cost New Jersey roughly $1 billion in foregone revenue annually, though collections from the surtax have been difficult to predict in prior years.

Adding to the state’s budget woes, NJ Transit will face a fiscal cliff after federal pandemic aid that has kept the agency’s books in the black amid declines in ridership runs dry partway at the end of 2024, when the agency faces a $119.4 million shortfall.

“That does create strain on the spending, and the Stay New Jersey program, of course, is the one that they’re going to be staying up at night worrying about,” Steindel said. “New Jersey Transit, they’re willing to screw.”

New Jersey’s current budget calls for the state to spend $1.5 billion more than it takes in, and it’s unclear whether legislators will be willing to forgo funding their own priorities to pay for a property tax relief program that won’t issue awards until early 2026, after 2025’s gubernatorial and Assembly elections.

Lawmaker’s specific priorities added roughly $1 billion in state spending to the current budget.

StayNJ has already cost taxpayers. State law called for $300 million deposits into the program in the current and prior fiscal years, and it requires the state to pay $600 million into the program in the fiscal year that begins July 1. Its annual costs are eventually expected to rise to $1.2 billion.

Uncertainty abounds

Despite the declines seen over the first half of the fiscal year, there’s some reason to believe sagging income tax collections, in particular, could see a rebound when Treasury officials release updated revenue forecasts late in the spring.

Income tax collections from employer withholdings rose in the first half of the current fiscal year but were offset by lower estimated payments and higher refunds.

That trend could reflect the effects of 2022’s stock market slowdown, said Steindel. Because the market saw steep declines that year, wealthy taxpayers and others who make quarterly estimated payments may have predicted they’d owe less in taxes for 2023.

But the market rallied late in the year, finishing 2023 more than 20% higher than it was at the start of the year.

“I think that has a fair possibility of showing up in a rebound in April in two ways,” Steindel said. “Final payments will be higher, and people will figure out, ‘I have to ramp up my estimates a bit.’”

Some of New Jersey’s other revenue sources showed signs of flagging, too. The state’s sales tax collections were essentially flat in the first six months of the current fiscal year, something Steindel called a cause for concern as economists predict slowdowns in consumer spending in 2024.

And revenue from the corporate business tax was down 5.2% year-over-year in the first six months of the fiscal year, when the surcharge was still in effect.

“It’s all about these moving pieces of a jigsaw puzzle finally settling in, and the governor and treasurer are going to make their best shot at this in February,” Pfeiffer said, referring to estimates in the governor’s February budget address. “But that’s why they do revenue estimates in February and then they do a late estimate in May or June once income tax revenues start coming in.”

Coughlin indicated budgetary troubles might not stop StayNJ.

“We have shown time and again that when we make something a priority, we achieve our goals,” he said.