An analysis by the New Jersey Business & Industry Association finds, in the event of economic downturn, New Jersey would have the second largest decline in state revenues of any state in the nation except Alaska, dropping tax collections by as much as $7.5 billion in a single year.
NJBIA’s analysis of recent national reports on state finances released by S&P and the PEW Charitable Trusts shows that the Garden State relies too heavily on revenue sources that are unstable and its budget does not carry a sufficient surplus.
“New Jersey continues to raise revenues from tax increases and new taxes, which are very vulnerable revenue sources,” said NJBIA President and CEO Michele Siekerka. “We have long advocated that New Jersey must restrain our spending in order to put our fiscal house in order and this must start now, while the economy is growing, in order to sustain us through a downshift in the economy.
“The approach of raising our income tax and Corporate Business Tax, which we seem to continue to rely on, may raise revenues in the short term. But, over time, as these reports note, it makes our finances worse.”
According to a study by S&P, New Jersey would experience an 18 percent drop in tax revenues under a moderate economic recession and a 20 percent shortfall if the recession is severe. New Jersey’s budget this year is $37.4 billion, so a 20 percent drop would cut revenues by $7.5 billion.
“Greater revenue volatility reflects a long-term trend toward increased reliance on the income tax, which serves as an artery for transmitting the volatility of financial markets … to state revenues,” the S&P report stated. “This is especially true in states with progressive income tax schedules. The states’ other primary revenues are either similarly volatile (corporate taxes) or, by failing to evolve with the economy, have stagnated (sales taxes).”
New Jersey has one of the most progressive income tax structures in the nation and has raised both its income tax and corporate business tax this year.
The report, however, does suggest New Jersey is in a good position to establish a rainy day fund that could make up for any tax revenue shortfalls at the beginning of a recession. The state has more discretionary funding than all but one state in the region (Delaware) and is ranked 19th nationally in the share of its budget dedicated to mandatory spending – Medicaid, public employee benefits, debt service and pensions, according to the report.
“New Jersey’s fixed budget expenditures are relatively low in comparison to the rest of our region. However all but a tiny fraction of state revenues is being spent as fast as it comes in,” Siekerka said.
According to the Pew Charitable Trust analysis, New Jersey has no days’ worth of expenditures in surplus, while the 50-state median is 20 days. In the region, only Pennsylvania fares as poorly as New Jersey. Similarly, the average state rainy day fund is $428 million; New Jersey’s is zero.