The State’s Office of Legislative Services says its revenue estimates for the current and next fiscal year are $162.1 million lower than those presented by Gov. Chris Christie’s administration. But, it turns out that that difference is truly negligible.
OLS told the Senate Budget and Appropriations Committee that its estimate for the current fiscal year, which ends in June, is $33.7 million – $73.2 million lower than the Treasury Department’s predictions. OLS’s forecast of $34.7 million in revenue for the 2017 fiscal year is $88.9 million lower than the executive’s estimate. Similar comments were made a day later before the Assembly Budget Committee.
A Mild Differential
OLS Revenue, Finance and Appropriation Section Chief Catherine Brennan indicated that both branches were largely in agreement, notwithstanding the nominal $162 million difference.
“We are largely in agreement with the executive with respect to its forecast for the gross income tax and the sales tax over the two fiscal years, but offer a slightly different perspective on collections from the corporation business tax, the inheritance taxes and the cigarette tax,” Catherine Brennan told the Senate Budget & Appropriations committee April 5.
Brennan went on to state that the $162.1 million differential between its revenue estimates and those from the Christie administration to be within a margin of error, as it is a difference of “less than two-tenths of 1 percent” of the forecast for total State budgeted revenues in fiscal years 2016 and 2017.
Where Are the Difference?
Brennan explained that the corporation business tax (CBT) has been among the most difficult revenues to predict. Collections are down 18 percent through February, and the executive has revised its estimate down to $2.3 billion. While OLS also assumes the decline will not be as steep in coming months, its estimate for the fiscal year is $56 million below the executive’s revisions.
“However, our biggest differential occurs in the out-year,” Brennan said.
While the executive branch expects revenues to remain flat at $2.3 billion in the next fiscal year, OLS anticipates the revenue would come in $156 million lower. Those differences are offset by a few areas where OLS expects better revenue returns than the Treasury.
One area of increase is the state inheritance tax, with a forecast that’s $31.9 million higher for fiscal year 2016 and $51.5 million higher in fiscal 2017. The other is the cigarette tax, for which OLS offers forecasts $15.5 million higher than the executive in the current fiscal year and $35.5 million higher in the next year.
The Senate Budget & Appropriation committee chairman, Sen. Paul Sarlo, said it was good to see both the administration and OLS close to agreeing on revenues, noting he’s been “very critical of the admiration” in the past for overly optimistic forecasts.
The legislative budget and finance officer, Frank Haines, also stated that the forecasts involve high levels of risk, with the state’s reliance on income tax revenue adding to the issue. A forecasting error of just 1 percent in income tax revenue could mean a $140 million budget gap.
What this means fundamentally is that in years where the State gains ‘millionaires’ you see a boost in revenue and vice versa. Thankfully this year the State is seeing an increase in top earners.
The nonpartisan OLS found that the number of income tax returns are growing in the top tax bracket, suggesting that the State is generating millionaires. This is contrary to a recent New Jersey Business and Industry Association study conducted with IRS data which showed a significant negative net outmigration in the state. Brennan indicated that this was due in large part, to the study’s failure to account for foreign nationals who moved to New Jersey during the same period. Brennan stated that according to the most recent IRS data, the population decreased by 25,122 in net migration for that year, but there was a net increase in the native population of about 26,000.
“The figures are close to being a wash,” she said.
Asked by Senator Anthony Bucco why the state isn’t “flush with cash” from an increase in tax returns from these high earners, Brennan said the reason is likely because national data has shown that since the great recession, incomes have decreased among top earners and rest of the population. Additionally, New Jersey revenue in real dollars, when adjusted for inflation, has not yet recovered since the recession.
NJ Economy Growing In Certain Areas
Nonetheless Haines acknowledged during his testimony that the economy in New Jersey, after years of slow growth, had in some areas surpassed the pre-recession peak. In other ways, though, he said, “we still have a ways to go.”
“Overall, this is not what one would call a rapid rebound from the lows of the end of the previous decade. But for the most part, growth in broad economic indicators and state revenues has been steady, if not spectacular, and the outlook is for more of the same,” he said.
One area of contention surrounded the Administration’s budget savings of $250 related to a reduction in cost from public employees’ health benefits. Assembly budget chair Gary Schaer on April 6 pressed OLS and Acting Treasurer Scudder on how the Christie administration calculated that there should be $250 million in reductions from state employees’ health benefits.
“Why $250 million? Why not 300 million or 200 million?” Schaer asked. “Is it based in any kind of analysis or is it arbitrary?”
The legislative budget and finance officer, Frank Haines, said OLS has not extensively studied the issue.
“I can’t say it is arbitrary, but I don’t know any underlying detail,” he said.
Pressed on what the State would do if savings did not materialize, Haines indicated that the reductions would be taken from the $790 million anticipated surplus.
- OLS Revenue Forecast
- Legislative Budget and Finance Officer’s Testimony
- OLS Revenue Forecast Testimony
- Acting State Treasurer’s Testimony