NJ Spotlight: Treasury Not Worried About Slow Revenue Growth in Early FY16 -Should It Be?

John Reitmeyer of NJ Spotlight writes on last week’s state revenue report which showed tax revenue coming in well below projections and cites analysis offered by GSI:

Despite tepid growth in tax revenues thus far in the fiscal year, Treasury Department optimistic surge is coming in second half of year

New Jersey’s fiscal year is a little more than halfway over and thus far there’s been only modest revenue growth. That’s something of a surprise considering a series of tax hikes were enacted over the summer, but top Department of Treasury officials are not yet sounding alarms.

One reason for their optimism is that they expect the recently ended tax-amnesty program will net at least the $200 million in back taxes originally budgeted.

The state’s new tax for online sales has also gotten off to a slow start as companies grow accustomed to it, suggesting revenue from that source should eventually become more robust.

Counting on the end of fiscal year

Treasury is also downplaying concerns about the overall pace of tax collections: The first half of the fiscal year closed at the end of December with revenues up about 2 percent compared with the same period last year. Overall growth will have to hit 7.5 percent through the end of June to keep the budget balanced, which is a requirement of the state constitution. While some fear there may be too much ground to make up, Treasury officials are more sanguine heading into the back end of the fiscal year, which always makes or breaks a budget thanks to April income-tax filings.

“Right now, in the aggregate, we’re on track,” said Catherine Brennan, the state’s deputy treasurer, at a recent public-finance meeting in New Brunswick that was sponsored by the New Jersey Bar Association.

In all, the fiscal 2019 budget totals $37.4 billion, which is the largest in the state’s history. It relied on a series of tax hikes to help support an increase in spending on things like K-12 education, public-employee retirements, and mass transit. Among them were higher income-tax rate on earnings over $5 million and a higher corporate-tax rate for companies with more than $1 million in annual profits. New taxes were also established for ridesharing and home-sharing services, and for online sales and sports betting following recent federal court rulings.

The amnesty window is closed

Meanwhile, the Murphy administration and legislative leaders also launched the tax-amnesty program in an effort to raise revenue without having to rely on even more tax hikes. While the amnesty window was open between November 15 and January 15, delinquents were able to settle outstanding liabilities with reduced interest charges and no penalties.

Brennan, speaking during last week’s event in New Brunswick, suggested the effort was a success based on preliminary results. The fiscal 2019 budget counts on the state netting $200 million from the tax amnesty.

“It’s actually too early to say how we’ve done, (but) we’re confident we’ve met our revenue projection,” Brennan said.

Reaching or surpassing the revenue goal for the amnesty program could give the state a boost heading into the crucial April income-tax season given the only modest pace of growth in general revenues that has occurred through the end of December.

According to Treasury’s latest revenue report, total tax collections were just shy of $13 billion heading into the second half of the fiscal year. That figure bested the $12.6 billion that was collected by this time during fiscal 2018 and generated the 2.1 percent growth rate.

Disappointing income-tax collections

But New Jersey’s income-tax collections were disappointing in December, falling well short of what the state collected from the income tax — which is the budget’s largest source of revenue — during the same month last year.

To explain the drop-off, Treasury officials pointed to federal tax changes that went into effect at the start of 2018 that likely caused many taxpayers to push payments into the end of 2017, falsely inflating that year’s December receipts. They now expect to see a rebound in January, and nonpartisan analysts from the Office of Legislative Services suggested in their own review that December and January collections should be viewed together before any conclusions are drawn.

But an analysis of the same tax-collection data by the Garden State Initiative, a right-leaning think tank based in Morristown, suggested only 2.1 percent growth in tax collections through the first half of the fiscal year is a cause for real concern. The pace of growth will have to “accelerate geometrically” through the final six months of the fiscal year to meet the year-end goal of 7.5 percent, the group’s analysis said.

Meanwhile, budget officials in neighboring New York are also concerned about the pace of revenue collections, with the administration of Gov. Andrew Cuomo recently deciding to downgrade the state’s revenue forecast by about $400 million due to an unexpected to drop in income-tax collections, according to a recent report from Bloomberg.

Will a forecast adjustment be necessary?

If a forecast adjustment does end up being necessary for New Jersey’s budget, it would likely come in early March when Murphy is due to put forward his budget proposal for fiscal 2020.

Treasury officials said very little about any new tax changes that could be in the works for fiscal 2020 during last week’s event. But they did confirm the Murphy administration remains committed to a series of fiscal-policy goals that were first identified as top priorities last year. They include increasing the contribution into the pension system, which is due to go up by about $700 million in fiscal 2020, and further boosting the state’s budget surplus, an account that is used to hedge against unforeseen revenue gaps that right now equals about 2 percent of total spending.

Putting even more pressure on the fiscal 2020 budget will be the need to make up for the $200 million in net revenue from the tax-amnesty program — assuming that target is met — because it is only a one-time source of funding that was used to balance the fiscal 2019 spending plan.

“Without a new source of revenue or significant cuts to programs that New Jersey families rely on, it’s unclear what will fill this $200 million budget hole,” said Sheila Reynertson, a senior policy analyst at New Jersey Policy Perspective, a left-leaning think tank based in Trenton.