Fight over taxes, spending could force government shutdown in NJ

James Nash | NorthJersey

Show Caption Hide Caption Video: Gov. Murphy's First 100 Days Political columnist Charlie Stile and Statehouse reporter Dustin Racioppi discuss what Murphy has done in his first 100 days, and what they expect him to do in the next 100.

It's a game of high-stakes poker, and in the view of Gov. Phil Murphy's administration, the other side won't show its hand.

As the slow-motion showdown over New Jersey's budget heads into its final act, the points of contention – Murphy's proposed tax increases, how to equitably fund schools – haven't changed much.

But with three weeks to go before the June 30 deadline for a state budget, neither Murphy nor Senate President Stephen Sweeney, D-Gloucester, appear to be budging. If the impasse isn't resolved, non-essential functions of state government will shut down July 1, as happened last year when then-Gov. Chris Christie and the Legislature clashed over health insurance reform.

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This year's dynamics are different: the confrontational Republican Christie has been replaced by the low-key Democrat Murphy, and the disputes center on education funding and taxes. But the threat of a shutdown looms anew, with Sweeney saying he'd rather close state offices and furlough thousands of workers than perpetuate what he calls an unfair school funding system.

"We have an administration that's new to politics, and we have a Legislature that's entrenched and full of veterans," said Thomas Bracken, president of the New Jersey Chamber of Commerce. "Therein lies the conflict."

The budget showdown pits the two most powerful men in Trenton -- Murphy and Sweeney -- with Assembly Speaker Craig Coughlin, D-Middlesex, and Republican lawmakers in both chambers largely on the sidelines.

Here are the key issues in the budget debate:

Taxes

Murphy is proposing nearly $1.7 billion in tax increases, including raising the income tax rate on millionaires to 10.75 percent and restoring the 7 percent sales tax rate, which dropped to 6.625 percent this year.

Sweeney, and to a lesser extent Coughlin, have expressed skepticism about the tax increases. The Senate president has said New Jersey can't tax its way to prosperity – it's already tied for the nation's second-highest tax burden, according to the Tax Foundation – and must consider spending cuts.

In March, Sweeney proposed an alternative to Murphy's taxes: raising the corporate income tax to 12 percent from 9 percent, which he said would yield about $657 million a year. Sweeney has since backed away from his own tax proposal, which Murphy never embraced. The Murphy administration argues that the 12 percent rate, which would be tied with Iowa's as the highest in the country, would make New Jersey uncompetitive for businesses, which would favor New York's 6.5 percent tax or Pennsylvania's 9.99 percent.

It's a variation on the argument Sweeney uses regarding Murphy's proposed income tax increase, which would make New Jersey's levy on millionaires the second-highest in the country after California. The difference, according to Murphy aides, is that millionaires almost never flee a state because of a higher tax rate.

With attention focused on those major taxes, the niche tax increases that Murphy proposed haven't drawn much protest. Airbnb has not objected to a tax on home-sharing services, while the vaping industry has spoken out against a tax on electronic cigarettes and similar products, and a coalition just formed to oppose a 7 percent tax on ride-sharing services like Uber and Lyft. Lawmakers, however, don't appear to be focused on these taxes.

Education funding

Sweeney has said Murphy isn't going far enough to address disparities in K-12 school funding that have sparked some of the loudest outcries during the budget process. While the disparities predate Murphy's time in office, Sweeney said the governor's proposal to boost state aid to schools by $284 million perpetuates an unjust formula.



The Senate president wants to phase in a new formula over seven years, at a cost of up to $2 billion. He introduced a bill that would remove enrollment-based limits on increases in state aid to districts, allowing districts that currently receive less than their share under the formula to receive more, while cutting state aid to other districts over time.

Murphy aides say the governor wants to make school funding fairer but is concerned that some districts would see big reductions in aid under the Sweeney plan. More to the point, the administration says, Sweeney can't demand more funding for schools without specifying how he'd pay for it. Murphy aides say any discussion of additional aid to schools is moot without a conversation on new revenue, which they say Sweeney is unwilling to have. Sweeney's camp isn't offering any hints on what a compromise might look like, saying it would be unproductive to negotiate in public.

Pension

Murphy is proposing a record $3.2 billion in funding for the state employee pension system, which would top the $2.5 billion that Christie included in the budget for the year ending June 30. Even so, the amount represents just 60 percent of what actuaries recommend to help nudge the pension system toward full funding – and a full payment isn't envisioned until 2023.

The pension payment hasn't been a source of controversy in the budget deliberations, but it could be cut to compensate for spending increases elsewhere or a lack of movement on tax increases.

NJ Transit

Murphy proposes to restore state funding for New Jersey Transit, after Christie's administration forced deep cuts. Murphy said his budget would nearly triple funding to the beleaguered agency, with $242 million proposed this year.

Still, the higher state subsidy mostly compensates for losses of other revenue sources, including turnpike tolls, rider fares and state and federal reimbursements. Lawmakers generally agree that the transit agency needs more money, and the line item hasn't drawn opposition during budget debates. That doesn't mean it couldn't be cut if none of the proposed tax increases comes to fruition.

Other spending priorities

Sweeney is pushing for some $123 million in line-item program spending that Murphy stripped from the budget, including about $4 million for a prisoner reentry program championed by former Gov. Jim McGreevy. Other programs are intended to boost tourism and help sexually abused children.



As with Sweeney's position on school funding, the Murphy administration's response can be distilled to one point: Show us the money.