New tax hikes for middle class? Phil Murphy says no as he pushes his tax increases

Gov. Phil Murphy is now pledging to shield the "middle class" from future tax hikes as he tries to drum up support for record state spending that relies on a range of tax increases so he can pursue his progressive policy agenda for New Jersey.

Murphy also remains open to negotiating with public employee unions on reforms to pension and health benefits, the costs of which threaten the state's fiscal future. But Murphy is just not ready yet to begin those talks, he says, and actual discussions could be a way off despite interest by the top Democrat in the Legislature to do so.

"If you’re in the middle class, the answer is no, that’s just not going to happen. And we’re being as explicit about that as possible," Murphy said when asked about future tax increases.

Murphy's comments came during a half-hour interview with The Record and NorthJersey.com on Thursday, his 101st day as governor. Having passed a long-standing benchmark for political leaders with a number of notable progressive achievements, Murphy now enters a critical phase in which he must reach an agreement with the Democratic-led Legislature on his $37.4 billion budget.

He faces resistance within his party over the central components of his progressive agenda: legalizing marijuana, passing a millionaires' tax and restoring the sales tax to 7 percent. But in the interview, Murphy pushed back on characterizations that fellow Democrats are blocking his path forward and likened the budget discussions to a baseball game.

"This is like: Hey, we just finished the top of the third. How’s the game going so far? It’s going well, starting pitcher’s still in there, the other guys still have the meat of their order coming up. This has to play out," Murphy said. "We don’t see this as sort of a big stall," he added.

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Murphy also defended plans to address New Jersey's notoriously high property taxes and said he is now leaning toward hiring two shared-services "czars" instead of one to more adequately assess the possibility of reducing local costs — large drivers of property tax rates — through consolidation.

His budget for the upcoming fiscal year includes about $1.6 billion in new taxes, including on services such as Uber and Airbnb as well as the increased rate on millionaires and the sales tax.

The spending plan is nearly $3 billion more than the current budget to support what Murphy calls a historic investment in the middle class and to make down payments on items such as universal prekindergarten and free community college.

But there is a question of what taxes Murphy may seek to raise in the future to support those proposals and others, such as fully funding the state's education formula and increasing payments into the public employee pension fund.

Murphy suggested he will lean more heavily in future years on stronger revenues to support his plans.

"The big X factor in this — and this dictates the pace at which we can do a lot of this stuff — is the growth in the economy," Murphy said. "The optimism we have — we’ve not been overly generous in our projections — is a quiet confidence. We have to execute," he added.

But for the upcoming 2019 fiscal year, Murphy is proposing tax increases that would be felt by nearly everyone.

By raising the sales tax from 6.625 to 7 percent — it was cut by former Gov. Chris Christie in a deal with Democrats to raise the gasoline tax — Murphy anticipates $581 million for the budget. The annual cost to a household earning between $75,000 and $125,000 would be $85 a year, he said. The sales tax cut, he said, "is a gimmick," and by reversing it "we're going to plow a lot more back into your life than $85."

Democrats resistant

Lawmakers are not sold on restoring the sales tax or raising rates on millionaires, which Murphy expects to generate $765 million next year. The biggest opponent of the increase is Senate President Stephen Sweeney, who reversed his long-held belief in it after President Donald Trump's federal tax overhaul.

As a possible alternative, Sweeney has proposed raising the corporate tax rate on income over $1 million from 9 percent to 12 percent on incomes. He estimates that would yield $657 million.

Murphy said Thursday that while he's open to Sweeney's proposal, he is also skeptical of its effect on New Jersey's competitiveness, specifically with New York, whose corporate rate is 6.5 percent, according to the Tax Foundation.

"I want to be in a slipstream on the revenue side with states that look like us. I’d like to be bold on where the money is going," he said.

"Like anything else, I’m reasonable. This is all about finding common ground, and I just think you’ve got to parse through what’s a core principle and what is something that you say, 'You know what? I’m willing to compromise on this,' " Murphy added. "What is the deepest passion for me and for us is the historic investment in the middle class and in — as I say often because I was that guy growing up — the dreams of those who look up who want to get into the middle class."

Murphy puts New York, Massachusetts and Northern California in the same class when it comes to economics. By that rationale, his plan to raise rates on millionaires would make New Jersey among the least competitive. He wants to raise the rate from the current maximum of 8.97 percent to 10.75 percent on incomes over $1 million. The top rate in Massachusetts is 5.1 percent, New York's is 8.82 percent and in California it's 13.3 percent.

Murphy argues that millionaires have "had a very good run in this state" and "the Trump tax plan is going to extend that good run." It is the middle class that has suffered, he said, and his plan aims to "get back to some sort of equity here."

But his budget is arguably the least equitable to low-income earners and senior citizens who rely on the state's Homestead Benefit Program for property tax relief. Rather than restore funding Christie cut in the current budget to the program, Murphy decreased it to $143 million, giving homeowners between $200 and $260 in tax relief, according to budget documents. In past years the program was funded by about double, with tax credits between $400 and $500.

Murphy said "there's no good rationale" for maintaining the Homestead cut.

"I’m not happy with the level it’s at. So if we can find some way to juice that, we will," he said.

Rising pension costs

Even if Murphy gets the budget he has presented, he'll be faced in future years with rising costs to pay into public employee pensions. The systems was underfunded for years by governors of both parties, and as a result New Jersey has the worst-funded system in the country. And despite health benefit and pension reforms by Christie and Democrats early in his tenure, the pension fund has such mounting cost that it threatens to consume an unsustainable amount of the budget.

Murphy, who once led a commission focused on pension and health benefits, has earmarked $3.2 billion for the fund in the upcoming year, a record amount consistent with a ramp-up plan set by Christie.

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Murphy has acknowledged the need for further reforms, but said throughout his campaign that the state must live up to its end of the bargain. Even though Christie paid a cumulative record amount in to the pension fund, he still slashed the state's obligation during lean budget years.

Murphy said his answer "has not changed" from the campaign, though. The state must show "over the longer arc of history" that it is meeting its financial obligations to retirees.

"I don’t mean tied to any particular contract or this particular budget. And so that’s where I’ve been and that’s where I continue to be," Murphy said.