Gas tax increase and its offsets
We recently addressed New Jersey lawmakers’ agreement that resolved the transportation funding impasse, thus bringing an end to the state of emergency Gov. Chris Christie declared in June. That deal involved a gas tax increase of 23-cents per gallon, bringing the total gas tax to 37.5 cents.
In order to achieve the gas tax increase, lawmakers agreed on several offsets, which the New Jersey Policy Project detailed as follows:
- The sales tax would be cut by 5 percent, to 6.625 percent from 7 percent, over two years, costing about $598 million a year once fully phased in and $735 million a year by 2026;
- The estate tax would be completely eliminated over two years, costing about $485 million a year once fully phased in and $690 million a year by 2026;
- A tax exemption for retirement income would be expanded by 400 percent over four years to reach higher-income families, costing up to $193 million a year once fully phased in and $221 million a year by 2026;
- The state Earned Income Tax Credit (EITC) would be increased from 30 to 35 percent of the federal credit, costing about $61 million a year to start and $73 million a year by 2026; and
- A new income tax exemption would be extended to some New Jersey veterans, costing about $23 million a year.
Impact on New Jersey’s rating
In spite of the much-needed solution to infrastructure funding and adjustments, not everyone celebrated the arrangement. Last week, Fitch Ratings warned that the plan “exacerbates long-term challenges to the state's operations” because the use of motor fuel taxes as a revenue source is expected to provide flat to declining revenue, and therefore offers “limited growth prospects.”
Fitch calculated that after implementation of the gas tax hike, $1.7 billion will be available for the Transportation Trust Fund (TTF), which, over the eight-year term of the deal, amounts to $14 billion. Although that is sufficient for currently identified projects, “delays (such as identifying a revenue source for New Jersey's share of the renovation costs for the rail line between Newark, NJ and New York City) due to political discord will likely continue to inject uncertainty and risk into New Jersey's infrastructure projects.”
What is more, after accounting for the tax cuts and adjustments, “operating fund revenue loss begins in fiscal 2018 at approximately $385 million, and balloons to approximately $1.15 billion in fiscal 2022.” Over the eight years, Fitch estimates an $8.4 billion loss in total operating fund revenue.
Beyond all of this, Fitch points out that lawmakers have addressed neither increasing pension costs, nor other post-employment benefits costs, both of which “are likely [to] escalate absent future revenue growth.” The current liability burden is almost three times the median, at 16.5 percent of personal income. Even so, Fitch gives New Jersey an 'A' rating with a Stable Rating Outlook.
The New Jersey Policy Project (NJPP) reached a similar conclusion on the numbers, estimating that the proposed tax cuts would cost the state up to $13 billion over the next decade. NJPP’s worry is not only with the state’s “ability to pay for essential services, promised obligations and other critical investment,” but that the tax cut package would disproportionately benefit well-off New Jerseyans who least need it, and that with the exception of the earned income tax increase provision, the remaining provisions fail the “tax fairness test.”
- Just 2,760 estates will benefit from elimination of the estate tax, and only 3 percent of these, with estates of more than $5 million, account for fully 41 percent of the estate tax revenue. As such, this is “clearly not a tax on the state’s middle class,” and will not help ordinary New Jerseyans;
- Similarly, the sales tax cut, the retirement exemption expansion and the EITC increase provisions present scant assistance to middle and low-income earners. According to the analysis:
- The top 1 percent (with annual incomes over $808,000) would get an annual cut of $723;
- The middle 20 percent (those earning between $49,000 and $79,000 per year) would get an average cut of $112 annually; and
- The bottom 20 percent (those earning less than $25,000) would get an average cut of $76.
As for the veterans’ exemption, NJJP opined that it is “too insignificant to be able to model, and no data exists on the actual earnings of estate tax filers.”
A different NJPP paper containing more detail about the EITC recognizes that it is a “critical tool that improves the lives of working families.” But even the EITC “falls short in boosting incomes for low-wage working adults who aren’t raising children, because they are largely excluded from the credit. As a result, working adults without children are the lone group of Americans that the federal tax code taxes into – or deeper into – poverty.”
This group of childless adults is significant for New Jersey. First, it has the largest number of 18 to 34 year-olds living at home. Second, an EITC credit would offset other taxes this group pays, which would promote economic mobility and help boost the state’s economy.
Furthermore, NJPP contends, EITC recipients show improvements in health outcomes, increased employment, and the possibility exists for reduced crime and increased public safety. For all of these reasons, “expanding the EITC would go a long way to helping more young adults enter the workforce, and…would help make work pay and encourage more young New Jerseyans to fully participate in the state’s economy.”
Congress is considering measures to expand the EITC to workers without children, and NJPP suggests that New Jersey lawmakers step up if federal lawmakers fail to act.