Income Tax Surge Bails Out State Budget

Three months ago, Gov. Chris Christie’s budget was in deep trouble. His revenue forecasts for FY2012 and FY2013 had come up a total of $750 million short. Standard & Poor's had downgraded New Jersey’s revenue picture from “stable” to “negative,” and nobody knew what the real budget impact of Hurricane Sandy would be.

Today, however, thanks to a surge in income tax payments by wealthy taxpayers cashing out before federal tax hikes and cashing in on a bull market, it’s clear that Christie has dodged what could have been a major fiscal nightmare heading into his November reelection.

Yes, the Republican governor had to downgrade his revenue forecast for the year by $406.3 million and push off paying $396 million in property tax rebates until August, giving Democrats ammunition for the fall campaign. And yes, he did have to give up the income tax cut that was the centerpiece of last year’s budget speech.

But it could have been a lot worse.

Christie’s bold projection of an 8.3 percent revenue surge in FY2013 was built on assumptions of a broad-based “New Jersey Comeback,” an economic boom that would transform a state that had the fourth-highest unemployment rate in the nation and had ranked 47th in economic growth for two years in a row.

Christie’s bullishness led him to certify a budget built on more than 25 percent growth in corporate taxes and realty transfer fees, an 18 percent jump in casino revenues, 15 percent more from the lottery, 13 percent higher inheritance taxes, a 6.1 percent jump in sales taxes, and 5.7 percent in income taxes.

Eight months into the fiscal year, corporate taxes, inheritance taxes and casino winnings are all running lower than last year, and even motor vehicle and gas taxes are down, reflecting a weak economy. But despite an unemployment rate that still ranks among the highest in the nation, New Jersey’s income tax collections are soaring.

In fact, Sidamon-Eristoff now expects income tax collections to grow by 9.4 percent and to exceed original projections by $406.5 million, while all other taxes combined are expected to come in a combined $811.9 million below expectations, reflecting the state’s sluggish economic growth.

It is just the latest example of the disconnect between New Jersey income tax collections and the overall economy in a state whose highly progressive income tax structure and heavy reliance on healthy Wall Street financial markets creates its own boom-and-bust state budget cycle.

Despite the lack of a “New Jersey Comeback,” Christie is cashing in on the Wall Street boom in both his current FY13 and his FY14 reelection year budget.

As David Rosen, the Office of Legislative Services’ chief budget officer, said in his 2011 budget testimony, “the performance of the stock market is the factor which drives the volatility of our income tax,” and the market is soaring.

The Standard & Poor's 500 stock index not only closed out the year at 1,426. 19 -- up from 1,257.6 at the end of the previous year and up from 903.25 at the close of 2008 in the middle of the Great Recession nosedive -- but also reached an all-time high of 1,551.18 last week.

The December and January income tax numbers -- and the final 2012 calculations that will undoubtedly provide a positive "April surprise" next month -- were boosted not only by the stock market run-up, but also by the protracted fiscal-cliff negotiations between the Obama administration and the GOP-controlled House.

Wealthy taxpayers in New Jersey and other states pushed hundreds of millions of dollars of income into 2012 to avoid paying higher taxes in 2013 and future years. On January 1, the top tax bracket on individuals earning over $400,000 and families above $450,000 rose from 35 percent to 39.6 percent, and capital gains taxes jumped from 15 percent to 20 percent.

Both Sidamon-Eristoff and Rosen said it would be difficult to separate out the one-time fiscal-cliff windfall from the normal bonuses and capital gains that accompany a bull market in New Jersey's income tax collections.

But the treasurer was sufficiently confident last month that 2013 would be another good year for upper-income New Jerseyans to count on another 6.5 percent income tax increase over and above this year's newly anticipated 9.4 percent gain.

Watching Wall Street

It's easy to see why Sidamon-Eristoff -- and Rosen, for that matter -- focus more on the Wall Street tea leaves than on unemployment statistics or salary growth for the average worker.

New Jersey's approximately 16,000 millionaires paid $2.289 billion -- or 26.4 percent -- of the $8.686 billion in income taxes collected in 2010, the last year for which the Department of Treasury provided its detailed Statistics of Income report.

Overall, the top 20 percent of taxpayers, who make over $100,000, paid $7.263 billion, or more than 85 percent of total income taxes that year.

However, 2010 was a good, but not great, year for the stock market.

In 2007, just before the stock market tanked in the Great Recession, New Jersey's millionaires enjoyed record income of more than $55 billion and paid $3.605 billion in state income tax. That represented 35.4 percent of the total $10.168 billion in income tax charged to state residents. As in 2010, those earning over $100,000 paid almost 85 percent of all state income taxes.

New Jersey's reliance on the wealthiest 1 percent to pay a high percentage of a tax that makes up about 40 percent of the total state tax base is the biggest reason for the extreme volatility of the state's tax system.

As Rosen noted, 75 percent of the sharp decline in New Jersey's revenue collections that caused such budget problems in 2009 -- Democratic Gov. Jon Corzine's last year -- was due to "a recession of the rich" caused by a plummeting stock market.

New Jersey's progressive income tax and its high proportion of high-paying jobs in the financial sector makes its stare budget more susceptible than almost any other state to the twists and turns of Wall Street, and makes revenue forecasting in New Jersey a dicier proposition than in other states that rely on broader income-tax bases and predictable broad-based sales taxes.

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