Monday, January 04, 2010

New Jersey Is Exhibit A In Fiscal Irresponsibility

Many states are facing massive budget holes that got papered over in FY 2009-10 because of stimulus funds. Instead of facing significant budget cuts to bring the budgets back into the black, they used the federal funds to keep the budgets pretty much unchanged (though some states like NY increased spending by 8% - over and above the prior year budget despite a gaping deficit). Next year, none of these states can count on federal assistance, so they're going to see their budgets whacked.


These states are going to have to confront tax hikes and spending cuts - or both.

And even then there's no guarantee that the budgets will be balanced. See New Jersey as Exhibit A for the consequences of ignoring and deferring the solutions for too long. New Jersey's incoming Governor Chris Christie will not be able to pad the state budget with billions in dollars printed by the federal government as part of a federal stimulus package as Jon Corzine did in the FY 2009-2010 budget. Corzine used billions to paper over the fact that spending didn't decline, but even with the infusion of federal money, the state is still in the red.

The numbers in New Jersey are staggering:
Non-partisan legislative analysts predict New Jersey's next budget will have an $8 billion structural deficit, while Governor-elect Chris Christie predicts a gap of at least $9.5 billion. Here are some of the bigger items that make up the deficit:

$2.5 billion to fully fund a 2010 pension obligation that was skipped in 2009.

$1.6 billion in one-time-only federal stimulus funds that were used to balance the budget in 2009.

$1.6 billion to fully fund a property tax rebate program that was cut back in 2009.

$1.1 billion in lost revenue from tax hikes that were billed as one-time-only in 2009.

$700 million in normal growth planned for state government programs.

$500 million to fund an increase in school aid planned for the next budget.

$400 million in projected tax revenue that was not collected in 2009.

$379 million in one-time savings achieved in 2009 by delaying raises for state employees.

$200 million in debt service savings achieved by a 2009 refinancing.

$200 million in surplus funds used to balance the budget in 2009.

Source: New Jersey Office of Legislative Services
The state faces a multibillion dollar budget deficit, and Christie's choices aren't going to be pretty. He will face a Democratic-controlled legislature that is not going to cut spending willingly, nor will they look to improve the business climate by cutting taxes to encourage businesses to come to the state.

Perhaps, what the state needs is to completely reevaluate its tax structure; reduce the overall tax burden by reducing the overall tax rates, simplifying the tax structure, and eliminating tax credits and incentives - streamlining the compliance for businesses and individuals.

It may also make sense to eliminate or reduce enterprise zone sales tax rate discount, if coupled with a corresponding decrease in the overall state sales tax rate. Currently, the enterprise zones have a rate of 3.5%, whereas the state sales rate is 7% (which includes 1% that was supposed to go to property tax relief). Setting the state rate at 5.5% and increasing the enterprise zone rate to 5% would still provide an enterprise zone benefit, while increasing the competitive advantage of New Jersey compared to neighboring states.

Eliminating the property tax rebate system would save billions, and would also shelve a shell game perpetrated by the Corzine Administration when they enacted a rebate whose cost outstripped the revenue source (the sales tax hike). It enabled localities and the state to ignore fundamental and structural causes of recurrent deficits and a state workforce that remains bloated and costs taxpayers billions.

Note too that Corzine managed to avoid paying billions to the pension funds, and sought legislation to allow municipalities to do the same. The deferred nature of those payments means that those localities would have to come up with the money and there's no revenue source other than looking to hike taxes across the board - particularly property taxes at the local level. Far from getting the state on a path to fiscal prudence, Corzine further destabilized the state's fiscal picture by engaging in the fiscally irresponsible act of delaying and ignoring the pension funds; a time bomb of epic proportions that will only increase as the amount of the unfunded pension obligations grows with each passing year.

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