Task force report: N.J.’s ‘eroding’ tax structure can’t support ever-growing program expenditures

TRENTON – A State Budget Crisis Task Force issued a report today that painted a grim picture of a state that can’t continue  to support growing expenditures on health, educational and social programs while maintaining an “eroding and volatile tax structure.”

The task force, created by former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Board Chair Paul Volcker, examined several states, and concluded that in New Jersey’s case, two areas, education and Medicaid, dominate state spending, and along with underfunded pensions will conspire to help drag down the economy unless addressed.

The report said that education aid to school districts in fiscal year 2013 totals $11.7 billion — 37 percent of all state spending. “In just the last two years, spending on school aid, including retirement benefits for teachers, has increased by $1.7 billion or 16 percent.”

For pensions, the combined unfunded liability for these retirement obligations is $84.8 billion, the report found.

The state budgeted $1.02 billion for pension contributions in FY 2013.

“The annual contribution will have to increase by as much as $4.5 billion between 2013 and 2018, to an estimated $5.5 billion, depending upon investment returns and other factors. This estimated increase equals nearly 40 percent of the state’s annual spending on education aid,” the report said.

On the other side, 64 percent of all revenue comes from sales and income taxes.

“When the economy suffers from a recession, income tax revenue falls sharply. The sales tax has a very narrow and eroding base: food, clothing, and many services go untaxed, and tax revenue from expanding internet sales is difficult to capture, damping revenue growth.”

Gordon MacInnes of N.J. Policy Perspective reacted to the report:

“This report provides an essential service by documenting in striking detail the road New Jersey traveled to put itself in such a fiscal mess. It also strikes the right tone of urgency that is too often ignored when budget and tax issues are addressed by governors and legislators.

“The takeaway here – that New Jersey is in danger of not being able to sustain essential services like public safety, education and transportation – is distressing. It is plain that New Jersey cannot continue to conduct business as usual without devastating effects.

“Moving forward, this report makes clear that New Jersey needs to not only heed the lessons of past mistakes, but also needs to reorient the focus of policymakers from tax cuts and smaller government to a new path, one that focuses on investment and opportunity. From partnering with federal and local governments to restore infrastructure, to improving access to education, to renewing New Jersey’s status as a hotbed of innovation, we have to invest real dollars in programs and projects that will bear future fruits for New Jersey’s economy.”

The report warned that federal deficit reductions threaten New Jersey’s economy and budget. The 2013 state budget includes $12 billion in federal funds.

“If the federal government cuts aid to state governments — as seems likely, eventually, if it makes any serious effort to reduce the deficit — the state could have a large and immediate loss of resources. A 10 percent reduction, for example, would cost the state $1.2 billion,” the report,.said.

In addition, the report raised warning signs related to the state’s high property taxes and its growing needs with aging infrastructure.

"He’s obviously working very, very hard at it. I mean he’s traveling all over the country as chairman of the [Republican Governors Association] and I think at this point he has as good a chance or better than anybody else. His name is household word all across the country, and I think he would make a great president."
—former U.S. Rep. Jim Saxton (R-3), on Gov. Chris Christie