Because we’re located here in the great State of New York, it follows that a lot of our posts deal with New York State in one form or another. Whether it’s the business franchise tax, or the treatment of sole proprietorships, or the ways in which New York State has responded to the Tax Cuts & Jobs Act, we’ve covered a wide variety of issues from a New York perspective. While this coverage is undoubtedly useful, it’s also useful to occasionally take a peek at the inner workings of other states, especially neighboring states such as Pennsylvania or New Jersey. Neighboring states frequently face issues similar to those which affect us here at home, so it’s very possible that the problems faced by one of these other states may be of relevance for us here in New York. In this initial blog post on neighboring state tax matters, we’ll first take a look at New Jersey budget issues.
The New York State budget brought up a whole range of complex, fascinating issues, some of which we explored in prior blog posts on this site. Most prominently, we examined the New York State reaction to the reductions in state and local tax deductibility. Among other things, we noted the difficulties involved with crafting a budget which meets both the needs of the state’s citizens and the state’s government. The State of New Jersey, likewise, tackled some pretty important issues in the course of developing its current state budget. New Jersey Governor Phil Murphy was forced to make tough decisions as he addressed the many problems facing New Jersey. Hopefully, some of the positive maneuvers taken by our neighbors can be emulated by our own New York State politicians in the future.
New Jersey Budget Pension Problems
One of the biggest issues facing the New Jersey budget is the dwindling pool of resources available to support retiree pensions. By New Jersey’s own estimate, the state will incur a deficit of approximately $45.4 billion over the course of the next 30 years, as it tries to service retiree pensions. In response, Governor Murphy set aside $3.2 billion of the current budget specifically for retiree pension payments. Though this is the largest amount allocated to pensions in the state’s history, it’s actually substantially below the amount recommended by the majority of actuaries familiar with the state’s pension problem. This $3.2 billion allocation is also just the first part of a two-pronged attempt to deal with New Jersey’s pension issue. The other prong of the fix is the increase made to both the state corporate tax rate and the individual tax rate for exceptionally high earners in New Jersey. As a result, both businesses and individuals earning over $5 million per year will face higher tax burdens.
To some degree, these rate increases will help, but from a long-term perspective, these measures should more accurately be viewed as band-aides on a critically serious wound. The reason why is that these tax increases will sunset, or go away, in four short years. In the meantime, they also risk alienating high earners and productive businesses from the state. If the increases drive away too many taxpayers, the budget may end up causing more harm than help.
Another big item on the New Jersey budget was funds allocated to New Jersey public schools. The new budget set aside $349 million to assist schools – which represents a roughly 4.3% increase over the previous budget – but unfortunately the issue of disparate treatment among districts was not resolved. Currently, funding for schools varies widely by district throughout the State of New Jersey. Numerous factors, such as enrollment trends and demographics, play a role in determining aid for districts. Even though this new budget did not completely settle the issue of differential funding, the budget does make it clear that this issue will be taken care of within the next 7 years. New Jersey recently passed a law which limits how much money can be taken away from districts with shrinking enrollment and growing tax bases, and removes existing caps for districts experiencing increasing enrollment. This new law will make it much easier to address the differential funding issue over this upcoming 7 year period.
Governor Murphy tried to focus on improving quality of life for New Jersey residents, and one step taken in this direction was maintaining the current sales tax rate of 6.625%. Sales tax impacts all state residents and so this step will have a statewide positive impact. But whatever steps Governor Murphy took in this regard may be counteracted by negative side effects from the substantial increases made to the corporate and high earning individual tax rates. Only time will tell how much the average resident will benefit from Murphy’s efforts.
We’ve said it before, and now it’s worth saying once again: politics is not an easy business, and negotiating a budget is among the most difficult tasks in all of politics. Whenever money is involved, negotiation is always a more difficult process because certain adjustments and compromises have to be made to satisfy a diverse range of interest groups. In his newly created budget, Governor Phil Murphy has attempted to deal with a number of key issues, with the issue of retiree pensions being perhaps the most tricky and controversial issue of all. It looks as though this new budget will temporarily improve New Jersey’s situation, but it seems clear that New Jersey will need to think a bit more outside-the-box than usual in order to turn things around in a more permanent way. Whatever the future of our southerly neighbor may be, it’s the job of our top New York City tax attorneys to stay up-to-date with topics such as these so that we can best service our clients. If you have any sort of tax issue, reach out to the firm of Mackay, Caswell & Callahan, P.C. and we will start working on your case right away!