by David P. Rebovich
Folks who follow New Jersey politics have heard an interesting argument about taxes and budgeting the last few years and quite a bit the last few months. It goes like this. If Jim Florio's controversial income and sales tax hikes were not rescinded in the early 1990's by Republican legislators and Governor Christie Whitman, state government would not be facing the budget challenges it does today. Many Democrats make the same point about President George W. Bush's tax cuts. Without them, they claim, federal budget deficits the last five years would not have been so big and more funds would have been available for important politics and programs.
Now there is some obvious truth to both versions of this argument. Tax cuts by Republicans in Trenton have cost the state billions in revenue, and those by the GOP in Washington have deprived the national government of hundreds of billions of dollars at a time of war and increasing demands for domestic spending. But in New Jersey today, as Governor Jon Corzine and the Democratic-controlled legislature consider the possibility of raising taxes to balance the budget and fund popular programs, they will have to pay attention to political and fiscal factors that Governor Florio overlooked and paid for when he sought reelection.
Nonetheless, Jim Florio deserves credit for developing and forwarding a revenue-raising plan that would provide not only more funds to cover the costs of existing and new programs in his Administration but also provide financial stability for state government for the foreseeable future. Florio was frustrated, understandably so, by the propensity of New Jersey's politicians to nickel and dime taxpayers in an effort to avoid making them very angry over big tax hikes. However, the simple fact is that New Jerseyans get mad over any tax hike. And the failure to deal with the state's long-term revenue needs puts constant pressure on lawmakers to balance the budget, satisfy citizens, and provide what the state needs to be economically competitive.
Within weeks after taking office in 1990, Florio figured that rather than having to deal with the competing demands for more spending and no new taxes every year, it made more sense fiscally and politically to raise tax rates once and for all in his first year in office. His plan was to use $2.8 billion in new revenue gained from hikes in sales and income tax rates to balance the state budget, to provide additional aid for education that the then-pending Abbott v. Burke state Supreme Court decision would require, spend more on higher education, job training, economic development and urban programs, and provide property tax relief for most residents.
Yes, New Jerseyans would be upset about the tax hikes. But, Florio assumed, they would soon understand the advantages of his approach. No more annual pressures or threats of new tax hikes. Better funded programs across the board. A more progressive state tax structure that included less reliance on property taxes and more property tax relief. There was a price in the form of higher state sales and income tax rates. But on balance most New Jerseyans would come out well ahead.
However, most New Jerseyans did not understand the benefits of this plan as Florio had hoped. Instead there was a tax revolt, fueled in part by the new Governor's failure to adequately explain the short term need for tax hikes and the long term advantages of his tax and spending policies. New Jerseyans also felt lied to, since the state's fiscal problems or the need for new taxes were not major topics of discussion during the 1989 gubernatorial campaign between Florio and Jim Courter. In the 1991 midterm elections Republicans gained veto proof majorities in both chambers of the legislature. Two years later Florio lost his reelection bid in a close race to Christie Whitman. Trailing in the polls late in that race, Whitman promised to cut income tax rates by 25 percent and ultimately reduced them by 30 percent.
Buttressed by a strong national and regional economy in the mid 1990's, Whitman and her fellow Republicans were not only able to keep state program and aid levels - i.e., state spending - high but to increase them. When spending and aid demands and requirements started to outstrip revenues, the Republicans did not cut the budget or raise taxes. Instead, they employed some fiscal gimmicks, e.g., refinancing debt, deferring payments, drawing money from funds, to keep the gravy train rolling.
The McGreevey Administration used some of these same techniques with the same unfortunate effects. Beneath the surface of those supposedly balanced budgets, the state's financial condition was precarious at best. One shot gimmicks, not regular revenue flows or careful financial management practices, were keeping the budget balanced. These fiscal shenanigans would end when the state Supreme Court ruled emphatically that the state cannot borrow money, even against anticipated revenues - a McGreevey favorite -, to use for the annual operating budget.
The bad news for lawmakers was that the state budget would actually have to be balanced, and this may require cuts in spending and aid or hikes in taxes. The really bad news was that New Jerseyans had become accustomed to high levels of program support, state aid to schools and municipalities, and property tax relief, all without paying any new major state taxes. New Jerseyans enjoyed an activist state government whose officials spent billions to improve the quality of life and provide property tax relief without asking for anything in return except support on election day. And when campaigning for office, candidates from both parties reinforced that message by promising voters a better future and no new taxes.
It's easy for citizens to become addicted to this kind of talk, and New Jerseyans did just that. Most candidates for state office seemed to calculate that speaking the truth - that the state needs more revenue, must tighten its belt, and cannot responsibly provide more property tax relief without doing either - would jeopardize their political careers. But something interesting happened last year during the gubernatorial and assembly campaigns. According to the polls, a majority of New Jerseyans admitted that they did not believe that the candidates could really deliver the property tax relief that they were promising. That was because the candidates, especially Corzine and Republican challenger Doug Forrester, had not detailed where they would get the money from to pay for property tax relief.
The gig was up. The state was broke, as Acting Governor Richard Codey put it. Gimmicks could not be used to balance future budgets, and citizens knew it. Major spending responsibilities, for school construction, government worker pensions, and transportation, loomed. Enter Jon Corzine as Governor. What will he do? Well, he won't make the same mistake that Florio did by raising taxes without adequately explaining to citizens why those tax hikes are necessary and desirable. The new Governor will seek spending cuts first, and the legislature agrees with this approach. Both remember 1990 and have read recent polls that show that New Jerseyans want cuts in wasteful, inefficient and ineffective programs and personnel to be made before lawmakers consider any tax hikes.
But some sort of tax hikes will likely be necessary for Corzine and his fellow Democrats to balance the budget and put state government in a position to move forward on other policy goals. What should Corzine and the legislature consider when they start thinking about hiking taxes? Well, obviously they need to explain the extent of the state's financial problems. What is the precise size of the deficit? The Corzine Administration has said $5 billion to $6 billion dollars. Former Governor and Senate President Codey puts in the $3 billion to $4 billion range. The difference is explained by whether you include payments to the government worker pension fund and Corzine's planned increase in property tax rebate checks in the calculations.
Beyond the budget pressures cause by the end of gimmicks, the state also has to figure out a way to keep the Transportation Trust Fund solvent, make payments to the pension fund, and pay for school construction projects in distressed districts. There is concern that the court will require state government to immediately find money for the pension and school construction funds. That definitely would mean higher state taxes. Gas taxes are already expected to be increased to pay for transportation projects. This will make for a somber State House and an unhappy bunch of citizens.
These folks will be upset not only about new tax hikes but about the very fact that public officials from both parties have, with their irresponsible and self-serving actions, have put the state in such dire financial straits. Corzine and state legislators in both parties would be wise to tell it like it is. The new Governor should have no qualms about complaining that he has to clean up the mess created by others. Court mandates to spend money on school construction and pensions could provide Corzine with political cover to do what frankly state government should do.
Putting state government on firm financial footing now will also enable the new Governor to eventually start pursuing his much ballyhooed affordability agenda. But something that legislators from both parties and members of the general public should start thinking about is the following. If increases in state income and sales taxes are necessary to balance the budget and satisfy spending responsibilities, what will happen to property tax reform. Will it still be practical and desirable to increase state income tax rates even more to produce revenue to replace that lost by reducing property taxes? Talk about important questions. This one deserves lots of discussion inside the State House and every household in New Jersey. Jim Florio should be invited to those discussions. He would have a lot to contribute.
David P. Rebovich, Ph.D., is Managing Director of the Rider University Institute for New Jersey Politics (www.rider.edu/institute). He also writes a regular column., "On Politics," for NEW JERSEY LAWYER and writes monthly reports on New Jersey for CAMPAIGNS AND ELECTIONS Magazine.
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