When is a budget or tax compromise not a compromise? When politicians say it's a compromise. And that was the case when New Jersey's political leadership came up with a compromise agreement to raise the gasoline tax while reducing other taxes.
Though it may seem like a fair trade-off, higher taxes balanced by lower taxes, in reality that was not the case. And that's the rub. This so-called tax compromise further compromised the state's financial situation, which was already tenuous.
First, the details. On the tax-increase side, the state's gasoline tax was raised by 23 cents. To balance that (at least politically), there was a modest reduction in the sales tax, the phasing-out of the estate tax, an increase in the earned income tax credit, a reduction in the retirement income tax, and a tax exemption for veterans.
Before explaining why this tax compromise was a budget disaster, let me state that every component of the tax plan was desirable, if not necessary.
The crown jewel in this agreement was the increase in the gasoline tax, which New Jersey had not raised since 1988. While other states found ways to fund needed infrastructure maintenance and improvements, New Jersey decided to let things go to pot.
The state's transportation trust fund was essentially bankrupt. Given the deteriorating infrastructure, increasing demand, and weak gasoline-tax growth, it should have surprised no one that the trust fund was failing. Nevertheless, until now, our no-tax-increase politicians were unwilling to raise the needed new revenues.
That politically popular approach to governing came with a huge cost. New Jersey's economy is heavily dependent on its infrastructure to compete in the global economy. It is densely populated, complicating the movement of goods and people. Yet the state is perfectly geographically located to take advantage of the growing world trade.
It is incomprehensible that the state's politicians took so long to recognize that failing to upgrade the transportation infrastructure was making New Jersey less competitive. This tax increase was essential and, given the backlog of spending needs, probably not nearly enough.
As for the retirement tax, if the state is to retain its retirees, it had to go. Why would households stay in New Jersey if they could move to a state, such as Pennsylvania or Florida, that doesn't tax pensions? This tax induced older households to leave the state, taking their income and wealth with them. Ending it makes total sense.
Cutting the sales tax from 7 percent to 6.625 percent over two years allowed politicians to say they lowered everyone's taxes, but it provides little tax relief. For those earning less than $100,000, the savings range from about $35 to $100 per year. Still, New Jersey had the 11th highest sales-tax burden in the nation, so the move made the state a little more competitive.
The other tax changes were issues of fairness and politics. If you get rid of the estate tax, you help higher-income families, while expanding the earned income tax credit assists lower-income households. And it is always popular to help veterans.
So, if all its components made sense, why didn't the entire tax compromise make sense? Simple: The tax reductions come out of general revenues, but the gasoline-tax revenues cannot balance those losses since all the money is earmarked for transportation.
Failure to offset the revenue losses in any way, in a budget that is already structurally unsound, makes it harder for the state to bring its budget into balance. Moody's Investor Services estimated the tax loss at nearly 3 percent of revenue, or more than $1 billion per year, exacerbating the state's budget crises.
Not surprisingly, Standard & Poor's Global Ratings recently lowered New Jersey's credit rating, the 10th downgrade under the Christie administration. The state has one of the lowest credit ratings in the nation. The loss of revenues from the tax cuts, coupled with the failure to address pension under-funding, were cited for the downgrade, which could increase the state's borrowing costs.
At the state level, where balanced budgets are required by law, tax compromises should largely balance changes in revenues and expenditures. This compromise failed to do that.
Instead, New Jersey's politicians balanced political needs while further unbalancing the budget. So the next time you hear about a tax compromise, grab your wallet and run.