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N.J. leaders reach budget deal, avert government shutdown

Despite sharing a political party, the Democratic governor, who took office this year, and leaders of the Legislature have been at odds over proposed tax increases.

New Jersey Gov. Phil Murphy speaks during a news conference after he and Democratic legislative leaders failed to strike a budget deal, Friday in Trenton.
New Jersey Gov. Phil Murphy speaks during a news conference after he and Democratic legislative leaders failed to strike a budget deal, Friday in Trenton.Read moreJULIO CORTEZ / AP

New Jersey barely escaped its second government shutdown in as many years Saturday, as Gov. Murphy and lawmakers announced a last-minute budget deal that will increase taxes on millionaires and corporations.

"This is not a win for any of us individually," Murphy said at a Trenton news conference with legislative leaders. "This is a win for the middle class and working families, and those who look up and dream to be in the middle class all across New Jersey."

No government services would be shut down, Murphy said in announcing the agreement about 7:40 p.m. Saturday. The Legislature will meet Sunday to begin turning the deal into law.

Despite sharing a political party, the Democratic governor, who took office this year, and leaders of the Legislature had been at odds for months over proposed tax increases to pay for more spending on education, workers' pensions, and public transportation.

Under the deal, a higher tax rate would be imposed on income over $5 million — a threshold lawmakers had proposed, and much higher than the $1 million level Murphy favored. "The millionaires tax was an existential item for me," he said. Murphy said lawmakers agreed to "meaningfully" increase the new tax rate on income over $5 million, from the 9.95 percent they initially proposed to 10.75 percent.

The corporate business tax would increase an average of 2 percent over four years. But the governor agreed to drop his proposal to raise the sales tax.

The new fiscal year began at midnight Sunday. Without a budget deal, the state faced a potential shutdown of nonessential services — including state parks and beaches, racetracks, and Motor Vehicle Commission offices.

While Murphy and legislative leaders had always agreed on spending priorities, the problem has been how to pay for it all, with widely divergent preferences for new revenue.

Lawmakers had bucked Murphy's call for a millionaires tax to fund the new governor's agenda, while Murphy had argued the $36.5 billion budget the Legislature passed last week wouldn't provide sustainable revenue.

During his campaign, Murphy pledged to raise taxes on millionaires, promising a progressive agenda and renewed investment in schools and infrastructure after the tenure of Gov. Chris Christie.

Senate President Stephen Sweeney (D., Gloucester)  had also favored a millionaires tax. But he changed his tune after President Trump's tax overhaul capping a deduction popular with New Jerseyans, saying a rate hike would drive wealthy residents from the state.

Instead, Sweeney and Assembly Speaker Craig Coughlin (D., Middlesex) pushed an increase in the corporate business tax — which they say would capture some of the profits flowing to corporations under the federal tax changes.

Under the deal struck Saturday, a surcharge averaging 2 percent over four years would be added to the corporate tax rate of 9 percent for corporations with profits over $1 million, Murphy said. The time frame is longer than what lawmakers initially proposed, but the increase less severe: Lawmakers would have raised the tax for two years from 9 percent to 13 percent on corporations that earn at least $25 million; that rate would have been the highest in the nation.

The agreement "will ensure we remain competitive as we work to grow our economy," Murphy said.

Under the budget deal, the sales tax will not increase. Murphy had wanted to restore the tax to 7 percent, after Christie and lawmakers reduced it to 6.625 percent in a 2016 deal to raise the gas tax.

"It is no secret that New Jersey faces real challenges. They weren't created overnight, and they won't be solved overnight," Murphy said. "But this is a strong first step."

Some of the deal's contours were included in a letter by the governor to lawmakers that was released by Murphy's office Saturday morning.

The final version of the millionaires tax, however, didn't match Murphy's proposed compromise — which was a 10.75 percent marginal tax rate on income over $1.75 million, up from his desired level of $1 million. The current top rate is 8.97 percent and applies to income above $500,000.

At Saturday's news conference, Murphy referred to the agreed-upon tax on income over $5 million as a "millionaires tax" and called it a first step toward a fairer tax system.

State government shut down for three days last year after Christie and lawmakers failed to reach a deal involving the state budget and changes Christie wanted to make to the state's largest health insurer.

That shutdown ended on the Fourth of July — but not until after Christie was photographed lounging with his family at the otherwise-closed Island Beach State Park, drawing intense criticism.

Lawmakers will be returning to Trenton on Sunday for voting sessions. As for Murphy, he said Saturday night that he will not be heading to the beach. He has bills to sign and mayors to swear in, and is "hoping to see a little bit of soccer."

Staff writer Andrew Seidman contributed to this article.