The Numbers Game: Can NJ Afford Christie's Tax Cuts?

While Gov. Chris Christie took his campaign for a 10 percent income tax cut to CBS's "Face the Nation" yesterday morning, trouble continued to brew in the wake of Standard & Poor's thumbs-down verdict on Christie's budget and revenue projections.

Standard & Poor's questioned Christie's assertion that a $2.2 billion surge in state revenue would swell the Garden State's coffers in the upcoming fiscal year, enabling him to cut business and income taxes while paying for pensions, debt service, and other bills piled up by previous governors.

The critical S&P report raises the stakes for Christie and State Treasurer Andrew Sidamon-Eristoff as they await a similar report expected to be issued this week by Moody's, the second major credit rating agency. Meanwhile, the nonpartisan Office of Legislative Services prepares its own revenue forecast for review by the Democratic-controlled Senate and Assembly budget committees next month. 

While Christie and Democratic legislative leaders have been sparring for the past six weeks over whether to cut income taxes or property taxes, the real question is whether New Jersey can afford a major tax cut at all.

When fully phased in four years from now, Christie's proposed income and business tax cuts would cut state revenue by more than $2 billion, while rising pension and debt service costs would add $2.7 billion in fixed budget costs.

It would take four consecutive years of booming economic growth to fill that $4.7 billion budget hole and cover other built-in spending needs -- and budget analysts are questioning how the Christie administration can be so optimistic in its revenue projections not only this year and next, but also for the next three fiscal years as well.

"For Christie to achieve what he would like to achieve would require annual revenue growth in the area of 5 percent, and while everyone would love for the governor to be right on this, we have to be prudent and plan for the likelihood that the economic rebound does not allow for that level of growth," said Raphael Caprio, professor of public policy at Rutgers University and a leading budget expert.

Christie insists that he's right and, further, that he's being responsible.

Asked by CBS correspondent Bob Schieffer on "Face the Nation" if New Jersey could afford a 10 percent income tax cut, Christie said, "We can afford it now because we made a lot of very hard decisions the last two years. We cut spending -- real spending, not projected growth, but real spending -- two years in a row in my first two budgets. What we've seen is some economic growth return to New Jersey, and we've continued to hold the line on spending."

Christie, who is often touted as a potential GOP presidential or vice presidential candidate, has come in for some criticism nationally from conservatives as a "RINO" -- Republican In Name Only -- over the spending increases in next year's budget. Christie's proposed $31.2 billion state budget would be the second-largest in New Jersey history, and his spending total of $49.474 billion in combined state, federal, and dedicated funds would surpass Democratic Gov. Jon Corzine's stimulus-fed final budget as the all-time-high.

But Christie yesterday focused on the impact that three years of tax cuts would have on New Jersey. "This is a state, Bob, that had 115 tax and fee increases in eight years before I became governor," Christie said. "People deserve to get some of their money back. We're doing it responsibly by the way -- 10 percent phased in over three years so we don't blow a hole in the budget and we have a way to adjust"– a tacit admission by the governor that he will have to wait for the May income tax numbers to see how well his administration's revenue projections for this year and next year will hold up.

Christie and Sidamon-Eristoff last week projected that state revenues for the current fiscal year would exceed the official forecast by $50 million by June 30 -- despite lagging $300 million behind projections for the first seven months – and that revenues would grow by $2.217 billion in Fiscal Year 2013. Those projections would represent a 7.5 percent growth rate, and the figure would be even higher if Christie were not proposing a $375 million increase in tax cuts.

Standard & Poor's, in its analysis of Christie's proposed $31.2 billion budget, sharply questioned those growth projections, asserting that New Jersey's "budget remains structurally unbalanced," and that "the economic assumptions that underlay the state's revenue forecast appear to be optimistic based on current and projected economic conditions at the state and national levels."

John Sugden-Castillo, the S&P credit analyst who wrote the Friday report, also questioned the state's increasing reliance on one-shot revenues and the decision to use $288 million from the projected end-of-year surplus to fund next year's budget, leaving "a limited financial cushion" of just $300 million -- less than 1 percent of the budget -- to "offset revenue shortfalls" if tax collections fall short.

Sidamon-Eristoff issued a statement asserting that "This governor has an unbroken record of creating responsible, balanced budgets without tax increases that have been built on solid, conservative revenue estimates. We think S&P should learn from its own experience and make more of an effort to avoid reaching premature conclusions."

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