TO:                      Members of the Senate Budget and Appropriations Committee 

FROM:                Christina M. Renna, President & CEO, CCSNJ

RE:                       S-2021 (Sarlo / Cunningham)

DATE:                  September 21, 2020

The Chamber of Commerce Southern New Jersey (CCSNJ) is the region’s largest and most influential business organization representing businesses in the seven most southern counties of New Jersey, as well as Greater Philadelphia and northern Delaware. The CCSNJ has more than 1,100 member companies, approximately 85 percent of which are small businesses that employ less than 50 people.  Thank you for the opportunity to comment on the revised FY2021 state budget.

Since the Governor delivered his original $41 billion FY2021 state budget, the COVID-19 pandemic has changed life as we know it in New Jersey. Businesses swiftly reacted to help flatten the curve of the virus, complying with mandated closures and adapting to safe social distancing protocols. However, as the economy slowly begins to reopen, residents and businesses continue to suffer from the fiscal impact of the pandemic.

Every discussion of a New Jersey government financial issue should begin with the recognition that the citizens and businesses of this state bear an extraordinarily high tax burden, which is particularly felt as the economic crisis caused by the COVID-19 pandemic continues. The continued call for new taxes and additional spending in this budget is no longer sensible in this climate and it is more urgent than ever to address the affordability issues facing the state. The revised FY2021 $40.07 billion budget does not propose enough cuts to spending, but rather introduces more expensive programs, while placing the burden on already struggling businesses.

One of the largest revenue generators in the FY2021 budget comes from increasing the rate of taxation on incomes in excess of $1 million from the current rate of 8.97 percent to 10.75 percent, which is expected to raise $390.0 million in FY2021. It is important to note once again that this tax is a tax on business, as more than 90 percent of businesses (sole proprietorships, partnerships and S-Corporations) file their taxes through the personal income tax. This is particularly distressing to see at a time when businesses are attempting to recover from the economic effects of the pandemic.

Increasing taxes on the wealthiest in our state is unsound public policy that has the potential to greatly impact future revenue from income taxes. The reality is that high earning individuals have the flexibility and can afford to relocate themselves - and their business - to another state. The loss of as few as 15 very high-income individuals could have an appreciable impact on the state government’s treasury. New Jersey’s highest earners pay the majority of the taxes that fund programs to support the middle class and low-income population in the state; therefore, policymakers should proceed with great caution when considering any measure that would incentivize top earners to leave New Jersey. 

Also of note, New Jersey’s income tax is the most progressive, and our top rate of 8.97 percent is the highest among the states in our region. Shifting the top rate to 10.75 percent – a nearly 20 percent increase - will once again put New Jersey at a significant competitive disadvantage with our neighboring states: Pennsylvania with a flat gross income tax rate of 3.07 percent; Delaware with a gradual income tax rate that tops out at 6.6 percent; and, New York which also has a gradual income tax rate that tops out at 8.82 percent.

The CCSNJ was disappoint that the FY2021 revised budget also included reversing the January 1 Corporation Business Tax (CBT) rate decline, making the recent 2.5 percent CBT surtax permanent and an increase to the current annual assessment on net written premiums of HMOs from three percent to five percent.

These measures are in addition to the fact that New Jersey has the highest property taxes in the nation, highest CBT in the nation, the second highest top marginal personal income tax rate in the nation and a slew of other taxes and fees that impact business operations. CCSNJ members continue to struggle with the challenges of operating in an extraordinarily high-cost, high tax and heavily regulated state and the revised FY2021 budget disappointingly doubles down to assure there is no relief in sight.

Since 2002, there has been 159 tax or fee increases and this does not include the additional taxes included in the revised FY2021 state budget. This, along with the effects of the pandemic, are pushing businesses in New Jersey to the breaking point. If state government wants New Jersey to be competitive and affordable for business, residents and students entering the workforce the trends seen in the FY2021 state budget must be reversed.

In a recent CCSNJ member survey we asked, “Does your business plan on making significant investments or expand in NJ in the next year?” There were several interesting responses, but one member replied “No new investments or expansion planned.  At this point, we are focused exclusively on surviving the economic turndown.” This is an oft heard response, along with comments about potentially moving out of New Jersey due to the high tax burden. This much is clear - businesses already struggling to survive due to the pandemic cannot afford the tax increases proposed in the revised FY2021 state budget.

These taxes come at the same time an increase on the gas tax will hit New Jersey businesses and residents on October 1. The CCSNJ is extremely concerned with the magnitude of the impact that a gas tax increase would have on small businesses in South Jersey.  The South Jersey region is unique geographically, demographically and economically with few mass transit options for residents, higher unemployment and lower wages than in other areas of the state.  There is no doubt that another gas tax increase will further drive up the cost of living in Southern New Jersey due to our residents’ dependency on passenger vehicles, which is much greater than our northern brethren.

 While businesses and residents are struggle with the financial devastation caused by the COVID19 pandemic, an increase to the gas tax is something that that New Jersey’s economy can ill-afford. Additionally, the notion that an increased gas tax can help solve New Jersey’s transportation and transit finance needs is an overly simplistic approach to a complex and important policy area.

The revised budget also proposes to borrow $4 billion to help address the massive economic fallout created by COVID-19. The proposed borrowing amount must first be approved by the Legislative Select Commission on Emergency COVID-19 Borrowing.

However, there are several options worth considering outside of borrowing. The CCSNJ fully understands that it is highly likely some borrowing will have to occur given the severity of the state’s economic crisis. If borrowing occurs it should be done on a short-term basis, not spread over many years adding enormous amounts of debt service to the state’s bottom line. Giving state government a blank check of $4 billion in borrowing is the opposite of fiscal responsibility and should not be supported by the residents and businesses of New Jersey.

New Jersey is already one of the most indebted states in the country, with the fourth highest debt ranking in the nation. Should $4 billion in borrowing be approved, it will come with extraordinarily high levels of interest that would take decades to pay off – all on the backs of the residents and businesses in New Jersey. It is also quite likely that this level of borrowing will cause New Jersey to receive a downgrade in credit rating and overall fiscal outlook. Tax increases are likely to pay off the debt incurred, which the Governor has previously stated publicly.

However, the CCSNJ was pleased to see the revised budget includes $1.25 billion in spending reductions across all state departments, but there is still more work that can and should be done to control costs. 

The CCSNJ respectfully urges the Legislature to continue to consider the proposals contained in Senate President Sweeney’s Path To Progress report, specifically shifting all public sector workers and retirees from a “platinum” level plan to a “gold” level health plan. The experts who comprised the Economic and Fiscal Policy Workgroup estimated this measure could save approximately $1.4 billion over a four-year period, or $350 million per year.

Also, there are many other revenue raising options that can be and should be explored outside of tax increases. The CCSNJ argues that much more can be done in the form of frozen wages and furloughs in the public sector. In times of crisis such as the one New Jersey is currently faced with, every option must be seriously considered that will not only provide immediate relief, but also does the least long-term harm to New Jersey’s fiscal situation.

The CCSNJ looks forward to continuing to review the details of the revised budget and encourages the Legislature to think creatively about new avenues for cost savings.

Thank you for the opportunity to present our position on S-2021 (Sarlo / Cunningham).