Massive hikes in sales and property taxes could be coming in New Jersey, adding to the economic devastation of the shutdown triggered by fear over COVID-19.

Economic fallout

Even as Gov. Phil Murphy readied plans to reopen the state's economy, much of the talk among lawmakers has been about how to deal with the economic fallout from record unemployment and the loss of tax revenue. The Murphy administration has already frozen $1 billion in spending in the current fiscal year. Lawmakers have also extended the fiscal year by three months, to Sept. 30. The state has also delayed the tax filing deadline until July 15.

It's unclear how bad tax collections will be, but with most businesses closed and almost three-quarters of a million unemployed, Murphy says the state will face "serious cash flow challenges."

Murphy has already suggested the state may need to borrow as much as $9 billion to cover operating expenses. Some Republican legislators have already balked at that, and it's unclear how much support Murphy will have among fellow Democrats. Over the weekend, Murphy warned the consequences of not borrowing money for operating expenses would be dire. He warned of "historic" layoffs and gutting programs that affect everyone in the state. Assembly Speaker Craig Coughlin issued a statement indicating he was open to the idea of borrowing money, but only if budget cuts are also enacted. The speaker did not get specific about what those cuts would be.

Will stimulus help?

Murphy and others hope the federal government will send as much as $500 billion in direct aid to states like New Jersey that have been disproportionately affected by the coronavirus crisis, but no deal has been announced yet. Direct aid would reduce, or possibly eliminate, the need for borrowing. However, some form of borrowing is likely going to be needed to support the 2021 state budget and possibly into the 2022 fiscal year.

How borrowing impacts your taxes

Under stimulus measures announced by the Trump Administration, the Federal Reserve will buy up to $500 billion in government bonds issued by state and municipal governments. It's a quick way to raise cash, but it comes with a price to taxpayers. Those bonds mature in two years or less, and are backed by tax collections. Even before the pandemic, New Jersey was facing a tough time balancing its books. A slow economic recovery will depress tax collections for the foreseeable future. Tax hikes would be needed to meet the cost of borrowing.

Bloomberg first reported on draft legislation being considered in Trenton for repaying those loans, relying on sales and property tax revenue. Current revenue projections show collections falling way short of what would be needed, making a hike in the sales tax and property taxes likely.

OK, so how much?

The devil is in the details, and no one is talking publicly about it, yet. No formal legislation has been drafted addressing increases, because the full impact of declining revenues and the amount to be borrowed has not yet been realized. However, there appears to be little appetite for raising property taxes, which are already the highest in the nation, or the sales tax, which is among the region's highest.

In 2018, Murphy proposed increasing the sales tax from 6.625% to 7%, claiming it would raise $597 million in revenue. An increase to 7.5% or even 8% coupled with an expansion of items subject to the tax could generate over $1 billion in new revenue. Food and clothing would likely remain exempt, but things like dry cleaning, beauty and barber shop services, even boat slip rentals and advertising could be included in a possible expansion.

However, it would be difficult to imagine Senate President Steve Sweeney and Coughlin supporting such an increase. Their resistance to raising the sales tax in 2018 almost led to a government shutdown. A high-ranking aide who is familiar with the budget process, but would not agree to be named because he was not authorized to speak publicly about this issue, said it was way too early in the process and much of the economic impact data is still unknown. However, the aide said increasing the sales tax “would be a last option.”

With the budget deadline pushed back to September, it is unlikely any of this will become clear in the near term. Lawmakers will not likely convene to address the fiscal 2021 budget until the fall.

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